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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
COMMISSION FILE NUMBER : 0-12499
FIRST FINANCIAL BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
California 94-28222858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
701 South Ham Lane, Lodi, California 95242
(Address of principal executive offices) (Zip Code)
(209)-367-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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. [ X ] Yes [ ] 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of January 31, 1998, there were 1,332,842 shares of Common Stock, no par
value, outstanding. The aggregate market value of the Common Stock held by non-
affiliates of the registrant was approximately $12,849,000 (based on the $13.00
average of bid and ask prices per share on January 27, 1998.)
Documents Incorporated by Reference Part of Form 10-K into which Incorporated
----------------------------------- -----------------------------------------
Proxy Statement for the Annual
Meeting of Shareholders to be held Part III, Items 10, 11, 12, 13
on April 28, 1998.
The Index to Exhibits is on page 59
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FIRST FINANCIAL BANCORP
1997 FORM 10-K
TABLE OF CONTENTS
PART 1
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ITEM 1. BUSINESS............................................................. 3
General.............................................................. 3
The Bank............................................................. 3
Bank Services........................................................ 3
Sources of Business.................................................. 4
Competition.......................................................... 4
Employees............................................................ 5
Supervision and Regulation........................................... 5
The Company.................................................. 5
The Bank..................................................... 6
Officers..................................................... 6
Recent Legislation and Regulations Affecting Banking......... 7
ITEM 2. PROPERTIES........................................................... 9
ITEM 3. LEGAL PROCEEDINGS.................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 10
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................. 10
ITEM 6. SELECTED FINANCIAL DATA.............................................. 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................ 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................................. 31
PART III
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ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 31
ITEM 11 EXECUTIVE COMPENSATION............................................... 31
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 31
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 31
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..... 31
Signatures................................................................... 58
Index to Exhibits............................................................ 59
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PART I
ITEM 1. BUSINESS
General:
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First Financial Bancorp (the "Company") was incorporated under the laws of the
State of California on May 13, 1982, and operates principally as a bank holding
company for its wholly owned subsidiary, Bank of Lodi, N.A. (the "Bank"). The
Company is registered under the Bank Holding Company Act of 1956, as amended.
The Bank is the sole subsidiary of the Company and its principal source of
income. The Bank owns the office building where the Bank's Lodi Branch and
administrative offices are located, and the Company owns the land upon which the
Bank's Woodbridge Branch is located. The Company receives income from the Bank
from the lease associated with the Woodbridge Property. All references herein to
the "Company" include the Bank, unless the context otherwise requires.
The Bank:
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The Bank was organized on May 13, 1982 as a national banking association. The
application to organize the Bank was accepted for filing by the Comptroller of
the Currency (the "OCC") on September 8, 1981, and preliminary approval to
organize was granted on March 27, 1982. On July 18, 1983 the Bank received from
the OCC a Certificate of Authority to Commence the Business of Banking.
Subsequently, the Bank opened branch offices in Woodbridge and Lockeford,
California. Effective February 22, 1997, the Bank acquired the Galt, Plymouth
and San Andreas offices of Wells Fargo Bank.
The Bank's main office is located at 701 South Ham Lane, Lodi, California, with
branch offices in Woodbridge, Lockeford, Galt, Plymouth and San Andreas,
California. The Bank's primary service area, from which the Bank attracts 75%
of its business, is the city of Lodi and the surrounding area. This area is
estimated to have a population approaching 70,000 persons, with a median annual
family income of approximately $30,000. The area includes residential
developments, neighborhood shopping centers, business and professional offices
and manufacturing and agricultural concerns. On January 5, 1998, the Bank opened
a loan production office in Folsom, California in order to develop loan business
in the Folsom, greater Sacramento, and South Placer County, California markets.
Bank Services:
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The Bank offers a wide range of commercial banking services to individuals and
business concerns located in and around its primary service area. These
services include personal and business checking and savings accounts (including
interest-bearing negotiable order of withdrawal ("NOW") accounts and/or accounts
combining checking and savings accounts with automatic transfers), and time
certificates of deposit. The Bank also offers extended banking hours at its
drive-through window, night depository and bank-by-mail services, and travelers'
checks (issued by an independent entity). Each branch location has a 24 hour
ATM machine, and the bank has 24 hour telephone banking and bill paying
services. The Bank issues MasterCard credit cards and acts as a merchant
depository for cardholder drafts under both VISA and MasterCard. In addition, it
provides note and collection services and direct deposit of social security and
other government checks.
The Bank engages in a full complement of lending activities, including
commercial, Small Business Administration (SBA), residential mortgage,
consumer/installment, and short-term real estate loans, with particular emphasis
on short and medium-term obligations. Commercial lending activities are
directed principally towards businesses whose demand for funds falls within the
Bank's lending limit, such as small to medium-sized professional firms, retail
and wholesale outlets and manufacturing and agricultural concerns. Consumer
lending is oriented primarily to the needs of the Bank's customers, with an
emphasis on automobile financing and leasing. Consumer loans also include loans
for boats, home improvements, debt consolidation, and other personal needs.
Real estate loans include short-term "swing" loans and construction loans.
Residential mortgages are generally sold into the secondary market for these
loans. SBA loans are made available to small to medium-sized businesses.
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Sources of Business:
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Management seeks to obtain sufficient market penetration through the full range
of services described above and through the personal solicitation of the Bank's
officers, directors and shareholders. All officers are responsible for making
regular calls on potential customers to solicit business and on existing
customers to obtain referrals. Promotional efforts are directed toward
individuals and small to medium-sized businesses. The Bank's customers are able
in their dealings with the Bank to be served by bankers who have commercial loan
experience, lending authority, and the time to serve their banking needs quickly
and competently. Bankers are assigned to customers and not transferred from
office to office as in many major chain or regional banks. In order to expedite
decisions on lending transactions, the Bank's loan committee meets on a regular
basis and is available where immediate authorization is important to the
customer.
The risk of non-payment (or deferred payment) of loans is inherent in commercial
banking. Furthermore, the Bank's marketing focus on small to medium-sized
businesses may involve certain lending risks not inherent in loans to larger
companies. Smaller companies generally have shorter operating histories, less
sophisticated internal record keeping and financial planning capabilities, and
greater debt-to-equity ratios. Management of the Bank carefully evaluates all
loan applicants and attempts to minimize its credit risk through the use of
thorough loan application and approval procedures.
Consistent with the need to maintain liquidity, management of the Bank seeks to
invest the largest portion of the Bank's assets in loans of the types described
above. Loans are generally limited to less than 75% of deposits and capital
funds. The Bank's surplus funds are invested in the investment portfolio, made
up of both taxable and non-taxable debt securities of the U.S. government, U.S.
government agencies, states, and municipalities. On a day to day basis, surplus
funds are invested in federal funds and other short-term money market
instruments.
Competition:
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The banking business in California generally, and in the northern portion of San
Joaquin County where the Bank is located, is highly competitive with respect to
both loans and deposits and is dominated by a relatively small number of major
banks with branch office networks and other operating affiliations throughout
the State. The Bank competes for deposits and loans with these banks, as well
as with savings and loan associations, thrift and loan associations, credit
unions, mortgage companies, insurance companies and other lending institutions.
Among the advantages certain of these institutions have over the Bank are their
ability (i) to finance extensive advertising campaigns, (ii) to allocate a
substantial portion of their investment assets in securities with higher yields
(not available to the Bank if its investments are to be diversified) and (iii)
to make funds available for loans in geographic regions with the greatest
demand. In competing for deposits, the Bank is subject to the same regulations
with respect to interest rate limitations on time deposits as other depository
institutions. See "Supervision and Regulation" below.
Many of the major commercial banks operating in the Bank's service area offer
certain services, such as international banking and trust services, which are
not offered directly by the Bank, and such banks, by virtue of their greater
capitalization, have substantially higher lending limits than the Bank. In
addition, other entities, both public and private, seeking to raise capital
through the issuance and sale of debt and equity securities compete with the
Bank for the acquisition of funds for deposit.
In order to compete with other financial institutions in its primary service
area, the Bank relies principally on local promotional activities, personal
contacts by its officers, directors, employees and shareholders, extended hours
and specialized services. The Bank's promotional activities emphasize the
advantages of dealing with a locally-owned and headquartered institution
sensitive to the particular needs of the community. The Bank also assists
customers in obtaining loans in excess of the Bank's lending limit or services
not offered by the Bank by arranging such loans or services in participation
with or through its correspondent banks.
The State Bank Parity Act, effective January 1, 1996, eliminated certain
existing disparities between California state chartered banks and national
banking associations, such as the Bank, by authorizing the California
Commissioner of Financial Institutions (the "Commissioner") to address such
disparities through a streamlined rule-making process.
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Employees:
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As of December 31, 1997, the Company employed 87 full-time equivalent employees,
including five executive officers. Management believes that the Company's
relationship with its employees is good.
SUPERVISION AND REGULATION
The Company
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The common stock of the Company is subject to the registration requirements of
the Securities Act of 1933, as amended, and the qualification requirements of
the California Corporate Securities Law of 1968, as amended. The Company is
also subject to the periodic reporting requirements of Section 13(d) of the
Securities Exchange Act of 1934, as amended, which include, but are not limited
to, annual, quarterly and other current reports with the Securities and Exchange
Commission.
The Company is a bank holding company registered under the Bank Holding Company
Act of 1956 (the "Act") and is subject to supervision by the Board of Governors
of the Federal Reserve System (the "Board"). As a bank holding company, the
Company must file with the Board quarterly reports, annual reports, and such
other additional information as the Board may require pursuant to the Act. The
Board may also make examinations of the Company and its subsidiaries.
The Act requires prior approval of the Board for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or control
of more than 5% of the voting shares, or substantially all the assets, of any
bank, or for a merger or consolidation by a bank holding company with any other
bank holding company. The Act also prohibits the acquisition by a bank holding
company or any of its subsidiaries of voting shares, or substantially all the
assets, of any bank located in a state other than the state in which the
operations of the bank holding company's banking subsidiaries are principally
conducted, unless the statutes of the state in which the bank to be acquired is
located expressly authorize such acquisition.
With certain limited exceptions, a bank holding company is prohibited from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company that is not a bank or bank holding company and from
engaging directly or indirectly in any activity other than banking or managing
or controlling banks or furnishing services to, or performing services for, its
authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities that the Board has
determined to be so closely related to banking or to managing or controlling
banks as to be properly incident thereto. In making such a determination, the
Board is required to consider whether the performance of such activities
reasonably can be expected to produce benefits to the public, such as greater
convenience, increased competition, or gains in efficiency, which outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. The
Board is also empowered to differentiate between activities commenced de novo
and activities commenced by the acquisition, in whole or in part, of a going
concern.
Additional statutory provisions prohibit a bank holding company and any
subsidiary banks from engaging in certain tie-in arrangements in connection with
the extension of credit, sale or lease of property or furnishing of services.
Thus, a subsidiary bank may not extend credit, lease or sell property, or
furnish any services, or fix or vary the consideration for any of the foregoing
on the condition that: (i) the customer must obtain or provide some additional
credit, property or service from or to such bank other than a loan, discount,
deposit or trust service; or (ii) the customer must obtain or provide some
additional credit, property or service from or to the company or any other
subsidiary of the company; or (iii) the customer may not obtain some other
credit, property to service from competitors, except reasonable requirements to
assure soundness of the credit extended. These anti-tying restrictions also
apply to bank holding companies and their non-bank subsidiaries as if they were
banks.
The Company's ability to pay cash dividends is subject to restrictions set forth
in the California General Corporation Law. See Note 12(e) to the financial
statements for further information regarding the payment of cash dividends by
the Company and the Bank.
The Company is a bank holding company within the meaning of Section 3700 of the
California Financial Code. As such, the Company and its subsidiaries are subject
to examination by, and may be required to file reports with the Commissioner.
Regulations have not yet been proposed or adopted to implement the
Commissioner's powers under this statute.
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The Bank:
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The Bank, as a national banking association whose accounts are insured by the
Federal Deposit Insurance Corporation (the "FDIC") up to the maximum legal
limits and is subject to regulation, supervision, and regular examination by the
OCC. The Bank is a member of the Federal Reserve System, and, as such, is
subject to certain provisions of the Federal Reserve Act and regulations issued
by the Board. The Bank is also subject to applicable provisions of California
law, insofar as they are not in conflict with, or preempted by, federal law.
The regulations of these various agencies govern most aspects of the Bank's
business, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends
and location of branch offices.
Officers:
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Leon Zimmerman, age 55, is President and Chief Executive Officer of the Bank and
of the Company; David M. Philipp, age 35, is Executive Vice-President, Chief
Financial Officer and Secretary of the Bank and of the Company; Lance Gallagher,
age 52, is Senior Vice President and Operations Administrator of the Bank and
the Company; Dennis Ceklovsky, age 45 is Senior Vice President and Regional
Manager of the Bank and the Company; and David Redman, age 53, is Senior Vice
President and Chief Credit Officer of the Bank and of the Company;
Mr. Zimmerman joined the Company in April, 1990. He was promoted from
Executive Vice President and Chief Credit Officer of Bank of Lodi to President
and CEO in August of 1994. Mr. Zimmerman became President and CEO of the
Company effective August 1995. He lives in Lodi with his wife and has been in
the San Joaquin-Sacramento Valley since 1960, serving in various banking
capacities since 1962. Mr. Zimmerman serves on many community boards and
committees, including San Joaquin County Education Foundation, Boys & Girls
Club of Lodi, Economic Development Task Force and LEED - Sacramento Steering
Committee. He is an active member of Rotary, Chamber of Commerce and several
other community groups.
Mr. Philipp joined the Company in April, 1992. Prior to joining the Company,
Mr. Philipp was the Budget Director and Financial Analyst for Merksamer
Jewelers, Inc., at that time the eighth largest jewelry retailer in the United
States, headquartered in Sacramento, California. Prior to joining Merksamer
Jewelers, Inc., Mr. Philipp was a Supervising Senior Accountant in the
Sacramento office of KPMG Peat Marwick, LLP. While at KPMG Peat Marwick, LLP,
Mr. Philipp specialized in providing audit and accounting services to financial
institution, agribusiness, and broadcasting clients. Mr. Philipp is a CPA and
holds a Bachelor of Science in Business Administration, Accountancy from
California State University. He lives in El Dorado Hills with his wife and two
children, having been in the Greater Sacramento area for over 25 years.
Mr. Gallagher joined the Bank in February, 1991. He was promoted from Vice
President of Compliance to Senior Vice President & Operations Administrator in
January, 1997. As a graduate of the American Bankers Associations Graduate
School of Compliance, he is responsible for the Bank's regulatory matters in
addition to Bank operations and item processing. Prior to joining the Company,
Mr. Gallagher was with Wells Fargo Bank for 22 years in various customer
service, operations, and human resource capacities of increasing responsibility.
He lives in San Joaquin County with his wife and has 4 boys and a grandson.
Mr. Gallagher is a banking instructor for The American Institute of Banking and
Delta Community College, serves as a member of the Colleges Banking Advisory
Board, a member of the Heald College Employer Advisory Committee, and is the
Initiation Coaching Program Director with U. S. Hockey Pacific District.
Mr. Ceklovsky joined the Company in December, 1997. A resident of the greater
Sacramento area for over 30 years, Mr. Ceklovsky has over 24 years of banking
experience, including nearly 18 years in the greater Sacramento area. While
previously with three community banks and two major banks, Mr. Ceklovsky has
been responsible for all aspects of credit administration and management
positions of increasing responsibility, including the position of chief credit
officer for two community banks in the Sacramento area, both under successful
turnaround strategies. He is the former owner of DFC Consulting Company, a
financial consulting firm specializing in due diligence reviews and litigation
support to the banking industry. Mr. Ceklovsky has served the greater Sacramento
area on various community boards and committees including the Sacramento Metro
Chamber of Commerce, SACTO, Sacramento Juvenile Diabetes Foundation, Sacramento
YWCA and Robert Morris Associates. He is a founding member of the Sacramento
Capitol Club.
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Mr. Redman joined the Company in December 1997. He has over 33 years of banking
experience in central California. He was previously President and CEO of
Citizens Bank of Paso Robles, N.A. (1990 to 1995). Mr. Redman assisted in the
start up of Commerce Bank of San Luis Obispo and served as Executive Vice
President of that bank (1985 to 1990). Most recently he was the organizing
President and CEO for Central California Bank (in organization). His banking
experience includes several years with two major California banks. Mr. Redman's
education includes Porterville Community College and the University of
Washington Graduate School of Banking. Community involvement has included the
Jaycees, Lions Club, Kiwanis Club, Rotary, Chamber of Commerce, Downtown
Merchants Association and the Elks Lodge.
Recent Legislation and Regulations Affecting Banking:
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From time to time, new laws are enacted which increase the cost of doing
business, limit permissible activities, or affect the competitive balance
between banks and other financial institutions. Proposals to change the laws
and regulations governing the operations and taxation of bank holding companies,
banks and other financial institutions are frequently made in Congress, in the
California legislature and before various bank holding company and bank
regulatory agencies. The likelihood of any major changes and the impact such
changes might have are impossible to predict. Certain significant recently
proposed or enacted laws and regulations are discussed below.
INTERSTATE BANKING. Since 1986, California has permitted California banks and
bank holding companies to be acquired by banking organizations based in other
states on a "reciprocal" basis (i.e., provided the other state's laws permit
California banking organizations to acquire banking organizations in that state
on substantially the same terms and conditions applicable to local banking
organizations). Since October 2, 1995, California law implementing certain
provisions of prior federal law has (1) permitted interstate merger
transactions; (2) prohibited interstate branching through the acquisition of a
branch business unit located in California without acquisition of the whole unit
of the California bank; and (3) prohibited interstate branching through de novo
establishment of California branch offices. Initial entry into California by an
out-of-state institution must be accomplished by acquisition of or merger with
an existing whole bank which has been in existence for at least five years.
CAPITAL REQUIREMENTS. Federal regulation imposes upon all FDIC-insured
financial institutions a variable system of risk-based capital guidelines
designed to make capital requirements sensitive to differences in risk profiles
among banking organizations, to take into account off-balance sheet exposures
and to aid in making the definition of bank capital uniform internationally.
Under the OCC's risk-based capital guidelines, the Bank is required to maintain
capital equal to a at least 8 percent of its assets, weighted by risk. Assets
and off-balance sheet items are categorized by the guidelines according to risk,
and certain assets considered to present less risk than others permit
maintenance of capital at less than the 8 percent ratio. The guidelines
established to categories of qualifying capital: Tier 1 capital comprising core
capital elements, and Tier 2 comprising supplementary capital requirements. At
least one-half of the required capital must be maintained in the form of Tier 1
capital. For the Bank, Tier 1 capital includes only common stockholders' equity
and retained earnings, but qualifying perpetual preferred stock would also be
included without limit of the Bank were to issue such stock. Tier 2 capital
includes, among other items, limited life (and in the case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt and a
limited amount of the allowance for loan and lease losses.
The guidelines also require all insured institutions to maintain a minimum
leverage ratio of 3 percent Tier 1 capital to total assets (the "leverage
ratio"). The OCC emphasizes that the leverage ratio constitutes a minimum
requirement for the most well-run banking organizations. All other banking
organizations are required to maintain a minimum leverage ratio ranging
generally from 4 to 5 percent. The Bank's required minimum leverage ratio is 4
percent.
The federal banking agencies during 1996 issued a joint agency policy statement
regarding the management of interest-rate risk exposure (interest rate risk is
the risk that changes in market interest rates might adversely affect a bank's
financial condition) with the goal of ensuring that institutions with high
levels of interest-rate risk have sufficient capital to cover their exposures.
This policy statement reflected the agencies' decision at that time not to
promulgate a standardized measure and explicit capital charge for interest rate
risk, in the expectation that industry techniques for measurement of such risk
will evolve.
However, the Federal Financial Institutions Examination Council ("FFIEC") on
December 13, 1996, approved an updated Uniform Financial Rating System
("UFIRS"). In addition to the five components traditionally included in the so-
called "CAMEL" rating system which has been used by bank examiners for a number
of years to classify and evaluate the soundness of financial institutions
(including capital adequacy, asset quality, management, earnings and
liquidity), UFIRS includes for all bank regulatory examinations conducted on or
after January 1, 1997, a new rating for a sixth category identified as
sensitivity to
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market risk. Ratings in this category are intended to reflect the degree to
which changes in interest rates, foreign exchange rates, commodity prices or
equity prices may adversely affect an institution's earnings and capital. The
rating system henceforth will be identified as the "CAMELS" system.
As of December 31, 1997, the Bank's total risk-based capital ratio was
approximately 12.95 percent and its leverage ratio was approximately 7.11
percent. The Bank does not presently expect that compliance with the risk-based
capital guidelines or minimum leverage requirements will have a materially
adverse effect on its business in the reasonably foreseeable future. Nor does
the bank expect that its sensitivity to market risk will adversely affect its
overall CAMELS rating as compared with its previous CAMEL ratings by bank
examiners.
DEPOSIT INSURANCE ASSESSMENTS. In 1995, the FDIC, pursuant to Congressional
mandate, reduced bank deposit insurance assessment rates to a range from $0 to
$.27 per $100 of deposits, dependent upon a bank's risk. The FDIC has continued
these reduced assessment rates through 1997. Based upon the above risk-based
assessment rate schedule, the Bank's current capital ratios, the Bank's current
level of deposits, and assuming no further change in the assessment rate
applicable to the Bank during 1998, the Bank estimates that its annual
noninterest expense attributed to the regular assessment schedule will not
increase during 1998.
PROMPT CORRECTIVE ACTION. Prompt Corrective Action Regulations (the "PCA
Regulations") of the federal bank regulatory agencies established five capital
categories in descending order (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized), assignment to which depends upon the institution's total
risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio.
Institutions classified in one of the three undercapitalized categories are
subject to certain mandatory and discretionary supervisory actions, which
include increased monitoring and review, implementation of capital restoration
plans, asset growth restrictions, limitations upon expansion and new business
activities, requirements to augment capital, restrictions upon deposit gathering
and interest rates, replacement of senior executive officers and directors, and
requiring divestiture or sale of the institution. The Bank has been classified
as a well-capitalized bank since adoption of the PCA Regulations.
COMMUNITY REINVESTMENT ACT. Community Reinvestment Act ("CRA") regulations
effective as of July 1, 1995 evaluate banks' lending to low and moderate income
individuals and businesses across a four-point scale from "outstanding" to "
substantial noncompliance," and are a factor in regulatory review of
applications to merge, establish new branches or form bank holding companies.
In addition, any bank rated in "substantial noncompliance" with the CRA
regulations may be subject to enforcement proceedings. The Bank has a current
rating of "satisfactory" CRA compliance.
SAFETY AND SOUNDNESS STANDARDS. Federal bank regulatory agency safety and
soundness standards for insured financial institutions establish standards for
(1) internal controls, information systems and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset
growth; and (6) compensation, fees and benefits. In addition, the standards
prohibit the payment of compensation which is excessive or which could lead to
material financial loss. If an agency determines that an institution fails to
meet any standard established by the guidelines, the agency may require the
financial institution to submit to the agency an acceptable plan to achieve
compliance with the standard. Agencies may elect to initiate enforcement action
in certain cases where failure to meet one or more of the standards could
threaten the safe and sound operation of the institution. The Bank has not been
and does not expect to be required to submit a safety and soundness compliance
plan because of a failure to meet any of the safety and soundness standards.
PERMITTED ACTIVITIES. Recently, the Federal banking agencies, especially the
OCC and the Board, have taken steps to increase the types of activities in which
national banks and bank holding companies can engage, and to make it easier to
engage in such activities. On November 20, 1996, the OCC issued final
regulations permitting national banks to engage in a wider range of activities
through subsidiaries. "Eligible institutions" (those national banks that are
well capitalized, have a high overall rating and a satisfactory CRA rating, and
are not subject to an enforcement order) may engage in activities related to
banking through operating subsidiaries after going through a new expedited
application process. In addition, the new regulations include a provision
whereby a national bank may apply to the OCC to engage in an activity through a
subsidiary in which the bank itself may not engage. Although the Bank in not
currently intending to enter into any new type of business, this OCC regulation
could be advantageous to the Bank if the Bank determines to expand its
operations in the future, depending on the extent to which the OCC permits
national banks to engage in new lines of business and whether the Bank qualifies
as an "eligible institution" at the time of making application.
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MONETARY POLICIES. Banking is a business in which profitability depends on
rate differentials. In general, the differences between the interest rate
received by a bank on loans extended to its customers and securities held in
that bank's investment portfolio and the interest rate paid on its deposits and
its other borrowings constitute the major portion of the bank's earnings. To
the extent that a bank is not able to compensate for increases in the cost of
deposits and other borrowings with greater income from loans, securities and
fees, the net earnings of that bank will be reduced. The interest rates paid and
received by any bank are highly sensitive to many factors which are beyond the
control of that bank, including the influence of domestic and foreign economic
conditions. See Item 7 herein, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The earnings and growth of a bank are also affected by the monetary and fiscal
policy of the United States Government and its agencies, particularly the Board.
These agencies can and do implement national monetary policy, which is used in
part to curb inflation and combat recession. Among the instruments of monetary
policy used by these agencies are open market transactions in United States
Government securities, changes in the discount rates of member bank borrowings,
and changes in reserve requirements. The actions of the Board have had a
significant effect on banks' lending, investments and deposits, and such
actions are expected to continue to have a substantial effect in the future.
However, the nature and timing of any further changes in such policies and their
impact on banks cannot be predicted.
PROPOSED LEGISLATION AND REGULATION. Certain legislative and regulatory
proposals that could affect the Bank and the banking business in general are
pending or may be introduced before the United States Congress, the California
State Legislature and Federal and state government agencies. The United States
Congress is considering numerous bills that could reform banking laws
substantially. For example, proposed bank modernization legislation under
consideration would, among other matters, include a repeal of the Glass-Steagall
Act restrictions on banks that now prohibit the combination of commercial and
investment banks.
It is not known whether any of these current legislative proposals will be
enacted and what effect such legislation would have on the structure, regulation
and competitive relationships of financial institutions. It is likely, however,
that many of these proposals would subject the Bank to increased regulation,
disclosure and reporting requirements and would increase competition to the Bank
and its cost of doing business.
In addition to pending legislative changes, the various banking regulatory
agencies frequently propose rules and regulations to implement and enforce
already existing legislation. It cannot be predicted whether or in what form
any such rules or regulations will be enacted or the effect that such rules and
regulations may have on the Bank's business.
The above description of the business of the Bank should be read in conjunction
with Item 7 herein, Management's Discussion and Analysis of Financial Condition
and Results of Operations.
ITEM 2. PROPERTIES
The Bank owns a 0.861 acre lot located at the corner of Ham Lane and Tokay
Street, Lodi, California. A 34,000 square foot, tri-level commercial building
for the main branch and administrative offices of the Company and the Bank was
constructed on the lot. The Company and the Bank use approximately 75% of the
leasable space in the building and the remaining area is either leased or
available for lease as office space to other tenants. This expansion in 1991 has
enabled the Bank to better serve its customers with more teller windows, four
drive-through lanes and expanded safe deposit box capacity.
The Bank assumed a long-term ground lease on 1.7 acres of land at 19000 North
Highway 88, Lockeford, California. The building previously occupying the Lodi
site was moved to Lockeford, California, and has become the permanent branch
office of the Bank at that location. A temporary office was opened by the Bank
on January 8, 1990 at this location in a 1,100 square foot building. The
permanent office was opened on April 1, 1991. The temporary office, along with
a portion of the permanent building, are leased by the Bank to two tenants.
9
<PAGE>
On February 22, 1997, the Bank acquired the Galt, Plymouth and San Andreas
branches of Wells Fargo Bank. The transaction included the assumption of the
6,000 square foot branch building lease in Galt with a remaining term of two
years, and the purchase of the branch building and land for the Plymouth and San
Andreas offices. The Plymouth and San Andreas offices are approximately 1,200
and 5,500 square feet, respectively.
The Company owns a 10,000 square foot lot located on Lower Sacramento Road in
the unincorporated San Joaquin County community of Woodbridge, California. The
entire parcel has been leased to the Bank on a long term basis at market rates.
The Bank has constructed, furnished and equipped a 1,437 square foot branch
office on the parcel and commenced operations of the Woodbridge Branch on
December 15, 1986.
On December 31, 1997, the Bank leased 1,220 square feet of office space in
Folsom, California for use as a loan production office. The lease term is for
one year and includes an option for one additional year.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings required to be discussed pursuant to this Item 3.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market and is not
presently listed on a national exchange or reported by the NASDAQ Stock Market.
Trading of the stock has been limited and has been principally contained within
the Company's general service area. As of March 2, 1998, there were 1,170
shareholders of record of the Company's common stock.
<TABLE>
<CAPTION>
1997 1996
BID PRICE OF COMMON SHARES HIGH LOW HIGH LOW
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $10.25 9.50 $ 8.87 8.37
Second Quarter 10.25 9.63 9.75 8.63
Third Quarter 12.75 9.81 10.00 9.50
Fourth Quarter 13.00 12.13 10.00 9.25
</TABLE>
The foregoing prices are based on trades of which Company is aware and reflect
inter-dealer prices, without retail mark-up, mark-down or commissions, and may
not represent specific transactions.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(in thousands except per share amounts)
Consolidated Statement of Income 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $10,592 8,045 8,089 7,462 6,907
Interest Expense 3,785 3,254 3,138 2,767 2,765
Net Interest Income 6,807 4,791 4,951 4,695 4,142
Provision for Loan Losses (60) 310 115 323 327
Noninterest Income 1,423 1,067 940 1,050 1,151
Noninterest Expense 6,796 4,654 4,534 5,137 4,115
Net Income $ 1,015 640 843 338 746
Per Share Data
- ------------------------------------------------------------------------------
Basic Earnings $ .77 .49 .65 .26 .57
Diluted Earnings .73 .48 .64 .26 .57
Cash Dividends Declared $ .20 .20 .15 -- .10
Consolidated Balance Sheet Data
- ------------------------------------------------------------------------------
Federal Funds Sold $ 4,900 1,100 3,300 2,000 2,600
Investment Securities 61,917 36,913 36,945 33,100 23,956
Loans, net of loss reserve and
deferred fees 62,228 52,672 50,524 55,812 59,943
Total Assets 147,850 104,913 103,972 105,167 99,806
Total Deposits 133,891 92,207 89,216 89,979 86,174
Note Payable -- -- 2,585 2,618 2,648
Total StockholdersO Equity $ 12,861 11,889 11,564 10,610 10,380
- ------------------------------------------------------------------------------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements in this Annual Report on Form 10-K include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These forward-
looking statements involve certain risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry; changes in the
interest rate environment; general economic conditions, either nationally or
regionally becoming less favorable than expected and resulting in, among other
things, a deterioration in credit quality and an increase in the provision for
possible loan losses; changes in the regulatory environment; changes in business
conditions; volatility of rate sensitive deposits; operational risks, including
data processing system failures or fraud; asset/liability matching risks and
liquidity risks; and changes in the securities markets.
The following discussion addresses information pertaining to the financial
condition and results of operations of the Company that may not be otherwise
apparent from a review of the consolidated financial statements and related
footnotes. It should be read in conjunction with those statements and notes
found on pages 33 through 54, as well as other information presented throughout
this report.
11
<PAGE>
SUMMARY OF EARNINGS PERFORMANCE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
For the Year Ended December 31:
------------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Earnings (in thousands) $1,015 640 843
- ------------------------------------------------------------------------------
Basic earnings per share $ .77 .49 .65
Diluted earnings per share $ .73 .48 .64
Return on average assets 0.75% 0.60% 0.83%
Return on average equity 8.18% 5.44% 7.45%
Dividend payout ratio 26.11% 42.55% 22.25%
- ------------------------------------------------------------------------------
"Cash" earnings (in thousands) (1) $1,293 640 843
Diluted "cash" earnings per share $ .93 .48 .64
"Cash" return on average assets 0.96% 0.60% 0.83%
"Cash" return on average equity 10.42% 5.44% 7.45%
- ------------------------------------------------------------------------------
Average equity to average assets 9.12% 11.12% 11.13%
- ------------------------------------------------------------------------------
</TABLE>
(1) "Cash" earnings represent earnings based upon generally accepted accounting
principles plus the after-tax, non-cash effect on earnings of the
amortization of intangible assets. Following the 1997 acquisition of three
branches from Wells Fargo Bank, the "cash" earnings, return on assets, and
return on equity are the most comparable to prior year numbers. They are
also the more relevant performance measures for shareholders because they
measure the Company's ability to support growth and pay dividends.
Diluted earning per share for 1997 increased by 52% over 1996, while 1997 "cash"
earnings per share increased by 94% over 1996. Diluted and cash earnings per
share for 1996 were 25% below the comparable earnings for 1995. "Cash" return
on equity and return on average assets for 1997 increased by 92% and 60%,
respectively, over 1996, while return on equity and return on average assets in
1996 were 27% and 28%, respectively, below 1995. The disproportionate increase
in return on average equity relative to return on average assets is the result
of more efficiently leveraged equity in 1997 versus 1996. Average equity to
average assets was reduced by 200 basis points in 1997 compared to 1996. As a
result each dollar of equity in 1997 supported $11 in assets versus $9 in 1996
and $9 in 1995. The principal reason for the increase in leverage was the
acquisition of three branches from Wells Fargo Bank on February 22, 1997. The
acquisition increased deposits by $34 million as of the closing date of the
transaction.
Earnings increased in 1997 versus 1996 as a result of a 30% increase in net
interest income, a 120% reduction in the provision for loan losses and a 31%
increase in noninterest income. The foregoing improvements were partially
offset by a 45% increase in noninterest expenses. The growth in net interest
income was the result of both increases in the volume of earning assets and
deposits and an increase in net interest margin. Noninterest income increased
due in part to record volumes in both SBA and mortgage lending of the Bank.
Service charges and noninterest expenses increased principally as a result of
the acquisition of three branches from Wells Fargo Bank on February 22, 1997.
As a result of the earnings in 1997, the Company continued the practice of
paying a quarterly dividend of $.05 per share that began in the first quarter of
1995.
Earnings fell in 1996 versus 1995 due to a 3.2% decrease in net interest income
and a 170% increase in the provision for loan losses. The impact of the
foregoing items offset the benefit of a 16% increase in SBA and mortgage income
in 1996 compared to 1995.
12
<PAGE>
BRANCH ACQUISITION
The single factor that had the most pervasive impact on the financial
performance and financial position of the Company during 1997 was the
acquisition of three branches.
On February 22, 1997, the Bank completed the acquisition of the Galt, Plymouth,
and San Andreas, California, branches of Wells Fargo Bank. The Bank purchased
the premises and equipment of the Plymouth and San Andreas branches and assumed
the building lease for the Galt branch. The Bank also purchased the furniture
and equipment of all three branches and paid a premium for the deposits of each
branch. The total cost of acquiring the branches, including payments to Wells
Fargo Bank as well as other direct costs associated with the purchase, was $2.86
million. The transaction was accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated first to identifiable
tangible assets based upon those assets' fair value and then to identifiable
intangible assets based upon the assets' fair value. The excess of the purchase
price over identifiable tangible and intangible assets was allocated to
goodwill. Allocations to identifiable tangible assets, identifiable intangible
assets, and goodwill were $856 thousand, $1.98 million, and $24 thousand,
respectively. Deposits totaling $34 million were acquired in the transaction.
13
<PAGE>
NET INTEREST INCOME
The following table provides a detailed analysis of net interest spread and net
interest margin for the years ended December 31, 1997, 1996, and 1995,
respectively:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended For the Year Ended For the Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
(in thousands) (in thousands) (in thousands)
-------------------------------------------------------------------------------------------------------
Average Income/ Average Income/ Average Income/
Balance Expenses Yield Balance Expenses Yield Balance Expenses Yield
-------- -------- ----- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Investment securities (1)..... $ 53,580 3,519 6.57% 34,700 2,233 6.44% 29,709 1,777 5.98%
Federal funds sold............ 8,400 461 5.49% 3,790 199 5.25% 3,490 200 5.73%
Loans (2)..................... 58,600 6,612 11.28% 54,520 5,613 10.30% 56,450 6,112 10.83%
-------- ------ ----- ------ ------ ------ ------ ------ ------
$120,580 10,592 8.78% 93,010 8,045 8.65% 89,649 8,089 9.02%
======== ====== ===== ====== ====== ====== ====== ====== ======
LIABILITIES:
Noninterest bearing deposits.. $ 13,470 -- -- 8,280 -- -- 7,140 -- --
Savings, money market, & NOW.. 67,520 1,660 2.46% 47,820 1,193 2.49% 46,370 1,187 2.56%
deposits
Time deposits................. 41,550 2,125 5.11% 34,320 1,799 5.24% 32,570 1,672 5.13%
Note payable.................. -- -- -- 2,440 262 10.74% 2,600 279 10.73%
-------- ------ ----- ------ ------ ------ ------ ------ ------
TOTAL LIABILITIES............. $122,540 3,785 3.09% 92,860 3,254 3.50% 88,680 3,138 3.54%
======== ====== ===== ====== ====== ====== ====== ====== ======
NET SPREAD.................... 5.69% 5.15% 5.48%
===== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
Average Income/ Average Income/ Average Income/
Balance Expenses Yield Balance Expenses Yield Balance Expenses Yield
-------- -------- ----- ------- --------- ------- ------- --------- -------
Yield on average earning
assets....................... $120,580 10,592 8.78% 93,010 8,045 8.65% 89,649 8,089 9.02%
Cost of funds for average
earning assets............... $120,580 (3,785) (3.13%) 93,010 (3,254) (3.50%) 89,649 (3,138) (3.50%)
-------- ------ ----- ------ ------ ------ ------ ------ ------
NET INTEREST MARGIN........... $120,580 6,807 5.65% 93,010 4,791 5.15% 89,649 4,951 5.52%
======== ====== ===== ====== ====== ====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Income on tax-exempt securities has not been adjusted to a tax equivalent
basis.
(2) Nonaccrual loans are included in the loan totals for each year.
Net interest income increased by 42% in 1997 after declining by 3% in 1996. The
increase in 1997 was the result of both growth in earning assets and deposits as
well as increased earning asset yields and decreased deposit costs. The decline
in 1996 was primarily the result of falling interest rates which served to
reduce net interest margin.
Average earning assets increased by 30% in 1997 compared to 1996 and 4% in 1996
compared to 1995. The increase in average earning assets was driven by growth
in average deposits. Average deposits increased by 36% in 1997 compared to 1996
and 5% in 1996 compared to 1995. Using year-end totals, loans outstanding at
December 31, 1997 were in excess of loans outstanding at December 31, 1996 by
18%. Despite the significant growth in the loan portfolio, the deposit growth
reduced the average loan-to-deposit ratio to 48% in 1997 compared to 60% in 1996
and 66% in 1995. Average loans also increased, growing by 7.5% after declining
by 3.5% in 1996 compared to 1995. The largest growth in average earning assets
took place in the investment portfolio into which the proceeds from the branch
acquisition were initially invested. Average investments increased by 54% in
1997 after growing by 17% in 1996.
14
<PAGE>
Net interest margin increased by 50 basis points in 1997 after declining by 37
basis points in 1996. The increase in 1997 was the result of several key items:
. The general level of short-term interest rates as indicated by the
comparative yields on federal funds sold increased by approximately 24 basis
points.
. Approximately $445 thousand in loan interest income was recognized during
1997 as a result of nonaccrual loan payoffs. The recovery of nonaccrual
interest increased loan yields and net interest margin for the year by 76
basis points and 37 basis points respectively.
. The general decline in interest rates helped to bring down the cost of
average certificates of deposit by 13 basis points, while a new tiered rate
pricing structure for savings, money market, and NOW accounts reduced the
cost of those funds by 3 basis points.
. In addition to changes in the pricing structure of deposits, the mix of
noninterest bearing and lower cost transaction accounts increased for 1997,
while the mix of higher cost certificates of deposit declined.
. The mortgage note payable, which carried a yield of 10.45%, was paid off
during November 1996.
The 37 basis point decline in net interest income in 1996 compared to 1995
reflects a drop in short term interest rates of approximately 48 basis points
based upon the change in the yield on federal funds for the same period. The
yield on loans declined in a similar manner, while investment yields increased
due to an emphasis on purchasing callable agency securities that carry higher
yields than conventional agency securities. The cost of certificates of deposit
increased during 1996 while short term interest rates declined as falling
interest rates prompted many depositors to extend maturities to achieve higher
yields.
15
<PAGE>
The following table presents the monetary impact of the aforementioned changes
in earning asset and deposit volumes, yields and mix for the three years ended
December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 compared to 1996 1996 compared to 1995 1995 compared to 1994
(in thousands) (in thousands) (in thousands)
Change due to: Change due to: Change due to:
Volume Rate Mix Total Volume Rate Mix Total Volume Rate Mix Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities $ 661 46 578 1,285 67 135 255 457 (5) 141 223 359
Federal funds sold 59 9 194 262 7 (17) 8 (2) 11 56 (1) 66
Loans 1,664 539 (1,203) 1,000 229 (300) (428) (499) (44) 642 (396) 202
------ ---- ------ ----- --- ---- ---- ---- --- --- ---- ---
Total interest income $2,384 594 (431) 2,547 303 (182) (165) (44) (38) 839 (174) 627
====== ==== ====== ===== === ==== ==== ==== === === ==== ===
Interest Expense:
Noninterest-bearing deposits $ -- -- -- -- -- -- -- -- -- -- -- --
Savings, money market, & NOW 382 (16) 103 469 56 (27) (22) 7 (18) 5 (80) (93)
accounts
Time deposits 573 (44) (205) 324 79 35 13 127 (28) 380 115 467
Note payable 84 (262) (84) (262) 13 -- (30) (17) 3 0 (6) (3)
------ ---- ------ ----- --- ---- ---- --- --- ---- ---
Total interest expense $1,039 (322) (186) 531 148 8 (39) 117 (43) 385 29 371
====== ==== ====== ===== === ==== ==== ==== === === ==== ===
Net interest income $1,345 916 (245) 2,016 155 (190) (126) (161) 5 454 (203) 256
====== ==== ====== ===== === ==== ==== ==== === === ==== ===
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The increase in net interest income for 1997 attributable to volume is
illustrative of the principal impact of acquiring the new branches. The volume
variance for 1997 compared to 1996 is nearly ten times greater than the
comparable variance for 1996 compared to 1995. Interest increased by $2.4
million as a result of volume, while interest expense increased by $1.1 million.
The volume variance for 1996 compared to 1995 reflects the modest growth in
earning assets and deposits.
The rate variance in net interest income for 1997 compared to 1996 is over ten
times greater than the comparable rate variance for 1996 compared to 1995.
Approximately 49% of the positive rate variance of $916 thousand for 1997
compared to 1996 is the result of the nonaccrual interest recoveries realized
during the year. The remainder of the variance is principally the result of
paying off the mortgage note payable and yield increases for loans and
investments. The negative rate variance for 1996 compared to 1995 is
principally the result of lower loan yields.
The negative impact of earning asset mix variances with respect to loans was
minimized for 1997 relative to 1996 due to favorable mix changes in the deposit
base. Noninterest bearing demand deposits increased to 11% of average deposits
for 1997 compared to 9% for 1996 and 8% for 1995. In a similar manner, NOW
accounts increased to 37% of average deposits compared to 34% in 1996 and 1995.
Certificates of deposit declined to 34% of average deposits in 1997 compared to
37% in 1996 and 1995. The favorable certificate of deposit mix variance in 1997
was $205 thousand, or twice the increase in interest expense attributable to the
growth in NOW account volumes. Although loans as a percentage of average
earning assets were 49% for 1997 compared to 59% in 1996, the growth in average
loans outstanding of 7.5% for 1997 compared to 1996 kept the loan mix variance
for interest income below the volume variance.
Provision for Loan Losses
16
<PAGE>
Provision for Loan Losses
The following table reconciles the beginning and ending loan loss reserve for
the previous five years. Reconciling activity is broken down into the three
principal items that impact the reserve: (1) reductions from charge-offs; (2)
increases from recoveries; and (3) increases or decreases from positive or
negative provisions for loan losses.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,207 959 1,127 924 1,334
CHARGE-OFFS:
Commercial 249 237 357 98 676
Real estate -- -- 30 -- 41
Consumer 41 97 95 77 46
------ ----- ----- ----- -----
TOTAL CHARGE-OFFS $ 290 334 482 175 763
RECOVERIES:
Commercial 434 260 174 37 21
Real estate -- -- -- -- --
Consumer 22 12 25 18 5
------ ----- ----- ----- -----
TOTAL RECOVERIES $ 456 272 199 55 26
------ ----- ----- ----- -----
Net charge-offs $ (166) 62 283 120 737
Additions charged to operations ( 60) 310 115 323 327
------ ----- ----- ----- -----
BALANCE AT END OF PERIOD $1,313 1,207 959 1,127 924
====== ===== ===== ===== =====
RATIO OF NET CHARGE-OFFS TO AVERAGE LOANS $(.28%) 0.11% 0.50% 0.20% 1.15%
OUTSTANDING ====== ===== ===== ===== =====
- --------------------------------------------------------------------------------------------
</TABLE>
Footnote 1(g) to the consolidated financial statement discusses the factors used
in determining the provision for loan losses and the adequacy of the allowance
for loan losses.
Charge-off activity declined by 31% and 13%, respectively, in 1996 and 1997,
while recoveries increased by 37% and 68%, respectively, for the same periods.
These trends are consistent with the improvements discussed below in the Asset
Quality section. The principal reason for the increases in recoveries was
improvement in the repayment capacity of certain credits that had previously
been charged off combined with the Bank's continued efforts subsequent to
charge-off to work diligently toward collection. These credits began to
contribute toward recoveries in the latter part of 1995 and were paid in full
during 1997. Approximately $285 thousand of the recoveries of $456 thousand for
1997 are attributable to the credits that were paid off.
The loan loss provision for 1996 exceeded the provision for 1995 by 170%.
Although net charge-offs declined from 1995 to 1996, management determined that
the loan loss provision of $310 thousand was necessary to provide for the loss
potential with respect to a specific group of loan relationships that exhibited
increased credit risk at that time.
The declining charge-offs and larger recoveries during 1997 increased the loan
loss reserve by more than management believed was necessary to provide for loss
potential in the loan portfolio. Accordingly, $60 thousand of the reserve for
loan losses was reversed and taken into income in the form of a negative
provision for loan losses in 1997. While portfolio quality generally improved
in 1997 compared to 1996 a larger reserve was necessitated by the significant
growth in the loan portfolio. Please also see the "Asset Quality".
17
<PAGE>
Noninterest Income
Noninterest income increased by 33% in 1997 compared to 1996 and rose by 14% in
1996 compared to 1995. The increases in both years came from growth in the
major components of noninterest income: service charges, SBA, mortgage income,
and other noninterest income. The following table summarizes the significant
elements of service charge, SBA, mortgage and Farmer Mac revenue for the three
years ending 1997, 1996, and 1995:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Periodic deposit account charges $ 307 192 169
Returned item charges 332 259 254
Ancillary services charges 70 33 32
Other service charges 57 75 37
-----------------
Total service charge revenue 766 559 492
=================
Gain on sale of SBA loans 217 163 143
SBA loan servicing revenue 199 183 174
-----------------
Total SBA revenue 416 346 317
Gain on sale of mortgage loans 77 44 36
Mortgage loan servicing revenue 53 41 30
-----------------
Total mortgage revenue 130 85 66
Farmer Mac origination, sale and servicing 29 20 10
-----------------
Total loan origination, sale and servicing revenue $ 575 451 393
- -------------------------------------------------------------------------------
</TABLE>
Service charge revenue increased by 37% in 1997 compared to 1996 and 14% in 1996
compared to 1995. The growth in service charge revenue for 1997 resulted
primarily from the acquisition of three branches as discussed above in "Branch
Acquisition." The acquisition increased deposits by approximately 37%. In
addition to deposit growth, the Bank's service charge schedule was reviewed
during 1997, and certain rates were increased in areas where the Bank's rates
were more than competitive. The increase in service charge revenue from 1995 to
1996 is principally the result of a 103% increase in other service charges. The
increase in other service charges was the result of increases in penalties for
the early withdrawl of certificates of deposit and increases in late charges on
loans. These items moderated in 1997 compared to 1996.
Revenue from SBA loan sales reached a record level in 1997, increasing by 33%
over 1996 and following an increase of 14% in 1996 compared to 1995. The
increase in 1997 was the result of both increases in the volume of loans
originated and sold as well as a general increase in the loan sale premiums
realized in the secondary market for SBA loan sales. During 1996, a new
incentive compensation program was put into place. The program was designed to
provide incentives for increasing levels of production. As production
increased, the SBA servicing portfolio increased and resulted in the 9% and 5%
increases in SBA servicing revenue for 1997 and 1996, respectively.
Revenue from mortgage loan sales also reached a record level in 1997, increasing
by 75% over 1996 and following an increase of 22% in 1996 compared to 1995.
Mortgage operations were reorganized in 1994, and part of the annual increases
since that time are the result of the relationships that have been developed
with builders, realtors, and title companies. In addition to reorganized
operations, housing activity in the Bank's trade area improved during 1996 and
1997, resulting in increased volumes. The Bank has packaged home construction
and mortgage take-out loans in a competitive manner and has successfully
marketed this product in the new trade areas that were opened as a result of the
acquisition of branches from Wells Fargo Bank in early 1997 (see "Branch
Acquisition" above). Finally, declining mortgage rates during 1997 have
resulted in increased mortgage refinance volumes.
The Bank began to participate in the Federal Agricultural Mortgage Corporation
("Farmer Mac") lending program in late 1994, whereby qualifying mortgage loans
on agricultural property are originated and sold.
18
<PAGE>
NONINTEREST EXPENSES
Noninterest expenses increased by 46% in 1997 compared to 1996 and 3% in 1996
compared to 1995. The single biggest factor behind the increase in 1997 was the
acquisition of three branches from Wells Fargo Bank on February 22, 1997 as
discussed above in "Branch Acquisition." Noninterest expense is broken down
into four primary categories each of which is discussed in this section.
SALARIES AND EMPLOYEE BENEFITS
- ------------------------------
The following table provides the detail for each major segment of salaries and
employee benefits together with relevant statistical data:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
(in thousands except full time equivalents) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Regular payroll, contract labor, and overtime $2,298 1,699 1,788
Incentive compensation and profit sharing 335 125 83
Payroll taxes and employment benefits 459 381 360
----------------------
TOTAL SALARIES AND EMPLOYEE BENEFITS $3,092 2,205 2,231
======================
Number of full-time equivalent employees 82.00 62.25 64.50
----------------------
Regular payroll per full-time equivalent employee 28.02 27.29 27.72
----------------------
Incentive compensation to regular payroll 14.6% 7.4% 4.6%
----------------------
Ratio of payroll taxes and benefits per full-time equivalent 5.60 6.12 5.58
- --------------------------------------------------------------------------------------
</TABLE>
Total salaries and benefits expense increased by 40% in 1997 compared to 1996
after declining by 1% in 1996 compared to 1995. Regular payroll increased by
35% in 1997 compared to 1996 due primarily to the increase in personnel from the
three branches purchased from Wells Fargo Bank (see "Branch Acquisition above").
At the closing date of the transaction, the branch acquisition added 20 full-
time equivalents. Regular payroll per full-time equivalent increased by 2.7% in
1997 compared to 1996. Regular payroll and regular payroll per full-time
equivalent declined in 1996 compared to 1995 by 5% and 1.5%, respectively. The
reason for the decline was twofold. The Bank's senior officers elected to forgo
salary increases for 1996 in exchange for the implementation of a management
Incentive Compensation Plan. In addition, during 1996 there were temporary
vacancies in certain officer positions with salaries for those positions that
were higher than the Bank average.
Incentive compensation includes bonus awards under the Incentive Compensation
Plan, contributions to the Employee Stock Ownership Plan and matching
contributions to the 401(k) Stock Ownership Plan. The Incentive Compensation
Plan pays bonuses to officers based upon the actual results of departmental and
Bank-wide performance in comparison to predetermined targets. As explained in
the preceding paragraph, the plan was implemented in 1996. Contributions to the
Employee Stock Ownership Plan are made at the discretion of the board of
directors based upon profitability. Matching contributions to the 401(k) Stock
Ownership Plan are made at the rate of 50% of the first 4% of compensation
contributed by employees. The rate of incentive compensation for 1997 was
nearly double the rate in 1996 based upon increased profitability. Although the
incentive compensation rate for 1996 is higher than 1995 despite a decline in
profitability, such a comparison is not meaningful as there was no Incentive
Compensation Plan in 1995.
Payroll taxes and employee benefits per full-time equivalent declined in 1997
compared to 1996 because certain benefit expenses did not increase
proportionately with the increase in full-time equivalents. Despite an increase
of 20 full-time equivalents, workers compensation insurance declined slightly in
1997, and medical insurance per full-time equivalent declined by $377. The
increase per full-time equivalent for payroll taxes and employee benefits of
9.6% in 1996 was the result of increases in the cost of medical benefits and
workers compensation insurance.
19
<PAGE>
Occupancy Expense
- -----------------
The following table provides the detail for each major segment of occupancy
expense:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
(in thousands except square footage and cost per sq. ft.) 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation 265 251 250
Property taxes, insurance, and utilities 204 168 183
Property maintenance 154 109 130
Net rental income (30) (45) (120)
--------------------------
TOTAL OCCUPANCY 593 483 443
==========================
Square footage of occupied and unoccupied space 40,725 28,312 24,635
--------------------------
Occupancy cost per square foot $14.56 $17.06 $17.98
--------------------------
Locations 6 3 3
- ----------------------------------------------------------------------------------------
</TABLE>
Occupancy expenses increased by 23% in 1997 compared to 1996 and 9% in 1996
compared to 1995.
The increase in 1997 is attributable to the acquisition of three branches from
Wells Fargo Bank (see "Branch Acquisition"). Approximately 13,500 square feet
of space was added by the branch acquisition. Two of the locations were
purchased and the third, representing 6,000 square feet, was leased. The
occupancy cost per square foot declined by 15% as the acquired locations had a
lower cost per square foot than existing locations.
The increase in 1996 compared to 1995 was principally the result of lower net
rental income. Net rental income is rental income less rental expense. The
decline in net rental income from 1995 to 1996 is the result of a reduction in
the occupancy of space available for lease to third parties at the Company's
main location. Some of the impact of the reduction in net rental income was
offset by a reduction of property taxes based upon a request made to the San
Joaquin County to reduce the assessed value of three properties.
EQUIPMENT EXPENSE
- -----------------
The following table provides the detail for each major segment of equipment
expense:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation $ 318 232 172
Maintenance 136 109 144
Rental expense 1 26 58
-----------------
TOTAL EQUIPMENT $ 455 367 374
- -----------------------------------------------------------------------------------------------------
</TABLE>
Equipment expense increased by 24% in 1997 compared to 1996 and declined by 2%
in 1996 compared to 1995.
The increase in 1997 was a function of the equipment acquired in, or purchased
as a result of, the acquisition of three branches from Wells Fargo Bank (see
"Branch Acquisition"). The increase in 1997 was also due in part to the
depreciation expense taken on a new banking information system, the Phoenix
Banking System, that was put into place in June of 1996. 1997 was the first
full year of depreciation and followed six months of depreciation in 1996. The
old system was no longer operationally or technologically current. As such, it
was subject to significant maintenance and repair expenses. Those costs
declined by 24% in 1996 as a result of the new system. Concurrent with
conversion to the Phoenix Banking System, the bank also contracted with an
outside vendor to process customer checks and statements. These functions had
previously been done internally with rented equipment. As a result of this
change, rental expenses for equipment were reduced by 55% in 1996 compared to
1995 and were nearly eliminated in 1997 compared to 1996.
20
<PAGE>
OTHER NONINTEREST EXPENSE
- -------------------------
The following table provides the detail for each major segment of other
noninterest expense:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Third party data processing $ 642 371 244
Intangible amortization 479 - -
Professional fees 401 372 311
Telephone and postage 182 132 123
Director fees 150 124 109
Office supplies 142 113 115
Marketing 120 121 102
Printing 117 86 78
Other real estate owned losses and holding costs 94 49 83
Business development 55 43 39
Regulatory assessments 53 40 142
Other 220 148 140
--------------------
TOTAL OTHER NONINTEREST EXPENSE $2,656 1,599 1,486
- ---------------------------------------------------------------------------
</TABLE>
Other noninterest expenses increased by 66% in 1997 compared to 1996 and 7.6% in
1996 compared to 1995. The most significant items behind the increase for 1997
were the acquisition of three branches from Wells Fargo Bank (see Branch
Acquisition), the outsourcing of more functions to third party processors and
increased losses and holding costs on other real estate owned. The increase in
1996 compared to 1995 was driven by higher outside processing costs and
increased professional fees related to loan resolution and strategic advisory
and consultation.
The acquisition of new branches in 1997 affected noninterest expenses in varying
degrees depending upon the fixed or variable nature of expenses. The most
definitive impact was the amortization of the core deposit and goodwill
intangible assets purchased in the acquisition. Amortization for 1997 amounted
to 24% of the purchase price of the related assets and represented 45% of the
increase in other noninterest expense for 1997 compared to 1996. The Bank is
using an accelerated method of amortization for these assets over an eight year
period. Excluding intangible amortization, the increase in other noninterest
expenses in 1997 was 36%.
As discussed under "Equipment Expense" above, the Bank outsourced the processing
of customer checks and statements to a third party in June of 1996. As a result
of this change in mid 1996, third party data processing costs increased in both
1996 and 1997. The acquisition of new branches approximately doubled the Bank's
customer base and added to the increase in third party data processing volumes
for 1997 compared to 1996.
The decision to outsource this function was based upon the prohibitive projected
cost of continuing to process these items in-house. An outside provider could
not only process these items more economically than what would be the case in-
house, it could do so with added features, such as statement imaging, which were
not affordable from an in-house perspective. While many of the financial
benefits of this change have been realized in other areas of the income
statement, such as salaries and benefits, equipment depreciation, and equipment
rental and maintenance, postage and supplies expenses (excluding the impact of
new branches) were also reduced.
Losses and holding costs for other real estate owned nearly doubled in 1997
compared to 1996. The Bank moved aggressively in 1997 to reduce other real
estate owned. In connection with that effort, carrying values and asking
prices were reduced to facilitate the sale of properties. In addition, new
properties were brought in during 1997 and increased holding costs, such as
taxes and bonds, compared to 1996.
Regulatory assessments decreased 72% in 1996 compared to 1995 based upon the
FDIC's new deposit insurance premium schedule. In 1995, the FDIC, pursuant to
Congressional mandate, reduced bank deposit insurance assessment rates to a
range from $0 to $.27 per $100 of deposits, dependent upon a bank's risk. The
FDIC has continued these reduced assessment rates through 1997.
21
<PAGE>
Income Taxes
The provision for income taxes as a percentage of pretax income for 1997, 1996,
and 1995 was 32%, 28%, and 32%, respectively. The effective rate is lower than
the combined marginal rate for state and federal taxes due primarily to the
level of tax exempt income relative to total pre-tax income. Tax exempt income
has been reduced during this same period in an effort to avoid paying
alternative minimum taxes and recoup alternative minimum taxes paid in previous
periods. Footnote 11 to the Consolidated Financial Statements contains a
detailed presentation of the income tax provision and the related current and
deferred tax assets and liabilities.
Balance Sheet Review
The following table presents average balance sheets for the years ended December
31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
For the Year Ended For the Year Ended For the Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
(in thousands) (in thousands) (in thousands)
-----------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------- -------
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash & Due from banks $ 5,362 3.94% 4,020 3.80% 3,582 3.54%
Federal funds sold 8,400 6.17% 3,790 3.58% 3,490 3.44%
Investment securities 53,580 39.36% 34,700 32.82% 29,709 29.33%
Loans (net of allowance for loan
losses and deferred income) 56,744 41.68% 53,213 50.33% 55,428 54.71%
Premises and equipment, net 7,227 5.31% 7,044 6.66% 6,552 6.47%
Other assets 4,830 3.54% 2,966 2.81% 2,546 2.51%
-------- ------ ------- ------ ------- ------
TOTAL ASSETS $136,143 100.00% 105,733 100.00 101,307 100.00%
======== ====== ======= ====== ======= ======
LIABILITIES & STOCKHOLDERS' EQUITY:
Deposits $122,540 90.00% 90,420 85.52% 86,080 84.97%
Note payable -- -- 2,440 2.31% 2,600 2.57%
Other liabilities 1,193 .88% 1,113 1.05% 1,309 1.29%
Stockholders' equity 12,410 9.12% 11,760 11.12% 11,318 11.17%
-------- ------ ------- ------ ------- ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $136,143 100.00% 105,733 100.00% 101,307 100.00%
======== ====== ======= ====== ======= ======
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Average total assets increased by 29% in 1997 compared to 1996 and 4% in 1996
compared to 1995. Year-end asset totals at December 31, 1997 reached $147.9
million and represented an increase of 41% over December 31, 1996. The increase
in 1997 is largely attributable to $34 million in deposits acquired in
connection with the acquisition of three branches from Wells Fargo Bank (see
"Branch Acquisition"). Deposits at December 31, 1997 increased by 45%, or $41.6
million, compared to December 31, 1996. Average deposits for 1997 exceeded 1996
by 36%. The increase in deposits reduced the ratio of average equity to average
assets by 200 basis points in 1997 to 9.12% and provided for a more efficient
use of capital.
The liquidity generated by the growth in deposits funded growth in the loan and
investment securities portfolios. Average loans for 1997 increased by 7% over
1996, while loans at December 31, 1997 were 18% above the comparable total at
December 31, 1996. The average investment portfolio for 1997 was 54% larger
than in 1996.
22
<PAGE>
Investment Securities
The following table presents the investment portfolio at December 31, 1997,
1996 and 1995 by security type, maturity, and yield:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
BOOK VALUE AT DECEMBER 31 (IN THOUSANDS)
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
Amount Yield(a) Amount Yield(a) Amount Yield(a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities:
Within 1 year $ 2,995 5.94% 600 8.09% 999 5.54%
After 1 year, within 5 years 1,000 5.87% 3,972 5.93% 600 8.09%
After 5 years, within 10 years -- -- -- -- -- --
After 10 years -- -- -- -- -- --
---------------------------------------------------
TOTAL U.S. TREASURY $ 3,995 5.92% 4,572 6.21% 1,599 6.49%
U.S. AGENCY SECURITIES:
Within 1 year 2,101 7.06% 4,023 5.94% 8,265 5.65%
After 1 year, within 5 years 13,997 6.46% 8,537 6.71% 7,105 6.37%
After 5 years, within 10 years 9,986 7.07% 5,038 7.04% 998 --
After 10 years 4,993 7.63% 483 8.30% -- --
---------------------------------------------------
TOTAL U.S. AGENCY $31,077 6.88% 18,081 6.67% 16,368 6.00%
COLLATERALIZED MORTGAGE OBLIGATIONS:
Within 1 year -- -- -- -- 1,142 5.89%
After 1 year, within 5 years 225 6.08% 329 5.65% 523 7.13%
After 5 years, within 10 years 277 6.27% 376 5.84% 35 6.00%
After 10 years 534 6.57% 534 6.40% 603 7.97%
---------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS $ 1,036 6.38% 1,239 6.03% 2,303 6.36%
MUNICIPAL SECURITIES:
Within 1 year 688 6.67% 250 6.33% 500 6.10%
After 1 year, within 5 years 3,118 6.94% 3,455 6.88% 1,987 6.74%
After 5 years, within 10 years 530 7.60% 886 6.14% 3,109 6.96%
After 10 years -- -- -- -- -- --
---------------------------------------------------
TOTAL MUNICIPALS $ 4,336 6.98% 4,591 6.71% 5,596 6.80%
OTHER DEBT SECURITIES:
Within 1 year 22 7.86% 27 8.57% 267 7.65%
After 1 year, within 5 years 2,748 7.41% 492 8.25% 8 8.20%
After 5 years, within 10 years 7 9.73% 1,097 7.33% 747 8.27%
After 10 years 972 7.67% 33 8.15% 1,007 7.11%
---------------------------------------------------
TOTAL OTHER DEBT SECURITIES $ 3,749 7.48% 1,649 7.64% 2,029 7.27%
MONEY MARKET MUTUAL FUND 17,200 6.12% 6,482 5.28% 8,640 5.77%
FEDERAL AGENCY STOCK 126 6.00% 83 6.00% 83 6.00%
UNREALIZED HOLDING GAIN/(LOSS) 398 -- 216 -- 327 --
---------------------------------------------------
TOTAL $61,917 6.59% 36,913 6.39% 36,945 6.18%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The yields on tax-exempt obligations have not been computed on a tax-
equivalent basis.
23
<PAGE>
The investment portfolio at December 31, 1997 increased by 68% compared to
December 31, 1996, and there was virtually no change in the portfolio size from
December 31, 1995 to December 31, 1996. The growth in the portfolio during 1997
resulted from the investment of the deposit liquidity that was received when the
Bank purchased three branches from Wells Fargo Bank (see "Branch Acquisition").
The growth in the portfolio was focused primarily in the U.S. Agency segment and
more specifically callable U.S. Agency bonds. The callable bonds provide
attractive yields relative to noncallable securities for the same contractual
maturity. In a rising rate scenario, the call option to the issuer loses
economic advantage. As a result, the securities estimated life extends but the
yield in excess of non-callable yields at the purchase date provides some
compensation for the extended life. In a falling rate scenario, the call option
to the issuer gains economic advantage. As a result, the likelihood of the bond
being called increases. While the proceeds from the call would need to be
reinvested at lower rates, the higher coupon on the callable bond compensates
for the risk of the bond being called. The callable U.S Agency securities
purchases were diversified. Final maturities ranged from three to fifteen years
with call protection from three months to two years. At December 31, 1997, the
Bank's callable U.S. Agency portfolio totaled $21 million and had an average
final maturity of nine years with average call protection of ten months.
A portion of the investment portfolio contains structured notes. Structured
notes generally carry terms that reference some index or predefined schedule as
a means of determining the coupon rate of interest to be paid on the security,
and there may also be interest rate caps or floors that limit the extent to
which the coupon rate can adjust in any given period and/or for the life of the
security. Depending upon the referenced index or predefined schedule as well as
the interest rate cap or floor, the coupon rate of a structured note can lead,
lag, move in tandem with, or move in the opposite direction of market interest
rates. As a result, the market value of the note can be favorably or adversely
impacted depending upon the direction and magnitude of change in market interest
rates. Structured notes may also contain provisions that give the issuer the
right to call the security away from the owner at a predetermined price;
therefore, the contractual, expected, and actual final maturity of the notes may
differ. Both the collateralized mortgage obligations and the structured agency
bonds are considered to be derivative securities under the broadest definitions
of derivatives, however, derivative investments in the Bank's portfolio are
structured such that they fall on the conservative end of the derivative risk
spectrum.
The amortized cost of the Bank's structured note portfolio at December 31, 1997
and 1996 was $1.0 million and $2.1 million, respectively, and represented
approximately 1.6% and 5.7%, respectively, of the investment portfolio. The
market value of the structured note portfolio at December 31, 1997 and 1996 was
$1.0 million and $2.1 million, respectively. All of the structured notes were
issued by Federal Agencies and therefore carry the implied AAA credit rating of
the Federal Government. The structured note portfolio at December 31, 1997
carries only floating rate coupons that generally lag overall movements in
market interest rates. The average final maturity of the structured note
portfolio at December 31, 1997 and 1996 was approximately one half year.
LOANS
The following table summarizes gross loans and the components thereof as of
December 31 for each of the last five years:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31 (IN THOUSANDS):
---------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $53,684 45,322 41,538 44,847 48,478
Real estate construction 6,900 5,802 7,549 9,809 10,182
Installment and other 3,525 3,155 2,757 2,656 2,804
------- ------ ------ ------ ------
$64,109 54,279 51,844 57,312 61,464
======= ====== ====== ====== ======
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Gross loans outstanding as of December 31, 1997 exceeded the comparable total at
December 31, 1996 by $9.8 million, or 18%. The primary lending categories of
commercial, real estate construction, and installment increased by 18%, 19%, and
12%
24
<PAGE>
respectively. A significant amount of effort was put forth by management during
1994 to improve the credit quality of the loan portfolio and alter the labor
intensivity of certain segments of the portfolio. The portfolio dollars declined
in 1995 as a result of these efforts. During 1995 and thereafter, management's
focus expanded to business development and the approach to business development
was refined. The 5% and 18% growth in the portfolio for 1996 and 1997 are
attributable to diligent application of those business development disciplines
as well as modest economic improvement in the Bank's market areas.
The most significant segment of the loan portfolio is commercial loans, which
represented 84% and 83% of the total portfolio, respectively, at December 31,
1997 and 1996. Commercial loans include agricultural loans, working capital
loans to businesses in a number of industries, and loans to finance commercial
real estate. Agricultural loans represented approximately 21% and 29% of the
commercial loan portfolio at December 31, 1997 and 1996, respectively.
Agricultural loans are diversified throughout a number of agricultural business
segments, including dairy, orchards, row crops, vineyards, cattle and contract
harvesting. Agricultural lending risks are generally related to the potential
for volatility of agricultural commodity prices. Commodity prices are affected
by government programs to subsidize certain commodities, weather, and overall
supply and demand in wholesale and consumer markets. Excluding agricultural
loans, the remaining portfolio is principally dependent upon the health of the
local economy and related to the real estate market.
The maturity and repricing characteristics of the loan portfolio at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
DUE: (1) Fixed Rate Floating Rate Total
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
In 1 year or less 1,072 665 1,737
After 1 year through 5 years 21,171 26,391 47,562
After 5 years 8,412 6,398 14,810
------ ------ ------
TOTAL LOANS 30,655 33,454 64,109
====== ====== ======
- -----------------------------------------------------------------------------------
</TABLE>
(1) Scheduled repayments are reported in the maturity category in which the
payment is due.
Approximately 48% of the loan portfolio carries a fixed rate of interest as of
December 31, 1997, while approximately 77% of the portfolio matures within five
years.
Deposits
The following table summarizes average deposit balances and rates for the years
ended December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(in thousands) For the Year Ended For the Year Ended For the Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
Type Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand - non-interest bearing $ 13,470 N/A 8,280 N/A 7,140 N/A
NOW accounts 27,520 1.68% 19,561 1.89% 18,019 2.01%
Money market accounts 17,870 3.09% 12,469 2.95% 12,561 2.95%
Savings 22,130 2.92% 15,790 2.89% 15,791 2.87%
Time deposits 41,550 5.11% 34,320 5.24% 32,566 5.13%
-------- ---- ------ ---- ------ ----
TOTAL DEPOSITS $122,540 3.09% 90,420 3.31% 86,079 3.32%
======== ==== ====== ==== ====== ====
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Average deposits increased by approximately 36% in 1997 compared to 1996, while
the average rate declined by 22 basis points. Average deposits increased by 5%
in 1996 compared to 1995, while the average rate declined by 1 basis point. The
majority of the deposit growth in 1997 came from the acquisition of three
branches with $34 million in deposits from Wells Fargo Bank on
25
<PAGE>
February 22, 1997 (see "Branch Acquisition"). Deposits also grew as a result of
internal growth that resulted from the focused business development efforts of
Bank officers and staff. Growth in 1996 also came through focused business
development efforts as well as account transfers from large banks by customers
that had grown tired of the merger activity amongst large institutions.
The reduced rates on the deposit portfolio in 1996 and 1997 are a function of
changes in mix, pricing, and the general level of interest rates. The mix of
deposits has become more cost efficient over the past three years. The mix of
noninterest bearing deposits was 7%, 8%, and 11% for 1995, 1996, and 1997,
respectively. The mix of certificates of deposit declined significantly from
1996 to 1997 in favor of NOW, money market and savings accounts. The savings,
money market, and NOW accounts were repriced in early 1997. The basis used to
pay interest on these accounts was changed from a flat rate of interest
regardless of balance to a tiered rate of interest with increasingly higher
rates paid on incrementally higher balances. During the fourth quarter of 1997
rates on NOW savings and money market accounts were reduced by 20, 10 and 10
basis points, respectively. The effect of the pricing structure and pricing
level changes was to reduce the average rates paid on NOW accounts by 21 basis
points. The average rates paid on money market and savings accounts increased
by 14 and 3 basis points respectively.
Certificates of deposit contain regular and individual retirement account
balances. There are no brokered certificates of deposit in the portfolio.
Certificates of $100,000 or more represent approximately 35% of the certificate
of deposit portfolio at December 31, 1997, and the maturities of those
certificates are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(in thousands) 1997
- ---------------------------------------------------------------------------------------------------
<S> <C>
Three months or less $ 6,285
Four months to six months 3,417
Seven months to twelve months 2,982
Over twelve months 800
-------
TOTAL TIME DEPOSITS OF $100,000 OR MORE $13,484
=======
- ---------------------------------------------------------------------------------------------------
</TABLE>
ASSET QUALITY
The following table contains asset quality information with respect to the loan
portfolio and other real estate owned:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ASSET QUALITY STATISTICS AT DECEMBER 31
(in thousands except multiples and percentages) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 340 898 987 765 714
Accruing loans past due more than 90 days 65 52 118 40 237
------ ----- ----- ----- ----
Total nonperforming loans $ 405 950 1,105 805 951
====== ===== ===== ===== ====
Reserve for loan losses 1,313 1,207 959 1,127 924
Reserve for loan losses to nonperforming loans 3.24x 1.27x .87x 1.4x .97x
Total loan portfolio delinquency 1.09% 2.14% 2.57% 2.71% 5.12%
Reserve for loan losses to total gross loans 2.05% 2.22% 1.85% 1.97% 1.50%
Other real estate owned $ 159 400 357 175 407
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's nonaccrual policy is discussed in note 1(c) to the consolidated
financial statements. Interest income recorded on these nonaccrual loans was
approximately $8,000, $7,000, $13,000, $14,000 and $22,000 in 1997, 1996, 1995,
1994 and 1993, respectively. Interest income foregone or reversed on these
loans was approximately $45,000, $149,000, $161,000, $74,000 and $57,000 in
1997, 1996, 1995, 1994 and 1993, respectively. At December 31, 1997, there were
no individually material or a
26
<PAGE>
material amount of loans in the aggregate for which management had serious
doubts as to the borrower's ability to comply with present loan repayment terms
and which may result in the subsequent reporting of such loans as nonaccrual.
Nonperforming loans have declined each year since 1995, while portfolio
delinquency has fallen each of the last four years. Nonperforming loans in 1997
are 57% below the 1996 level, while portfolio delinquency fell by 49% for the
same period. The reserve for loan losses increased for each of the last two
years after declining by 15% in 1995 compared to 1994. As a result, the reserve
coverage ratio for nonperforming loans increased in 1995, 1996, and 1997,
reaching 3.24 times at December 31, 1997. Notwithstanding the improving asset
quality statistics in 1997 and 1996, the reserve for loan losses was increased
in order to provide for the inherent loss potential in the new loan portfolio
growth. The following table summarizes the allocation of the allowance for loan
losses at December 31 for each of the last five years:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) December 31, December 31, December 31, December 31, December 31,
EXCEPT PERCENTAGES 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Loan Category Amount % Amount % Amount % Amount % Amount %
------ Loans ------ Loans ------ Loans ------ Loans ------ Loans
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 309 60.95% 490 91.42% 295 84.29% 376 78.25% 140 79.22%
Real estate 192 37.87% 45 8.40% 38 10.86% 121 17.12% 45 16.20%
Consumer 6 1.18% 1 0.19% 17 4.86% 4 4.63% 2 4.58%
Unallocated 806 N/A 671 N/A 609 N/A 629 N/A 737 N/A
------ ------ ----- ------ --- ------ ----- ------ --- ------
$1,313 100.00% 1,207 100.00% 959 100.00% 1,127 100.00% 924 100.00%
====== ====== ===== ====== === ====== ===== ====== === ======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please also see "Provision for Loan Losses".
27
<PAGE>
MARKET RISK
While there are several varieties of market risk, the market risk material to
the Company and the Bank is interest rate risk. Within the context of interest
rate risk, market risk is the risk of loss due to changes in market interest
rates that have an adverse effect on net interest income, earnings, capital or
the fair value of financial instruments. Exposure to this type of risk is a
regular part of a financial institution's operations. The fundamental
activities of making loans, purchasing investment securities, and accepting
deposits inherently involve exposure to interest rate risk. As described in
"Asset Liability Management," the Company monitors the repricing differences
between assets and liabilities on a regular basis and estimates exposure to net
interest income, net income, and capital based upon assumed changes in the
market yield curve. The following table summarizes the expected maturity,
principal repayment and fair value of the financial instruments that are
sensitive to changes in interest rates as of December 31, 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Expected Maturity / Principal Repayment TOTAL FAIR
In Thousands 1998 1999 2000 2001 2002 AFTER 02 BALANCE VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets:
Federal funds sold 4,900 - - - - - 4,900 4,900
Fixed rate investments (1) 5,307 3,695 2,018 4,405 10,770 15,384 41,579 41,648
Floating rate investments (1) 17,700 500 - - - 2,138 20,338 20,338
Fixed rate loans (2) 1,072 13,880 2,062 2,135 3,094 8,412 30,655 31,102
Floating rate loans (2) 665 19,557 1,582 2,181 3,071 6,398 33,454 33,454
Interest-Sensitive Liabilities:
NOW account deposits (3) - - - - - 29,734 29,734 29,734
Money market deposits (3) - - - - - 20,456 20,456 20,456
Savings deposits (3) - - - - - 24,802 24,802 24,802
Certificates of deposit 40,794 2,127 465 129 431 25 43,971 43,911
Interest-Sensitive Off-Balance
Sheet Items:
Loans serviced for others - - - - - - 45,939 400
Commitments to lend - - - - - - 17,950 180
Standby letters of credit - - - - - - 50 1
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Expected maturities for investment securities are based upon anticipated
prepayments as evidenced by historical prepayment patterns.
(2) Expected maturities for loans are based upon contractural maturity dates.
(3) NOW, money market and savings deposits do not carry contractual maturity
dates; therefore, they have been shown in the "after 02" category. The
actual maturities of NOW, money market, and savings deposits could vary
substantially if future prepayments differ from the Company's historical
experience.
28
<PAGE>
ASSET LIABILITY MANAGEMENT
The primary goal of the Company's asset and liability management system is to
maximize net interest margin within reasonable risk parameters with respect to
the maturity and pricing structure of assets and liabilities. The Company
monitors the repricing differences between assets and liabilities on a regular
basis and estimates exposure to net interest income, net income, and capital
based upon assumed changes in the market yield curve. The following table
summarizes the repricing intervals for the balance sheet at December 31, 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
BY REPRICING
INTERVAL
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) WITHIN AFTER THREE AFTER SIX AFTER ONE AFTER FIVE NONINTEREST TOTAL
THREE MONTHS, MONTHS, YEAR, WITHIN YEARS BEARING FUNDS
MONTHS WITHIN SIX WITHIN ONE FIVE YEARS
MONTHS YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold 4,900 -- -- -- -- -- 4,900
Investment securities 23,337 -- 535 19,912 18,133 -- 61,917
Loans 33,693 551 282 21,171 8,412 -- 64,109
Noninterest earning
assets and allowance
for loan losses -- -- -- -- -- 16,924 16,924
-------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 61,930 551 817 41,083 26,545 16,924 147,850
LIABILITIES AND
STOCKHOLDERS' EQUITY
Savings, money market &
NOW deposits 74,992 -- -- -- -- -- 74,992
Time deposits 18,794 10,807 11,193 3,152 25 -- 43,971
Other liabilities and
stockholders' equity -- -- -- -- -- 28,887 28,887
-------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 93,786 10,807 11,193 3,152 25 28,887 147,850
-------------------------------------------------------------------------------------------------------------
Interest Rate
Sensitivity Gap (31,856) (10,256) (10,376) 37,931 26,520 (11,963) --
=============================================================================================================
Cumulative Interest (31,856) (42,112) (52,488) (14,557) 11,963 -- --
Rate Sensitivity Gap
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The interest rate gaps reported in the table arise when assets are funded with
liabilities having different repricing intervals. Since these gaps are actively
managed and change daily as adjustments are made in interest rate forecasts and
market outlook, positions at the end of any period may not be reflective of the
Company's interest rate sensitivity in subsequent periods. Active management
dictates that longer-term economic views are balanced against prospects for
short-term interest rate changes in all repricing intervals. For purposes of
the above analysis, repricing of fixed-rate instruments is based upon the
contractual maturity of the applicable instruments. In addition, repricing of
assets and liabilities is assumed in the first available repricing period.
Actual payment patterns may differ from contractual payment patterns, and it has
been management's experience that repricing does not always correlate directly
with market changes in the yield curve.
29
<PAGE>
Fluctuations in interest rates can also impact the market value of assets and
liabilities either favorably or adversely depending upon the nature of the rate
fluctuations as well as the maturity and repricing structure of the underlying
financial instruments. To the extent that financial instruments are held to
contractual maturity, market value fluctuations related to interest rate changes
are realized only to the extent that future net interest margin is either higher
or lower than comparable market rates for the period. To the extent that
liquidity management dictates the need to liquidate certain assets prior to
contractual maturity, changes in market value from fluctuating interest rates
will be realized in income to the extent of any gain or loss incurred upon the
liquidation of the related assets.
LIQUIDITY
Liquidity is managed on a daily basis by maintaining cash, federal funds sold,
and short-term investments at levels commensurate with the estimated
requirements for loan demand and fluctuations in deposits. Loan demand and
deposit fluctuations are affected by a number of factors, including economic
conditions, seasonality of the borrowing and deposit bases, and the general
level of interest rates. The Bank maintains two lines of credit with
correspondent banks as a supplemental source of short-term liquidity in the
event that saleable investment securities and loans or available new deposits
are not adequate to meet liquidity needs. The Bank may also borrow on a short-
term basis from the Federal Reserve in the event that other liquidity sources
are not adequate.
At December 31, 1997, liquidity was considered adequate, and funds available in
the local deposit market and scheduled maturities of investments are considered
sufficient to meet long-term liquidity needs. Compared to 1996, liquidity
increased during 1997 as a result of the growth in deposits internally and the
$34 million in new deposits received in the acquisition of three branches from
Wells Fargo Bank (see "Branch Acquisition").
In November, 1996, the mortgage debt related to the headquarters building in
Lodi, California matured and was paid off. The opportunity cost of using
otherwise liquid funds to pay the mortgage debt was lower than rates that would
have been paid had the mortgage been refinanced.
CAPITAL RESOURCES
Consolidated capital increased by $1 million, or 9%, during 1997. The increase
was due primarily to net income of $1.01 million. The increase in the net
unrealized gain on available for sale securities of $160 thousand together with
capital paid in upon exercise of stock options of $131 thousand offset $265
thousand in capital used to pay dividends. The consolidated capital to assets
ratio declined by 200 basis points, to 9.12% from 11.12%, due to the growth in
assets upon the acquisition of three branches from Wells Fargo Bank (see "Branch
Acquisition").
The Bank's total risk-based and leverage capital ratios at December 31, 1997
were 12.9% and 7.1%, respectively, at December 31, 1997 compared to 17.0% and
10.8%, respectively, at December 31, 1996. The decrease reflects the additional
leverage created by the growth in deposits as well as increased lending which
moves assets from lower risk-weight categories to the higher risk-weight
categories of loans. The leverage and total risk-based capital ratios at
December 31, 1997, are in excess of the required regulatory minimums of 3% and
8%, respectively, for well-capitalized institutions.
On November 14, 1996, the Company transferred title of its headquarters
building to the Bank of Lodi. For regulatory accounting purposes, the building
was transferred to the Bank at its fair value of $4.25 million, and the Bank
assumed the mortgage on the building. The equity in the building of $1.4
million represented a contribution of capital to the Bank.
YEAR 2000 PREPAREDNESS
Preparedness for the year 2000 date change with respect to computer systems is
recognized as a serious issue throughout the banking industry. Both the Company
and the Bank have a detailed year 2000 compliance plan that has been approved by
their respective boards of directors. The Bank's core banking system, The
Phoenix Banking System, uses a four-digit date field; therefore, it is expected
to be year 2000 compliant already. Testing to confirm this status will be
performed by the Bank in early 1998. With respect to external systems, the
Company and the Bank are in contact with vendors and customers
30
<PAGE>
in order to monitor their progress with year 2000 compliance efforts and assess
the need for contingency plans, if applicable. At the present time, vendors and
customers are already compliant or are making satisfactory progress toward
planned compliance by the end of 1998. The cost of year 2000 compliance efforts
is not material to the financial position or the results of operation of the
Company or the Bank.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEMS 10, 11, 12 AND 13.
The information required by these items is contained in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held on April 28,
1998, and is incorporated herein by reference. The definitive Proxy Statement
will be filed with the Commission within 120 days after the close of the
Company's fiscal year pursuant to Regulation 14A of the Securities Exchange Act
of 1934.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
<TABLE>
<CAPTION>
(A) FINANCIAL STATEMENTS AND SCHEDULES PAGE REFERENCE
<S> <C> <C>
Independent Auditors' Report 33
Consolidated Balance Sheets as of
December 31, 1997 and 1996. 34
Consolidated Statements of Stockholders' Equity
Years Ended 1997, 1996, and 1995 35
Consolidated Statements of Income
Years Ended 1997, 1996, and 1995 36
Consolidated Statements of Cash Flows
Years Ended 1997, 1996, and 1995 37
Notes to Consolidated Financial Statements 38
</TABLE>
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the last quarter of the
period covered by this report.
On January 30, 1998 the Company filed a Current Report on Form 8-K
regarding its press release of the same date, reporting the Company's
results of operations for the year ended December 31, 1997 and the
declaration of a cash dividend of $.05 per share, payable February 27,
1998 to shareholders of record on February 13, 1998.
31
<PAGE>
(C) EXHIBITS
Exhibit No. Description
----------- -----------
3(a) Articles of Incorporation, as amended, filed as Exhibit 3.1 to
the Company's General Form for Registration of Securities on
Form 10, filed on September 21, 1983, is hereby incorporated
by reference.
3(b) Bylaws, as amended.
4 Specimen Common Stock Certificate, filed as Exhibit 4.1 to the
Company's General Form for Registration of Securities on Form
10, filed on September 21, 1983, is hereby incorporated by
reference.
10(a) First Financial Bancorp 1991 Director Stock Option Plan and
form of Nonstatutory Stock Option Agreement, filed as Exhibit
4.1 to the Company's Form S-8 Registration Statement
(Registration No. 33-40954), filed on May 31, 1991, is hereby
incorporated by reference.
10(b) Amendment to First Financial Bancorp 1991 Director Stock
Option Plan, filed as Exhibit 4.3 to the Company's Post-
Effective Amendment No. 1 to Form S-8 Registration Statement
(Registration No. 33-40954) filed on May 1, 1995 is hereby
incorporated by reference.
10(c) First Financial Bancorp 1991 Employee Stock Option Plan and
forms of Incentive Stock Option Agreement and Nonstatutory
Stock Option Agreement, filed as Exhibit 4.2 to the Company's
Form S-8 Registration Statement (Registration No. 33-40954),
filed on May 31, 1991, is hereby incorporated by reference.
10(d) Bank of Lodi Employee Stock Ownership Plan, filed as Exhibit
10 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, is hereby incorporated by reference.
10(e) First Financial Bancorp 1997 Stock Option Plan, filed as
Exhibit 10 to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1997, is hereby incorporated by
reference.
10(f) Bank of Lodi Incentive Compensation Plan.
10(g) First Financial Bancorp 401(k) Profit Sharing Plan.
11 Statement re computation of earnings per share is incorporated
herein by reference to footnotes 1(k) and 12(d) to the
consolidated financial statements included in this report.
23 Consent of KPMG Peat Marwick LLP, independent auditors.
27 Financial Data Schedule.
(D) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are included in this report on the
basis that they are either inapplicable or the information required to
be set forth therein is contained in the financial statements included
in this report.
32
<PAGE>
Independent Auditors' Report
The Board of Directors
First Financial Bancorp:
We have audited the accompanying consolidated balance sheets of First Financial
Bancorp and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Financial
Bancorp and subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Sacramento, California
February 12, 1998
33
<PAGE>
FIRST FINANCIAL BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Assets 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks (note 2) $ 7,183 4,748
Federal funds sold 4,900 1,100
Investment Securities: (note 3)
Held-to-maturity securities (at amortized cost, market
value of $1,785 and $1,888 in 1997 and 1996) 1,716 1,789
Available-for-sale securities at fair value 60,201 35,124
- ---------------------------------------------------------------------------------------------
Total investments 61,917 36,913
Loans, net of deferred loan fees and allowance for loan losses of
$1,881 and $1,607 in 1997 and 1996, respectively (notes 4 & 13) 62,228 52,672
Premises and equipment, net (notes 5 & 8) 7,233 6,723
Accrued interest receivable 1,473 1,060
Other assets 2,916 1,697
--------------------------------------------------------------------------------------------
$147,850 104,913
============================================================================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------
Liabilities:
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Deposits (notes 7 & 13):
Noninterest bearing $ 14,928 9,066
Interest bearing 118,963 83,141
- ---------------------------------------------------------------------------------------------
Total deposits 133,891 92,207
Accrued interest payable 429 324
Other liabilities 669 493
- ---------------------------------------------------------------------------------------------
Total liabilities 134,989 93,024
Stockholders' equity (notes 12 & 16):
Common stock - no par value; authorized 9,000,000 shares, issued and
outstanding in 1997, 1,332,842 shares; in 1996, 1,308,950 shares 7,455 7,324
Retained earnings 5,188 4,438
Net unrealized holding gain on available-for-sale securities 218 127
- ---------------------------------------------------------------------------------------------
Total stockholders' equity 12,861 11,889
- ---------------------------------------------------------------------------------------------
Commitments and contingencies (notes 8, 9 & 18)
$147,850 104,913
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
FIRST FINANCIAL BANCORP AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(in thousands except share amounts)
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Unrealized
Common Stock Retaine Securities
Shares Amount Earnings Gain(Loss)Net Total
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 1,306,296 $7,310 3,412 (112) 10,610
- ---------------------------------------------------------------------------------------------------------------------------------
Options exercised (Note 12) 700 4 __ __ 4
Cash dividend declared (Note 12) __ __ (196) __ (196)
Net change in unrealized gains on available-for-sale __ __ __ 303 303
securities, net of tax effect of $216
Net income __ __ 843 __ 843
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,306,996 7,314 4,059 191 11,564
Options exercised (Note 12) 1,954 10 -- -- 10
Cash dividends declared (Note 12) -- -- (261) -- (261)
Net change in unrealized gain on available-for-sale
securities, net of tax effect of $48 -- -- -- (64) (64)
Net income -- -- 640 -- 640
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,308,950 7,324 4,438 127 11,889
Options exercised (Note 12) 23,892 131 __ __ 131
Cash dividends declared (Note 12) __ __ (265) __ (265)
Net change in unrealized gain on available-for-sale securities,
net of tax effect of $92 __ __ __ 91 91
Net income __ __ 1,015 __ 1,015
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,332,842 $7,455 5,188 218 12,861
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
FIRST FINANCIAL BANCORP AND SUBSIDIARY
Consolidated Statements of Income
(in thousands except per share amounts)
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 6,612 5,613 6,112
Interest on investment securities available for sale:
Taxable 3,252 1,918 1,424
Exempt from Federal taxes 150 202 216
Interest on investment securities held to maturity:
Exempt from Federal taxes 117 113 137
Federal funds sold 461 199 200
- ---------------------------------------------------------------------------------------
Total interest income 10,592 8,045 8,089
Interest expense:
Deposit accounts 3,785 2,992 2,859
Other 262 279
- ---------------------------------------------------------------------------------------
Total interest expense 3,785 3,254 3,138
- ---------------------------------------------------------------------------------------
Net interest income 6,807 4,791 4,951
Provision for loan losses (Note 4) (60) 310 115
- ---------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 6,867 4,481 4,836
Noninterest income:
Service charges 766 559 492
Premiums and fees from SBA and
mortgage operations 575 451 393
Other 82 57 55
- ---------------------------------------------------------------------------------------
Total noninterest income 1,423 1,067 940
Noninterest expense:
Salaries and employee benefits 3,092 2,205 2,231
Occupancy 593 483 443
Equipment 455 367 374
Other (Note 10) 2,656 1,599 1,486
- ---------------------------------------------------------------------------------------
Total noninterest expense 6,796 4,654 4,534
- ---------------------------------------------------------------------------------------
Income before provision for income
taxes 1,494 894 1,242
Provision for income taxes (Note 11) 479 254 399
- ---------------------------------------------------------------------------------------
Net income $ 1,015 640 843
=======================================================================================
Earnings per share:
- ---------------------------------------------------------------------------------------
Basic (Note 12) $.77 .49 .65
=======================================================================================
Diluted (Note 12) $.73 .48 .64
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
FIRST FINANCIAL BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,015 640 843
Adjustments to reconcile net income to net cash flows
provided by operating activities:
(Increase) decrease in loans held for resale (1,318) (166) 201
Increase (decrease) in deferred loan income 168 40 (12)
Provision for other real estate owned losses 60 35 60
Depreciation and amortization 1,066 481 422
Provision for loan losses (60) 310 115
Provision for deferred taxes (28) (98) 188
(Increase) decrease in accrued interest receivable (413) 79 (36)
Increase (decrease) in accrued interest payable 105 (84) 108
Increases in other assets (492) (79) (35)
Increase (decrease) in other liabilities 176 294 (461)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 279 1,610 1,393
Cash flows from investing activities:
Proceeds from maturity of held-to-maturity securities 70 249 --
Proceeds from maturity of available-for-sale securities 19,230 30,780 20,218
Proceeds from sale of available-for-sale securities 28,077 -- --
Purchases of available-for-sale securities (72,201) (31,107) (24,544)
(Increase) decrease in loans made to customers (7,928) (2,629) 4,730
Proceeds from the sale of other real estate 285 209 11
Purchases of bank premises, equipment and intangible
assets (3,127) (1,207) (231)
- ------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (35,594) (3,705) 184
Cash flows from financing activities:
Net increase (decrease) in deposits 41,684 2,991 (753)
Payments on notes payable (2,585) (33)
Proceeds received upon exercise of stock options 131 10 4
Dividends paid (265) (261) (196)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 41,550 155 (988)
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,235 (1,940) 589
Cash and cash equivalents at beginning of year 5,848 7,788 7,199
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 12,083 5,848 7,788
============================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 3,680 3,338 3,029
Income taxes 476 242 391
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
FIRST FINANCIAL BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of First Financial Bancorp (the
Company) and its subsidiary, Bank of Lodi, N.A., (the Bank) conform with
generally accepted accounting principles and prevailing practices within
the banking industry. In preparing the consolidated financial statements,
Management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance
sheet and revenue and expense for the period. Actual results could differ
from those estimates applied in the preparation of the consolidated
financial statements. The following are descriptions of the more
significant accounting and reporting policies:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiary for all periods presented. All material intercompany
accounts and transactions have been eliminated in consolidation.
(b) Investment Securities
The Company designates a security as held-to-maturity or available-for-sale
when a security is purchased. The selected designation is based upon
investment objectives, operational needs, and intent. The Company does not
engage in trading activity.
Held-to-maturity securities are carried at cost, adjusted for accretion of
discounts and amortization of premiums, which are recognized as adjustments
to interest income using the interest method. Available-for-sale securities
are recorded at fair value with unrealized holding gains and losses, net of
the related tax effect reported as a separate component of stockholders'
equity until realized. For the years ended December 31, 1997 and 1996,
there were no transfers between classifications.
To the extent that the fair value of a security is below cost and the
decline is other than temporary, a new cost basis is established using the
current market value, and the resulting loss is charged to earnings.
Gains and losses realized upon disposition of securities are recorded as a
component of noninterest income on the trade date, based upon the net
proceeds and the adjusted carrying value of the securities using the
specific identification method.
(c) Loans
Loans are stated at principal balances outstanding, net of deferred
origination fees, costs and loan sale premiums. A loan is considered
impaired when based on current information and events, it is probable that
the Company will be unable to collect all amounts due according to the
"contractual terms" of the loan agreement, including scheduled interest
payments. For a loan that has been restructured, the contractual terms of
the loan agreement refer to the contractual terms specified by the original
loan agreement, not the contractual terms specified by the restructuring
agreement. An impaired loan is measured based upon the present value of
future cash flows discounted at the loan's effective rate, the loan's
observable market price, or the fair value of collateral if the loan is
collateral dependent. Interest on impaired loans is recognized on a cash
basis. Large groups of small balance, homogenous loans are collectively
evaluated for impairment. If the measurement of the impaired loan is less
than the recorded investment in the loan, an impairment is recognized by
adjusting the allowance for loan loss. Loans held for sale are carried at
the lower of aggregate cost or market.
38
<PAGE>
Interest on loans is accrued daily. Nonaccrual loans are loans on which the
accrual of interest ceases when the collection of principal or interest is
determined to be doubtful by management. It is the general policy of the
Company to discontinue the accrual of interest when principal or interest
payments are delinquent 90 days or more unless the loan is well secured and
in the process of collection. When a loan is placed on non-accrual status,
accrued and unpaid interest is reversed against current period interest
income. Interest accruals are resumed when such loans are brought fully
current with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectable as to both
principal and interest.
(d) Loan Origination Fees and Costs
Loan origination fees, net of certain direct origination costs, are
deferred and amortized as a yield adjustment over the life of the related
loans using the interest method, which results in a constant rate of
return. Loan commitment fees are also deferred. Commitment fees are
recognized over the life of the resulting loans if the commitments are
funded or at the expiration of the commitments if the commitments expire
unexercised. Origination fees and costs related to loans held for sale are
deferred and recognized as a component of gain or loss when the related
loans are sold.
(e) Gain or Loss on Sale of Loans and Servicing Rights
In June, 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. This statement provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are
secured borrowings. In addition, it requires that servicing assets and
other retained interests in transferred assets be measured by allocating
the previous carrying amount of the transferred assets between the assets
sold, if any and retained interests, if any, based on their relative fair
value at the date of transfer. Liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets are to be
initially measured at fair value. Servicing assets and liabilities are to
be subsequently amortized in proportion to and over the period of estimated
net servicing income or loss and assessed for asset impairment or increased
obligation based on fair value.
The Bank recognizes a gain and a related asset for the fair value of the
rights to service loans for others when loans are sold. In accordance with
SFAS No. 125, the fair value of the servicing assets is estimated based
upon the present value of the estimated expected future cash flows. The
Bank measures the impairment of the servicing asset based on the difference
between the carrying amount of the servicing asset and its current fair
value. As of December 31, 1997 and 1996, there was no impairment in
mortgage servicing asset.
A gain or loss is recognized to the extent that the sales proceeds and the
fair value of the servicing asset exceed or are less than the book value of
the loan. Additionally, a normal cost for servicing the loan is considered
in the determination of the gain or loss.
When servicing rights are sold, a gain or loss is recognized at the closing
date to the extent that the sales proceeds, less costs to complete the
sale, exceed or are less than the carrying value of the servicing rights
held.
(g) Allowance for Loan Losses
The allowance for loan losses is established through a provision charged to
expense. Loans are charged off against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely.
Recoveries of amounts previously charged off are added back to the
allowance. The allowance is an amount that management believes will be
adequate to absorb losses inherent in existing loans, standby letters of
credit, overdrafts and commitments to extend credit based on evaluations of
collectibility and prior loss experience. The evaluations take into
consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific problem
loans, commitments, and current and anticipated economic
39
<PAGE>
conditions that may affect the borrowers' ability to pay. While management
uses these evaluations to recognize the provision for loan losses, future
provisions may be necessary based on changes in the factors used in the
evaluations. The allowance for loan losses is also subject to review by the
Comptroller of the Currency, the Bank's principal regulator.
(h) Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the related assets. Estimated useful lives are as
follows:
Building 35 years
Improvements, furniture, and equipment 3 to 10 years
Expenditures for repairs and maintenance are charged to operations as
incurred; significant betterments are capitalized. Interest expense
attributable to construction-in-progress is capitalized.
(i) Intangible Assets
Goodwill, representing the excess of purchase price over the fair value of
net assets acquired, results from branch acquisitions made by the Bank.
Goodwill is being amortized on an accelerated basis over eight years. Core
deposit intangibles are amortized on an accelerated basis over eight years.
Intangible assets are reviewed on a periodic basis for other than temporary
impairment. If such impairment is indicated, recoverability of the asset
is assessed based upon expected undiscounted net cash flows.
(j) Other Real Estate Owned
Other real estate owned (OREO) consists of property acquired through
foreclosure and is recorded at the time of foreclosure at its fair market
value. Thereafter, it is carried at the lower of cost or fair market value
less estimated completion and selling costs. If at foreclosure, the loan
balance is greater than the fair market value of the property acquired, the
excess is charged against the allowance for loan losses. Subsequent
operating expenses or income, changes in carrying value, and gains or
losses on disposition of OREO are reflected in other noninterest expense.
Fair market value is generally determined based upon independent
appraisals.
Revenue recognition on the disposition of OREO is dependent upon the
transaction meeting certain criteria relating to the nature of the property
sold and the terms of the sale. Under certain circumstances, revenue
recognition may be deferred until these criteria are met.
(k) Earnings Per Share
The Company adopted SFAS No. 128, Earnings per Share. SFAS No. 128 replaces
APB Opinion 15, Earnings per Share, and simplifies the computation of
earnings per share (EPS) by replacing the presentation of primary EPS. In
addition, the statement requires dual presentation of basic and diluted EPS
by entities with complex capital structures. Basic EPS includes no dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share
in the earnings of an entity, similar to fully diluted EPS.
40
<PAGE>
(l) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Income tax expense is allocated to each entity of the Company based upon
analyses of the tax consequences of each company on a stand alone basis.
(m) Statements of Cash Flows
For purposes of the statements of cash flows, cash, non-interest bearing
deposits in other banks and federal funds sold, which generally have
maturities of one day, are considered to be cash equivalents.
(n) Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
(o) Stock Based Compensation
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees, and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. SFAS No.
123, Accounting for Stock Based Compensation, allows entities to elect to
recognize as expense over the vesting period the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB No. 25 and provide pro
forma net income and pro form earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-
based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123.
(p) Year 2000
Both the Company and the Bank have a detailed year 2000 compliance plan
that has been approved by their respective board of directors. The Bank's
core banking system, The Phoenix Banking System, uses a four-digit date
field; therefore, it is expected to be year 2000 compliant already.
Testing to confirm this status should be completed by the Bank in early
1998. With respect to external systems, the Company and the Bank are in
contact with vendors and customers in order to monitor the progress with
year 2000 compliance efforts and assess the need for contingency plans, if
applicable. To date vendors and customers have provided confirmations that
they are either compliant or are making progress toward planned compliance
by the end of 1998. The cost of year 2000 compliance efforts are not
expected to be material to the financial position or the results of
operation of the Company.
41
<PAGE>
(q) Reclassifications
Certain reclassifications not affecting net income or stockholders' equity
have been made to prior years' balances to conform with the current year's
presentation.
(2) Restricted Cash Balances
The Bank is required to maintain certain daily reserve balances in
accordance with Federal Reserve Board requirements. Aggregate reserves of
$1,053,000 and $881,000 were maintained to satisfy these requirements at
December 31, 1997 and 1996, respectively.
(3) Investment Securities
Investment securities at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
- ----------------
Municipal Securities $ 1,716,000 69,000 1,785,000
- --------------------------------------------------------------------------------------
Available for Sale
- ------------------
U.S. Treasury securities 3,995,000 5,000 4,000,000
U.S. Agency securities 31,077,000 208,000 14,000 31,271,000
Municipal securities 2,620,000 155,000 2,775,000
Collateralized mortgage obligations 1,036,000 5,000 17,000 1,024,000
Other debt securities 3,749,000 58,000 2,000 3,805,000
Money market mutual fund 17,200,000 17,200,000
Investment in Federal Agency stock 126,000 126,000
- --------------------------------------------------------------------------------------
59,803,000 431,000 33,000 60,201,000
- --------------------------------------------------------------------------------------
Total $61,519,000 500,000 33,000 61,986,000
======================================================================================
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
- ----------------
Municipal Securities $ 1,789,000 99,000 1,888,000
- ---------------------------------------------------------------------------------------------
Available for Sale
- ------------------
U.S. Treasury securities 4,572,000 10,000 -- 4,582,000
U.S. Agency securities 18,081,000 47,000 32,000 18,096,000
Municipal securities 2,802,000 181,000 2,983,000
Collateralized mortgage obligations 1,239,000 6,000 21,000 1,224,000
Other debt securities 1,649,000 33,000 8,000 1,674,000
Money market mutual fund 6,482,000 -- -- 6,482,000
Investment in Federal Agency stock 83,000 -- -- 83,000
- ---------------------------------------------------------------------------------------------
34,908,000 277,000 61,000 35,124,000
- ---------------------------------------------------------------------------------------------
Total $36,697,000 376,000 61,000 37,012,000
=============================================================================================
</TABLE>
Investment securities totaling $4,631,000 and $251,000 were pledged as
collateral to secure Local Agency Deposits as well as treasury, tax and loan
accounts with the Federal Reserve at December 31, 1997 and 1996,
respectively.
Proceeds from the sale of Available for Sale securities during 1997 were
$28,077,000 and represented the sale of money market mutual fund shares at
book value. Accordingly, no gain or loss was realized. There were no sales
of Available for Sale securities during 1996 and 1995.
Federal Agency stock dividends paid to the Company were $7,000, $5,000, and
$5,000 in 1997, 1996 and 1995, respectively.
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturity, or expected maturity where applicable,
are shown below. Expected maturities will differ from contractual maturities
because certain securities provide the issuer with the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
December 31, 1997
Amortized Market
Cost Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Held to Maturity
- ----------------
Due in one year or less $ 535,000 547,000
Due after one year through five years 1,181,000 1,238,000
Due after five years through 10 years -- --
Due after 10 years -- --
- ---------------------------------------------------------------------------------------------
$ 1,716,000 1,785,000
=============================================================================================
Available for Sale
- ------------------
Due in one year or less $ 5,272,000 5,292,000
Due after one year through five years 19,907,000 20,167,000
Due after five years through 10 years 10,800,000 10,897,000
Due after 10 years 6,498,000 6,519,000
- ---------------------------------------------------------------------------------------------
42,477,000 42,875,000
- ---------------------------------------------------------------------------------------------
$44,193,000 44,660,000
=============================================================================================
</TABLE>
43
<PAGE>
(4) Loans
The Bank grants commercial, installment, real estate construction and other
real estate loans to customers primarily in the greater Lodi area.
Generally, the loans are secured by real estate or other assets. Although
the Bank has a diversified loan portfolio, a significant portion of its
debtors' ability to honor their contract is dependent upon the condition of
the local real estate market.
Outstanding loans consisted of the following at December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Commercial $50,155,000 42,215,000
Real estate construction 6,900,000 5,802,000
Other real estate 3,529,000 3,107,000
Installment and other 3,525,000 3,155,000
- ---------------------------------------------------------------------------------
64,109,000 54,279,000
Deferred loan fees and
loan sale premiums (568,000) (400,000)
Allowance for loan losses (1,313,000) (1,207,000)
- ---------------------------------------------------------------------------------
$62,228,000 52,672,000
=================================================================================
</TABLE>
Included in total loans are loans held for sale of $1,807,000 and $489,000
for 1997 and 1996, respectively. SBA and mortgage loans serviced by the
Bank totaled $45,939,000 and $41,319,000, and $35,505,000 in 1997, 1996,
and 1995, respectively.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $1,207,000 959,000 1,127,000
Loans charged off (290,000) (334,000) (482,000)
Recoveries 456,000 272,000 199,000
Provision charged to operations (60,000) 310,000 115,000
-------------------------------------------------------------------------------
Balance, end of year $1,313,000 1,207,000 959,000
===============================================================================
</TABLE>
Nonaccrual loans totaled $340,000, $898,000 and $987,000 at December 31,
1997, 1996 and 1995 respectively. Interest income which would have been
recorded on nonaccrual loans was $45,000, $149,000 and $161,000, in 1997,
1996, and 1995, respectively.
Impaired loans are loans for which it is probable that the Bank will not be
able to collect all amounts due. At December 31, 1997 and 1996, the Bank
had outstanding balances of $821,000 and $1,465,000 in impaired loans which
had valuation allowances of $100,000 in 1997 and $371,000 in 1996. The
average outstanding balances of impaired loans for the years ended December
31, 1997, 1996 and 1995 were $1,150,000, $1,116,000 and $682,000
respectively, on which $47,000, $45,000 and $22,000, respectively, was
recognized as interest income.
At December 31, 1997 and 1996, the collateral value method was used to
measure impairment for all loans classified as impaired. The following
table shows the recorded investment in impaired loans by loan category at
December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 821,000 1,457,000
Installment and other - 8,000
- -------------------------------------------------------------------------------
$ 821,000 1,465,000
===============================================================================
</TABLE>
44
<PAGE>
(5) Premises and Equipment
Premises and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Land $ 874,000 694,000
Building 5,705,000 5,438,000
Leasehold improvements 1,258,000 1,243,000
Furniture and equipment 2,616,000 1,979,000
- -----------------------------------------------------------------------------------
10,453,000 9,354,000
- -----------------------------------------------------------------------------------
Accumulated depreciation and amortization (3,220,000) (2,631,000)
- -----------------------------------------------------------------------------------
$ 7,233,000 6,723,000
===================================================================================
</TABLE>
The Bank leases a portion of its building to unrelated parties under
operating leases which expire in various years.
The minimum future rentals to be received on noncancelable leases as of
December 31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Year Ending December 31,
- -----------------------------------------------------------------------------------
<S> <C>
1998 $ 57,000
1999 58,000
2000 43,000
- -----------------------------------------------------------------------------------
Total minimum future rentals $158,000
===================================================================================
</TABLE>
(6) Other Real Estate Owned
Other real estate owned is included in other assets and was $159,000 and
$400,000 at December 31, 1997 and 1996, respectively. During 1997, 1996,
and 1995, real estate of $170,000, $297,000 and $254,000, respectively, was
acquired through foreclosure as settlement for loans. These amounts
represent noncash transactions, and accordingly, have been excluded from
the Consolidated Statements of Cash Flows.
(7) Deposits
The following is a summary of deposits at December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Demand $ 14,928,000 9,066,000
NOW and Super NOW Accounts 29,734,000 20,553,000
Money Market 20,456,000 13,042,000
Savings 24,802,000 15,972,000
Time, $100,000 and over 13,484,000 11,111,000
Other Time 30,487,000 22,463,000
- -----------------------------------------------------------------------------------
$133,891,000 92,207,000
===================================================================================
</TABLE>
45
<PAGE>
Interest paid on time deposits in denominations of $100,000 or more was
$620,000, $607,000 and $561,000 in 1997, 1996 and 1995, respectively.
At December 31, 1997, the aggregate maturities for time deposits is as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
<S> <C>
1998 $40,794,000
1999 2,127,000
2000 465,000
2001 129,000
2002 431,000
Thereafter 25,000
- -----------------------------------------------------------------------------------
Total $43,971,000
===================================================================================
</TABLE>
(8) Operating Leases
The Bank has noncancelable operating leases with unrelated parties for
office space and equipment. The lease payments for future years are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ending December 31, Lease Payments
- -------------------------------------------------------------------------------
<S> <C>
1998 $ 56,000
1999 14,000
2000 12,000
2001 12,000
2002 14,000
- -----------------------------------------------------------------------------------
$108,000
===================================================================================
</TABLE>
Total rental expense for operating leases was $32,000, $35,000 and $67,000
in 1997, 1996 and 1995 respectively.
(9) Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company is a party to financial
instruments with off-balance sheet risk. These financial instruments
include commitments to extend credit and standby letters of credit.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance
sheet instruments.
At December 31, 1997 and 1996, financial instruments whose contract amounts
represent credit risk are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $17,950,000 11,784,000
===================================================================================
===================================================================================
Standby letters of credit $ 50,000 50,000
===================================================================================
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates, other termination clauses
and may require payment of a fee. Many of the commitments are expected to
expire without being drawn upon and accordingly, the total commitment
amounts do not necessarily represent future cash requirements. The Company
46
<PAGE>
evaluates each customer's creditworthiness on a case-by-case basis. Upon
extension of credit, the amount of collateral obtained, if any, is based on
management's credit evaluation of the counter-party. Collateral varies but
may include accounts receivable, inventory, property, plant and equipment,
and income-producing or other real estate.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support private borrowing arrangements.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. Collateral
obtained, if any, is varied.
(10) Other Noninterest Expense
Other noninterest expense for the years 1997, 1996 and 1995 included the
following significant items:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Intangible amortization $479,000
Ancillary data processing expense 326,000 105,000
Directors' fees 150,000 124,000 109,000
Legal fees 166,000 207,000 142,000
Provision for other real estate owned losses 60,000 35,000 60,000
- -----------------------------------------------------------------------------------
</TABLE>
(11) Income Taxes
The provision for income taxes for the years 1997, 1996 and 1995 consisted
of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1997 Federal State Total
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $312,000 195,000 507,000
Deferred, net 16,000 (44,000) (28,000)
- -----------------------------------------------------------------------------------
Income tax expense $328,000 151,000 479,000
===================================================================================
1996
- -----------------------------------------------------------------------------------
Current $212,000 140,000 352,000
Deferred, net (66,000) (32,000) (98,000)
- -----------------------------------------------------------------------------------
Income tax expense $146,000 108,000 254,000
===================================================================================
1995
- -----------------------------------------------------------------------------------
Current $143,000 68,000 211,000
Deferred, net 118,000 70,000 188,000
- -----------------------------------------------------------------------------------
Income tax expense $261,000 138,000 399,000
===================================================================================
</TABLE>
Income taxes payable of $164,000 and $134,000 are included in other
liabilities at December 31, 1997 and 1996, respectively.
47
<PAGE>
The provision for income taxes differs from amounts computed by applying
the statutory Federal income tax rate to operating income before income
taxes. The reasons for these differences are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995
Amount Rate Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense, at statutory
income tax rates $508,000 34% 304,000 34% 422,000 34%
State franchise tax expense, net of federal
income tax benefits 107,000 7% 63,000 7% 87,000 7%
Tax-free municipal interest income (83,000) (6%) (97,000) (11%) (110,000) (9%)
Change in the beginning of the year deferred
tax asset valuation allowance 32,000 2% -- -- -- --
Other (85,000) (5%) (16,000) (2%) -- --
- --------------------------------------------------------------------------------------------------------------
$479,000 32% 254,000 28% 399,000 32%
==============================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Deferred tax assets: 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses $ 419,000 387,000
Reserve for losses on other real estate owned 60,000 65,000
Deferred loan income 157,000 112,000
Accumulated Amortization 154,000 --
Deferred compensation 53,000 64,000
Alternative minimum tax credit carryforwards 60,000 159,000
Settlement accruals -- 12,000
Other 93,000 59,000
- ----------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 996,000 858,000
Less valuation allowance (165,000) (133,000)
- ----------------------------------------------------------------------------------------------------------------------
Deferred tax assets, net of allowance 831,000 725,000
- ----------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation (61,000) (46,000)
Deferred loan origination costs (108,000) (61,000)
Unrealized gain on available-for-sale securities, net (180,000) (88,000)
Other (76,000) (60,000)
- --------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (425,000) (255,000)
- --------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 406,000 470,000
==============================================================================================================
</TABLE>
The valuation allowance for deferred tax assets increased by $32,000 for
the year ended December 31, 1997. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over
the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits
of these deductible differences, net of the existing valuation allowances
at December 31, 1997 and 1996.
At December 31, 1997, the Company has alternative minimum tax credit carry
forwards of $60,000 which are available to reduce future federal regular
income taxes, if any, over an indefinite period.
48
<PAGE>
(12) Stockholders' Equity
(a) Stock Options
In December 1982, the Board of Directors adopted the First Financial
Bancorp 1982 Stock Incentive Plan. A total of 250,000 shares of the
Company's common stock were reserved for issuance under the Plan. Options
were granted at an exercise price not less than the fair market value of
the stock at the date of grant and became exercisable over varying periods
of time and expired 10 years from such date.
In February 1991, the Board of Directors adopted the First Financial
Bancorp 1991 Employee Stock Option Plan and Director Stock Option Plan. The
maximum number of shares issuable under the Employee Stock Option Plan is
178,500. The maximum number of shares issuable under the Director Stock
Option Plan was 55,000. Options are granted at an exercise price of at
least 100% and 85% of the fair market value of the stock on the date of
grant for the Employee Stock Option Plan and the Director Stock Option Plan
respectively. The 1991 Plans replaced the 1982 Plan; however, this does not
adversely affect any stock options outstanding under the 1982 Plan.
In February 1997, the Board of Directors adopted the First Financial
Bancorp 1997 Stock Option Plan. The maximum number of shares issuable
under the Plan is 393,207 less any shares reserved for issuance pursuant to
the 1991 Plans. Options are granted at an exercise price of at least 100%
and 85% of the fair market value of the stock on the date of grant for
employee stock options and director stock options, respectively. The 1997
Plan replaces the 1991 Plans; however, this does not adversely affect any
stock options outstanding under the 1991 Plans.
Stock option plan activities are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Options Outstanding
Exercise Price
Options Per Share
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1994 156,838 $5.74 - 10.43
=================================================================================================
Options granted 55,350 $5.78 - 6.80
=================================================================================================
Options exercised (700) $5.74 - 6.50
=================================================================================================
Options expired (1,764) $10.43
=================================================================================================
Balance, December 31, 1995 209,724 $5.74 - 10.43
=================================================================================================
Options exercised (3,675) $5,78 - 8.57
=================================================================================================
Options expired (10,374) $5.74 - 10.43
=================================================================================================
Balance, December 31, 1996 195,675 $5.74 - 8.57
=================================================================================================
Net increase from 1997
plan -- --
=================================================================================================
Options granted 76,500 $10.00 - 12.50
=================================================================================================
Options exercised (27,600) $5.74 - 8.57
===================================================================================================
Options expired (28,000) $6.80 - 10.00
===================================================================================================
Balance, December 31, 1997 216,575 $5.74 - 12.50
===================================================================================================
</TABLE>
49
<PAGE>
At December 31, 1997, the weighted-average remaining contractual life of
all outstanding options was 7.59 years, respectively. At December 31,
1997, the number of options exercisable was 123,775 and the weighted-
average exercise price of those options was $7.22.
Options exercised during 1997 included options exercised in a cashless
manner whereby no cash is paid by the optionee, and the actual shares
issued are determined by dividing the difference between the options gross
market value and option price by the market value per share of the stock on
the date of exercise. The effect of cashless exercises was to reduce the
shares otherwise issuable under those options by 1,692 shares.
There were no stock options granted during 1996. The per share weighted-
average fair value of stock options granted during 1997 and 1995 was $3.03
and $1.96, respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Sholes option-pricing model with the
following weighted-average assumptions used for grants in 1997 and 1995,
respectively: dividend yield of 2.18% and 2.22%; expected volatility of
18.4% and 20.1%; risk-free interest rate of 6.2% and 6.0%; and an expected
life of five years and five years.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock options
in the accompanying consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, the Company's net income would have
been reduced to the pro forma amounts indicated below for the period ended
December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income
As reported $1,015,000 $640,000 $843,000
Pro forma 985,000 630,000 833,000
Basic Net Income Per Share
As reported $ .77 $ .49 $ .65
Pro forma .75 .48 .64
Diluted Net Income Per Share
As reported $ .73 $ .48 $ .64
Pro forma .71 .47 .63
</TABLE>
Pro forma net income reflects only options granted after 1994. Therefore,
the full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options' vesting
period of five years and compensation cost for options granted prior to
January 1, 1995 is not considered.
(b) Employee Stock Ownership Plan
Effective January 1, 1992, the Bank established the Bank of Lodi Employee
Stock Ownership Plan. The plan covers all employees, age 21 or older,
beginning with the first plan year in which the employee completes at least
1,000 hours of service. The Bank's annual contributions to the plan are
made in cash and are at the discretion of the Board of Directors based upon
a review of the Bank's profitability. Contributions for 1997, 1996 and 1995
totaled approximately $98,000, $37,000, and $56,000, respectively.
Contributions to the plan are invested primarily in the Common Stock of
First Financial Bancorp and are allocated to participants on the basis of
salary in the year of allocation. Benefits become 20% vested after the third
year of credited service, with an additional 20% vesting each year
thereafter until 100% vested after seven years. As of December 31, 1997,
the plan owned 34,962 shares of Company Common Stock.
50
<PAGE>
(c) Dividends and Dividend Restrictions
On January 22, 1998, the Company's Board of Directors declared a cash
dividend of five cents per share payable on February 27, 1998, to
shareholders of record on February 13, 1998.
The Company's principal source of funds for dividend payments is dividends
received from the Bank. Under applicable Federal laws, permission to pay a
dividend must be granted to a bank by the Comptroller of the Currency if
the total dividend payment of any national banking association in any
calendar year exceeds the net profits of that year, as defined, combined
with net profits for the two preceding years. At December 31, 1997, there
were Bank retained earnings of $2,422,000 free of this condition.
(d) Weighted Average Shares Outstanding
Basic and diluted earnings per share for the years ended December 31, 1997,
1996, and 1995 were computed as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Shares
Income (denominator) Per-Share
1997 (numerator) Amount
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share $ 1,015,000 1,323,398 $.77
Effect of dilutive securities -- 68,678 --
----------------------------
Diluted earnings per share $ 1,015,000 1,392,076 $.73
============================
- ---------------------------------------------------------------------------------------------
Shares
Income (denominator) Per-Share
(numerator) Amount
- ---------------------------------------------------------------------------------------------
Basic earnings per share $ 640,000 1,307,364 $.49
Effect of dilutive securities -- 32,547 --
-------------------------------
Diluted earnings per share $ 640,000 1,339,911 $.48
===============================
- ---------------------------------------------------------------------------------------------
Income Shares Per-Share
1995 (numerator) (denominator) Amount
- ---------------------------------------------------------------------------------------------
Basic earnings per share $ 843,000 1,306,772 $.65
Effect of dilutive securities -- 16,862 --
-------------------------------
Diluted earnings per share $ 843,000 1,323,634 $.64
================================
- ---------------------------------------------------------------------------------------------
</TABLE>
(13) Related Party Transactions
During the normal course of business, the Bank enters into transactions
with related parties, including directors, officers, and affiliates. These
transactions include borrowings from the Bank with substantially the same
terms, including rates and collateral, as loans to unrelated parties. At
December 31, 1997 and 1996, respectively, such borrowings totaled
$1,108,000 and $1,176,000, respectively. Deposits of related parties held
by the Bank totaled $1,000,000 and $951,000 at December 31, 1997 and 1996,
respectively.
51
<PAGE>
The following is an analysis of activity with respect to the aggregate
dollar amount of loans made by the Bank to directors, officers and
affiliates for the years ended December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $1,176,000 1,803,000
Loans funded 524,000 738,000
Principal repayments (592,000) (1,365,000)
- -------------------------------------------------------------------------------
Balance, end of year $1,108,000 1,176,000
===============================================================================
</TABLE>
(14) Parent Company Financial Information
This information should be read in conjunction with the other notes to the
consolidated financial statements. The following presents summary balance
sheets as of December 31, 1997 and 1996, and statements of income, and cash
flows information for the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Balance Sheets:
Assets 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash in bank $ 139,000 29,000
Investment securities available-for-sale, at fair value 5,000 80,000
Premises and equipment, net 66,000 68,000
Investment in wholly-owned subsidiary 12,548,000 11,683,000
Other assets 107,000 56,000
- ------------------------------------------------------------------------------------------
$12,865,000 11,916,000
==========================================================================================
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------------
Accounts payable and other liabilities $4,000 27,000
- -------------------------------------------------------------------------------------------
Common stock 7,455,000 7,324,000
Retained earnings 5,188,000 4,438,000
Unrealized holding gain on available-for-sale
securities, net 218,000 127,000
- -------------------------------------------------------------------------------------------
Total stockholders' equity 12,861,000 11,889,000
- -------------------------------------------------------------------------------------------
$12,865,000 11,916,000
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Statements of Income: 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rent from subsidiary 6,000 356,000 456,000
Interest from unrelated parties 2,000 9,000 23,000
Other expenses (215,000) (626,000) (610,000)
Equity in undistributed income of subsidiary 1,100,000 832,000 935,000
Income tax benefit 122,000 69,000 39,000
- ------------------------------------------------------------------------------------------
Net income $1,015,000 640,000 843,000
==========================================================================================
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows: 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $1,015,000 640,000 843,000
Adjustments to reconcile net income to net cash
flows provided by operating activities:
Depreciation and amortization 2,000 125,000 142,000
Provision for deferred taxes (36,000) 7,000 4,000
(Decrease) increase in other liabilities (23,000) 27,000 (41,000)
(Increase) decrease in other assets (15,000) 3,000 7,000
Increase in equity of subsidiary (774,000) (832,000) (935,000)
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 169,000 (30,000) 20,000
Proceeds from sale of available-for-sale securities 75,000 302,000 127,000
Capital expenditures -- (4,000) --
- ---------------------------------------------------------------------------------------------
Net cash provided by investing activities 75,000 298,000 127,000
Payments on notes payable -- (33,000) (33,000)
Proceeds received upon exercise of stock options 131,000 10,000 4,000
Dividends paid (265,000) (261,000) (196,000)
- ---------------------------------------------------------------------------------------------
Net cash used by financing activities (134,000) (284,000) (225,000)
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in cash 110,000 (16,000) (78,000)
- ---------------------------------------------------------------------------------------------
Cash at beginning of year 29,000 45,000 123,000
- ---------------------------------------------------------------------------------------------
Cash at end of year $ 139,000 29,000 45,000
=============================================================================================
</TABLE>
(15) Lines of Credit
The Bank has two lines of credit with correspondent banks totaling
$5,000,000. As of December 31, 1997 and 1996, no amounts were outstanding
under these lines of credit.
(16) Regulatory Matters
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate mandatory and possibly additional discretionary
actions by regulators, that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measure of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below).
First, a bank must meet a minimum Total Risk-Based Capital to risk-weighted
assets ratio of 8%. Risk-based capital and asset guidelines vary from Tier
I capital guidelines by redefining the components of capital, categorizing
assets into different classes, and including certain off-balance sheet
items in the calculation of the capital ratio. The effect of the risk-
based capital guidelines is that banks with high exposure will be required
to raise additional capital while institutions with low risk exposure
could, with the concurrency of regulatory authorities, be permitted to
operate with lower capital ratios. In addition, a bank must meet minimum
Tier I Capital to average assets ratio.
53
<PAGE>
Management believes, as of December 31, 1997, that the Bank meets all
capital adequacy requirements to which it is subject. As of December 31,
1997, the most recent notification, the Federal Deposit Insurance
Corporation (FDIC) categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Bank must meet the minimum ratios as set forth
below. There are no conditions or events since that notification that
management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Risk-based capital
(to Risk weighted assets) $11,459,000 12.95% $7,081,000 8.0% $8,851,000 10.0%
Tier I Capital (to Risk Weighted assets) $10,352,000 11.70% $3,541,000 4.0% $5,310,000 6.0%
Tier I Capital (to Average Assets) $10,352,000 7.11% $5,828,000 4.0% $7,285,000 5.0%
</TABLE>
(17) Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
--------------------------
sheet for cash and due from banks and federal funds sold are a reasonable
estimate of fair value.
Investment securities: Fair values for investment securities are based on
----------------------
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. (See note 3).
Loans: For variable-rate loans that reprice frequently and with no
------
significant change in credit risk, fair values are based on carrying
values. The fair values for other loans (e.g., commercial real estate,
mortgage loans, commercial and construction loans, and installment loans)
are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
Commitments to extend credit and standby letters of credit: The majority of
-----------------------------------------------------------
commitments to extend credit and standby letters of credit contain variable
rates of interest and credit deterioration clauses, and therefore, the
carrying value of these credit commitments approximates fair value.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
--------------------
interest and non-interest checking, savings, and money market accounts) are,
by definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). The fair values for fixed-rate time deposits
are estimated using a discounted cash flow calculation that applies interest
rates currently being offered on time deposits to a schedule of aggregated
expected monthly maturities on time deposits.
Limitations: Fair value estimates are made at a specific point in time,
------------
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists for
a significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
54
<PAGE>
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments. Other significant assets and
liabilities that are not considered financial assets or liabilities include
deferred tax assets, premises, and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in many of the estimates.
The estimated fair values of the Bank's financial instruments are
approximately as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1997
Carrying Fair
Amount Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and due from banks and
federal funds sold $ 12,083,000 12,083,000
Investment securities 61,917,000 61,986,000
Loans:
Gross Loans 64,109,000 64,556,000
Less:
Allowance for loan losses (1,313,000) (1,313,000)
Deferred loan fees and loan sale premiums (568,000) (568,000)
- ---------------------------------------------------------------------------------------------
Net loans $ 62,228,000 62,675,000
Financial liabilities:
Deposits:
Demand $ 14,928,000 14,928,000
Now and Super Now accounts 29,734,000 29,734,000
Money Market 20,456,000 20,456,000
Savings 24,802,000 24,802,000
Time 43,971,000 43,911,000
- ---------------------------------------------------------------------------------------------
Total deposits $133,891,000 133,831,000
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Contract Carrying Fair
Amount Amount Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrecognized financial instruments:
Commitments to extend credit $17,950,000 __ 180,000
Standby letters of credit 50,000 __ 1,000
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1996
Carrying Fair
Amount Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and due from banks
and federal funds sold $ 5,848,000 5,848,000
Investment securities $36,913,000 37,012,000
Loans:
Gross Loans $ 54,279,000 53,920,000
Less:
Allowance for loan losses (1,207,000) (1,207,000)
Deferred loan fees and loan sale premiums (400,000) (400,000
- ---------------------------------------------------------------------------------------------
Net loans $52,672,000 52,313,000
Financial liabilities:
Deposits:
Demand $ 9,066,000 9,066,000
Now and Super Now accounts 20,553,000 20,553,000
Money Market 13,042,000 13,042,000
Savings 15,972,000 15,972,000
Time 33,574,000 33,702,000
- ---------------------------------------------------------------------------------------------
Total deposits $92,207,000 92,335,000
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Contract Carrying Fair
Amount Amount Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrecognized financial instruments:
Commitments to extend credit $ 11,784,000 __ 118,000
Standby letters of credit 50,000 __ 1,000
</TABLE>
(18) Legal Proceedings
The bank is involved in various legal actions arising in the ordinary
course of business. In the opinion of management, after consulting with
legal counsel, the ultimate disposition of these matters will not have a
material effect on the Bank's financial condition, results of operations,
or liquidity.
(19)
Derivative Financial Instruments
As of December 31, 1997 and 1996, the Company has no off-balance sheet
derivatives. The Company held $1,036,000 and 1,224,000 in collateralized
mortgage obligations and $1,000,000 and $2,100,00 in structured notes as of
December 31, 1997 and 1996 respectively. These investments are held in the
available for sale portfolio.
(20) Acquisition of Branches
On February 22, 1997, the Bank completed the acquisition of the Galt,
Plymouth, and San Andreas, California, branches of Wells Fargo Bank. The
Bank purchased the premises and equipment of the Plymouth and San Andreas
branches and assumed the building lease for the Galt branch. The Bank also
purchased the furniture and equipment of all three branches and paid a
premium for the deposits of each branch. The total cost of acquiring the
branches, including payments to Wells Fargo Bank as well as other direct
costs associated with the purchase, was $2.86 million. The transaction was
accounted for using the purchase
56
<PAGE>
method of accounting. Accordingly, the purchase price was allocated first
to identifiable tangible assets based upon those assets' fair value and
then to identifiable intangible assets based upon the assets' fair value.
The excess of the purchase price over identifiable tangible and intangible
assets was allocated to goodwill. Allocations to identifiable tangible
assets, identifiable intangible assets, and goodwill were $856 thousand,
$1.98 million, and $24 thousand, respectively. Deposits totaling $34
million were acquired in the transaction.
(21) Prospective Accounting Pronouncements
Reporting Comprehensive Income
------------------------------
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 is effective for interim and annual periods beginning after
December 15, 1997 and is to be applied retroactively to all periods
presented. SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. It does not, however, specify when to recognize or
how to measure items that make up comprehensive income. SFAS No. 130 was
issued to address concerns over the practice of reporting elements of
comprehensive income directly in equity. This statement requires all items
that are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed in equal prominence with the other financial statements. It does
not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive
income for the period in that financial statement. Enterprises are required
to classify items of "other comprehensive income" by their nature in the
financial statement and display the balance of other comprehensive income
separately in the equity section of a statement of financial position. It
does not require per share amounts of comprehensive income to be disclosed.
Management does not expect that adoption of SFAS No. 130 will have a
material impact on the Company's consolidated financial statements.
Financial Reporting for Segments of a Business Enterprise
---------------------------------------------------------
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 is effective for
interim and annual periods beginning after December 15, 1997 and is to be
applied retroactively to all periods presented. SFAS No. 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. SFAS No. 131 supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise but retains the requirement
to report information about major customers. Management does not expect
that adoption of SFAS No. 131 will have a material impact on the Company's
consolidated financial statements.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 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, on the 6th day of March,
1998.
FIRST FINANCIAL BANCORP
/s/ LEON J. ZIMMERMAN
---------------------------
Leon J. Zimmerman
(President and Chief Executive
Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Capacity DATE
--------------------------------------- -------------
<S> <C> <C>
/s/ BENJAMIN R. GOEHRING Director and Chairman of the Board March, 6 1998
- ------------------------------
Benjamin R. Goehring
/s/ WELDON D. SCHUMACHER Director and Vice Chairman of the Board March, 6 1998
- ------------------------------
Weldon D. Schumacher
/s/ BOZANT KATZAKIAN Director March, 6 1998
- ------------------------------
Bozant Katzakian
/s/ ANGELO J. ANAGNOS Director March, 6 1998
- ------------------------------
Angelo J. Anagnos
/s/ RAYMOND H. COLDANI Director March, 6 1998
- ------------------------------
Raymond H. Coldani
/s/ MICHAEL D. RAMSEY Director March, 6 1998
- ------------------------------
Michael D. Ramsey
/s/ FRANK M. SASAKI Director March, 6 1998
- ------------------------------
Frank M. Sasaki
/s/ DENNIS SWANSON Director March, 6 1998
- ------------------------------
Dennis Swanson
/s/ LEON J. ZIMMERMAN President and March, 6 1998
- ------------------------------ Chief Executive Officer
Leon Zimmerman (Principal Executive Officer)
/s/ DAVID M. PHILIPP Executive Vice President, March, 6 1998
- ------------------------------ Chief Financial Officer and Secretary
David M. Philipp (Principal Financial and Accounting Officer)
</TABLE>
58
<PAGE>
INDEX TO EXHIBITS
Exhibit Page
- ------- ----
3(b) Bylaws, as amended 60
10(f) Bank of Lodi Incentive Compensation Plan 74
10(g) First Financial Bancorp 401 (k) Profit Sharing Plan 76
23 Consent of Expert 136
27 Financial Data Schedule (electronic submission only)
59
<PAGE>
EXHIBIT 3(B) - BYLAWS, AS AMENDED
BYLAWS
------
OF
--
FIRST FINANCIAL BANCORP
A CALIFORNIA CORPORATION
(as amended through February 20, 1998)
Article I. Offices
-------------------
SECTION 1.01. PRINCIPAL OFFICE. The Board of Directors shall fix the location
- -------------------------------
of the principal executive office of the Corporation at any place within or
without the State of California. If the principal executive office is located
outside this State, and the Corporation has one or more business offices in this
State, the Board of Directors shall fix and designate a principal business
office in the State of California.
SECTION 1.02. OTHER OFFICES. The Board of Directors may at any time establish
- ----------------------------
branch or subordinate offices at any place or places where the Corporation is
qualified to do business.
ARTICLE II. MEETINGS OF THE SHAREHOLDERS
-----------------------------------------
SECTION 2.01. PLACE OF MEETINGS. Meetings of shareholders shall be held at any
- --------------------------------
place within or without the State of California designated by the Board of
Directors. In the absence of any such designation, shareholders' meetings shall
be held at the principal office of the Corporation.
SECTION 2.02. ANNUAL MEETINGS. Annual meetings of shareholders of the
- ------------------------------
Corporation for the purpose of electing directors and for the transaction of
such other proper business as may come before such meetings may be held at such
time, date and places as the Board of Directors shall determine by resolution.
SECTION 2.03. SPECIAL MEETINGS. Special meetings of the shareholders may be
- -------------------------------
called at any time, for any purpose or purposes whatsoever, by the President, by
the Chairman of the Board, by the Secretary, by the Board of Directors or by one
or more shareholders holding not less than ten percent (10%) of the voting
shares of the Corporation.
SECTION 2.04. NOTICE OF MEETINGS.
- ---------------------------------
(A) Written notice of all meetings of the shareholders shall be given to
each shareholder entitled to vote by the Secretary or by any Assistant-
Secretary, or by any other person whom the Board of Directors may charge with
that duty. Such notice shall be given, either personally or by mail or other
means of written communication, addressed to the shareholder at the address of
such shareholder appearing on the books of the Corporation or given by the
shareholder to the Corporation for the purpose of notice; or if no such address
appears or is given, at the place where the principal executive office of the
Corporation is located or by publication at least once in a newspaper of general
circulation in the county in which the principal executive office is located.
The notice or report shall be deemed to have been given when delivered
personally or deposited in the mail or sent by other means of written
communication. An affidavit of mailing of any notice or report in accordance
with these Bylaws executed by the Secretary, Assistant-Secretary or any transfer
agent shall be prima facie evidence of the giving of the notice or report. If
any notice or report addressed to the shareholder at the address of such
shareholder appearing on the books of the Corporation is returned to the
Corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice or report to the
shareholder at such address, then all future notices shall be deemed to have
been duly given without further mailing if the same shall be available
1
<PAGE>
for the shareholder upon written demand at the principal executive office of the
Corporation for a period of one year from the date of giving of the notice or
report to the other shareholders.
(B) All notices shall be given not fewer than ten (10) nor more than
sixty (60) days before the date of the meeting to each shareholder entitled to
vote thereat. Such notice shall state the place, the date, and hour of the
meeting and (i) in the case of a special meeting, the general nature of the
business to be transacted, and no other business may be transacted, or (ii) in
the case of the annual meeting, those matters that the Board, at the time of the
mailing of the notice, intends to present for action by the shareholders,
provided, however, that any shareholder approval at an annual meeting, other
than unanimous approval by those entitled to vote on any matter specified in
Section 310, 902, 1201, 1900 or 2007 of the California General Corporation Law,
shall be valid only if the general nature of the proposal so approved was stated
in the notice of meeting or in any written waiver of notice; and provided
further, that any unanimous shareholder approval at an annual meeting by those
entitled to vote on any matter specified in Section 310, 902, 1201, 1900 or
2007 of the California General Corporation Law shall be valid even though the
general nature of the proposal so approved was not stated in the notice of
meeting or in any written waiver of notice. A notice of any meeting at which
directors are to be elected shall include the names of nominees intended at the
time of the notice to be presented by management for election.
SECTION 2.05. NOMINATIONS FOR DIRECTORS. Nominations for election to
- ------------------------------------------
the Board of Directors may be made by the Board of Directors or by any
shareholder entitled to vote for the election of directors, Nominations, other
than those made by the Board of Directors, shall be made in writing and shall be
delivered or mailed, with first-class United States mail postage prepaid, to the
Secretary not less than 20 days nor more than 50 days prior to any meeting of
shareholders called for the election of directors; provided, however, that if
less than 25 days notice of the meeting is given to the shareholders, such
nomination shall be mailed or delivered to the Secretary not later than the
close of business on the seventh day following the day on which the notice of
the meeting was mailed. Shareholder nominations shall contain the following
information: (a) the name, age, business address and, if known, residence
address of each proposed nominee; (b) the principal occupation or employment of
each proposed nominee; (c) the total number of shares of capital stock of the
Corporation that are beneficially owned by each proposed nominee and by the
nominating shareholder; (d) the name and residence address of the notifying
shareholder; and (e) any other information the Corporation must disclose
regarding director nominees in the Corporation's proxy solicitation.
Nominations not made in accordance with this Section may be disregarded by the
Chairman of the meeting, and if the Chairman so instructs, the inspectors of
election may disregard all votes cast for each such nominee.
SECTION 2.06. QUORUM. The presence in person or by proxy of the persons
- ---------------------
entitled to vote a majority of the voting shares of the Corporation at any
meeting shall constitute a quorum for the transaction of business. The
shareholders present at a duly called or held meeting at which a quorum is
present may continue to transact business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by a least a majority of the shares
required to constitute a quorum.
SECTION 2.07. ADJOURNED MEETING AND NOTICE THEREOF. Any shareholder's meeting,
- ---------------------------------------------------
annual or special, whether or not a quorum is present, may be adjourned from
time to time by the vote of a majority of the shares represented either in
person or by proxy, but in the absence of a quorum no other business may be
transacted at such meeting, except as provided in Section 2.06 of these Bylaws.
It shall not be necessary to give any notice of the time and place of the
adjourned meeting or of the business to be transacted thereat, other than by
announcement at the meeting at which such adjournment is taken except that, when
any meeting is adjourned for more than forty-five (45) days or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder of record entitled to
vote thereat. At the adjourned meeting the Corporation may transact any
business which could have been transacted at the original meeting.
SECTION 2.08. VOTING AT MEETINGS.
- ---------------------------------
(A) The shareholders entitled to notice of any meeting or to vote at any
such meeting shall be the persons in whose name shares stand on the stock
records of the Corporation on the record date determined in accordance with
Section 2.09 of these Bylaws.
(B) Voting shall in all cases be subject to the provisions of Chapter 7
of the California General Corporation Law and to the following provisions:
2
<PAGE>
(1) subject to clause (8), shares held by an administrator, executor,
guardian, conservator or custodian may be voted by such holder either in person
or by proxy, without a transfer of the shares into the holder's name;
(2) subject to clause (8), shares standing in the name of a trustee
may be voted by the trustee, either in person or by proxy, but no trustee shall
be entitled to vote shares so held without a transfer of them into the trustee's
name.
(3) shares standing in the name of a receiver may be voted by such
receiver; and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into the receiver's name if authority
to do so is contained in the order of the court by which such receiver was
appointed;
(4) subject to the provisions of Section 705 of the California
General Corporation Law and of Section 2.10 of these Bylaws, and except where
otherwise agreed in writing between the parties, a shareholder whose shares are
pledged shall be entitled to vote such shares until the shares have been
transferred into the name of the pledgee, and thereafter the pledgee shall be
entitled to vote the shares so transferred;
(5) shares standing in the name of a minor may be voted and the
Corporation may treat all rights incident thereto as exercisable by the minor,
in person or by proxy, whether or not the corporation has notice, actual or
constructive, of the nonage, unless a guardian of the minor's property has been
appointed and written notice of such appointment has been given to the
Corporation;
(6) shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxyholder as the bylaws of
such other corporation may prescribe or, in the absence of such provision, as
the Board of Directors of such other corporation may determine or, in the
absence of such determination, by the chairman of the board, president or any
vice-president of such other corporation, or by any other person authorized to
do so by the chairman of the board, president or any vice-president of such
other corporation. Shares which are purported to be voted or any proxy purported
to be executed in the name of a corporation (whether or not any title of the
person signing is indicated) shall be presumed to be voted or the proxy executed
in accordance with the provisions of this subdivision, unless the contrary is
shown;
(7) shares of the Corporation owned by any subsidiary of the
Corporation shall not be entitled to vote on any matter;
(8) shares held by the Corporation in a fiduciary capacity, and
shares of the Corporation held in a fiduciary capacity, and shares of the
Corporation held in a fiduciary capacity by any subsidiary of the Corporation,
shall not be entitled to vote on any matter, except to the extent that the
settlor or beneficial owner possesses and exercises a right to vote or to give
the Corporation binding instructions as to how to vote such shares;
(9) if shares stand of record in the names of two (2) or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, husband and wife as community property, tenants by the entirety,
voting trustees, persons entitled to vote under a shareholder voting agreement
or otherwise, or if two or more persons (including proxyholders) have the same
fiduciary relationship respecting the same shares, unless the Secretary of the
Corporation is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the following
effect:
(a) if only one votes, such act binds all;
(b) if more than one vote, the act of the majority so voting binds
all;
(c) if more than one vote, but the vote is evenly split on any
particular matter, each faction may vote the securities in
question proportionately.
If the instrument so filed or the registration of the shares shows that any such
tenancy is held in unequal interests, a majority or even split for the purpose
of the above shall be a majority or even split in interest.
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(C) Subject to the following sentence and to the provisions of Section
708 of the California General Corporation Law, every shareholder entitled to
vote at any election of directors may cumulate his votes and give one candidate
a number of votes equal to the number of directors to be elected multiplied by
the number of votes to which his shares are entitled (except for this Section
2.08(C) as to cumulative voting), or distribute his votes on the same principle
among as many candidates as he may see fit. No shareholder shall be entitled to
cumulate votes for any candidate or candidates pursuant to the preceding
sentence unless such candidate or candidates' name(s) have been placed in
nomination before the voting and the shareholder has given notice, at the
meeting and before the voting, of his intention to cumulate his votes. If any
one shareholder has given such notice, then all shareholders may cumulate their
votes for candidates in nomination.
(D) Elections shall be by written ballot.
(E) In any election of directors, the candidates receiving the highest
number of votes of the shares entitled to be voted for them up to the number of
directors to be elected by such shares are elected.
SECTION 2.09. RECORD DATE.
- --------------------------
(A) The Board of Directors may fix a time in the future as a record date
for the determination of the shareholders entitled to notice of, and to vote at,
any meeting of the shareholders or entitled to receive any dividend or
distribution, or any allotment of rights, or to exercise rights in respect to
any change, conversion or exchange of shares. The record date so fixed shall not
be more than sixty (60) nor fewer than ten (10) days before the date of the
meeting, nor more than sixty (60) days before any other action. When a record
date is so fixed, only shareholders of record on that date shall be entitled to
notice of, and to vote at, the meeting, or to receive the dividend, distribution
or allotment of rights, or to exercise the rights, as the case may be,
notwithstanding any transfer of shares on the books of the Corporation after the
record date. A determination of shareholders of record entitled to notice of, or
to vote at, a meeting of the shareholders shall apply to any adjournment of the
meeting unless the Board of Directors fixes a new record date or the meeting is
adjourned for more than forty-five (45) days from the date set for the original
meeting.
(B) If the Board of Directors does not fix a record date, then the record
date for determining which shareholders are entitled to notice of, or to vote
at, a meeting of the shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, of notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held. The record date for determining shareholders for any
purpose other than those set forth in this Section and Section 2.13 of these
Bylaws shall be at the close of business on the day on which the Board of
Directors adopts the resolutions relating thereto, or on the sixtieth (60) day
before the date of such other action, whichever is later.
SECTION 2.10. PROXIES.
- ----------------------
(A) Every person entitled to vote or to execute consents shall have the
right to do so either in person or by one or more agents authorized by a written
proxy executed by such a person or his duly authorized agent and filed with the
Secretary of the Corporation. No proxy shall be valid after the expiration of
eleven (11) months from the date thereof unless otherwise provided in the proxy.
Every proxy continues in full force and effect until revoked by the person
executing it before the vote pursuant thereto, except as otherwise provided in
this Section 2.10 or by law. Revocation may be effected by a writing delivered
to the Corporation stating that the proxy is revoked or by a subsequent proxy
executed by, or by attendance at the meeting and voting in person by, the maker.
The dates contained on the forms of proxy presumptively determine the order of
execution, regardless of the postmarked date on the envelopes in which they are
mailed. A proxy is not revoked by the death or incapacity of the maker unless,
before the vote is counted, written notice of the death or incapacity is
received by the Corporation.
(B) Except when other provision shall have been made by written agreement
between the parties, the record-holder of shares held by a pledgee or otherwise
as security or belonging to another shall issue to the pledgor or to the owner
of such shares, upon demand therefor and payment of necessary expenses thereof,
a proxy to vote or take other action.
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(C) A proxy stating that it is irrevocable is irrevocable for the period
specified therein when it is held by any of the following or a nominee of any of
the following:
(1) a pledgee;
(2) a person who has bought or agreed to buy or holds an option to
buy the shares of a person who has sold a portion of such person's shares in the
Corporation to the maker of the proxy;
(3) a creditor or creditors of the Corporation or the shareholder
who extended or continued credit to the Corporation or the shareholder in
consideration of the proxy, if the proxy states that it was given in
consideration of such extension or continuation of credit and the name of the
person extending or continuing credit;
(4) a person who has contracted to perform services as an employee
of the Corporation, if a proxy is required by the contract of employment and if
the proxy states that it was given in consideration of such contract of
employment, the name of the employee and the period of employment contracted
for.
(D) Notwithstanding the period of irrevocability specified, the proxy
becomes revocable when the pledge is redeemed, the option or the agreement to
buy is terminated or the seller no longer owns any shares of the Corporation or
dies, the debt of the Corporation or the shareholder is paid, or the period of
employment provided for in the contract of employment has terminated.
(E) A proxy may be revoked, notwithstanding a provision making it
irrevocable, by a buyer of shares without knowledge of the existence of the
provision unless the existence of the proxy and its irrevocability appear on the
certificate representing such shares.
SECTION 2.11. INSPECTORS OF ELECTION.
- -------------------------------------
(A) In advance of any meeting of the shareholders, the Board of Directors
may appoint inspectors of election to act at such meeting and any adjournment
thereof. If the Board of Directors does not appoint inspectors of election, then
the Chairman of any such meeting may, and on the request of any shareholder or
his proxy shall, make such appointment at the meeting. The number of inspectors
shall be either one or three. If appointed at a meeting on the request of one or
more shareholders or proxies, the majority of shares present shall determine
whether one or three inspectors are to be appointed. In case any person
appointed as inspector fails to appear or fails or refuses to act, the vacancy
may be filled by appointment by the Board of Directors before the meeting, or at
the meeting by the Chairman.
(B) The inspectors of election, impartially, in good faith, to the best
of their ability, and as expeditiously as is practical, shall determine the
number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, shall receive votes, ballots or consents, hear
and determine all challenges and questions in any way arising in connection with
the right to vote, shall count and tabulate all votes or consents, determine the
result, and do such acts as may be proper to conduct the election or vote with
fairness to all shareholders. If there are three inspectors of election, the
decision, act or certificate of a majority of them shall be effective in all
respects as the decision, act or certificate of all. On request of the Chairman
of the meeting or of any shareholder or his proxy, the inspectors shall make a
report in writing of any challenge or question or matter determined by them and
shall execute a certificate of any fact found by them. Any report or certificate
made by them shall be prima facie evidence of the facts stated therein.
SECTION 2.12. SHAREHOLDERS' RIGHT TO INSPECT CORPORATE RECORDS.
- ---------------------------------------------------------------
(A) A shareholder or shareholders holding at least five percent (5%) in
the aggregate of the outstanding voting shares of the Corporation or who hold at
least one percent (1%) of such voting shares and have filed a Schedule 14-B with
the securities and Exchange Commission relating to the election of directors of
the Corporation shall have an absolute right to do either or both of the
following: (i) inspect and copy the record of shareholders' names and addresses
and shareholdings during usual business hours upon five business days' advance
written demand upon the Corporation or, (ii) obtain from the transfer agent for
the Corporation, upon five business days' advance written notice and upon the
tender of its
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usual charges for such a list (the amount of which charges shall be stated to
the shareholders by the transfer agent upon request), a list of the
shareholders' names and addresses, who are entitled to vote for the election of
directors, and their shareholdings, as of the most recent record date for which
it has been compiled or as of a date specified by the shareholders after the
date of demand.
(B) The record of shareholders shall also be open to inspection and
copying by any shareholder or holder of a voting trust certificate at any time
during usual business hours upon written demand on the Corporation, for a
purpose reasonably related to such holder's interests as a shareholder or holder
of a voting trust certificate.
(C) The accounting books and records and minutes of proceedings of the
shareholders, Board and committees of the Board of the Corporation shall be open
to inspection upon the written demand on the Corporation of any shareholder or
holder of a voting trust certificate at any reasonable time during usual
business hours, for a purpose reasonably related to such holder's interest as a
shareholder or as a holder of such voting trust certificate. Such inspection by
a shareholder or holder of a voting trust certificate may be made in person or
by agent or attorney, and the right of inspection includes the right to copy and
make extracts.
(D) Any inspection and copying under this Section 2.12 may be made in
person or by an agent or attorney.
SECTION 2.13. INSPECTION OF BYLAWS. The Corporation shall keep in its
- -----------------------------------
principal office for the transaction of business the original or a copy of the
Bylaws, as amended or otherwise altered to date, certified by the Secretary,
which shall be open to inspection by the shareholders at all reasonable times
during office hours.
ARTICLE III. DIRECTORS
-----------------------
Section 3.01. Powers. Subject to the limitation of the Articles of
- ---------------------
Incorporation, of these Bylaws, and of the California General Corporation Law
relating to action required to be approved by the shareholders or the
outstanding shares, the business and affairs of the Corporation shall be
managed, and all corporate powers shall be exercised, by or under the direction
of the Board of Directors. The Board of Directors may delegate the management
of the day-to-day operation of the business of the Corporation to a management
company or other person, provided that the business and affairs of the
Corporation shall be managed and all corporate powers shall be exercised under
the ultimate direction of the Board of Directors.
SECTION 3.02. NUMBER OF DIRECTORS. The Corporation shall have not less than
- ----------------------------------
eight (8) nor more than fifteen (15) directors, the exact number to be
determined from time to time by resolution adopted by the Board of Directors,
and such exact number shall be thirteen (13) until otherwise determined by
resolution of the Board of Directors, provided, however, that before the
issuance of any shares or so long as the Corporation has only one shareholder
the number may be one or two, and so long as the Corporation has two
shareholders the number may be two. A bylaw specifying or changing a fixed
number of directors to a variable board or vice versa may only be adopted by the
vote of the holders of not less than two-thirds (2/3) the total voting power of
all outstanding shares of voting stock of the Corporation, provided, however,
that a bylaw reducing the fixed number or the minimum number of directors to a
number smaller than five (5) shall not be adopted if the votes cast against its
adoption at a meeting of shareholders are equal to more than sixteen and two-
thirds percent (16-2/3%) of the outstanding shares entitled to vote. No
reduction of the authorized number of directors shall have the effect of
removing any director before the expiration of his term of office.
SECTION 3.03. EXECUTIVE COMMITTEE.
- ----------------------------------
(A) The Board of directors may, by resolution adopted by a majority of
the authorized number of directors, appoint one or more committees, each
consisting of two or more directors, and delegate to such committees any of the
authority of the Board of Directors except with respect to:
(1) the approval of any action for which the California General
Corporation Law requires shareholders' approval or approval of the outstanding
shares;
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(2) the filling of vacancies on the Board of Directors or on any
committee;
(3) the fixing of compensation of the directors for serving on the
Board of Directors or on any committee;
(4) the amendment or repeal of Bylaws or the adoption of new Bylaws;
(5) the amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable;
(6) a distribution to the shareholders of the Corporation except at
a rate or in a periodic amount or within a price range determined by the Board
of Directors;
(7) the appointment of other committees of the Board of Directors or
the members thereof.
(B) The Board of Directors shall have the power to prescribe the manner
in which proceedings of any such committee shall be conducted. In the absence of
any such prescription, such committee shall have the power to prescribe the
manner in which its proceedings shall be conducted. Unless the Board of
Directors or such committee shall otherwise provide, the regular and special
meetings and other actions of any such committee shall be governed by the
provisions of this Article applicable to meetings and actions of the Board of
Directors. Minutes shall be kept of each meeting of each committee.
SECTION 3.04. ELECTION AND TERM OF OFFICE. The directors shall be elected at
- ------------------------------------------
each annual meeting of shareholders, but if any such annual meeting is not held
or the directors are not elected thereat, then the directors may be elected at
any special meeting of shareholders held for that purpose. Each director shall
hold office until the next annual meeting and until a successor has been elected
and qualified.
SECTION 3.05. VACANCIES.
- ------------------------
(A) A vacancy or vacancies in the Board of Directors shall be deemed to
exist in case of death, resignation or removal of any director, or if the
authorized number of directors is increased, or if the shareholders fail, at any
annual or special meeting of shareholders at which any director or directors are
elected, to elect the full authorized number of directors to be voted for at
that meeting.
(B) The Board of Directors may declare vacant the office of a director
who has been declared of unsound mind by an order of court, convicted of a
felony, or if within sixty (60) days after notice of his election, he does not
accept the office either in writing or by attending a meeting of the Board of
Directors. Vacancies in the Board of Directors may be filled by a majority of
the remaining directors, though less than a quorum, or by a sole remaining
director, and each director so elected shall hold office until his successor is
elected at an annual or a special meeting of the shareholders. If, after the
filling of any vacancy by the directors, the directors then in office who have
been elected by the shareholders constitute less than a majority of the
directors then in office, then any holder or holders of an aggregate of five
percent (5%) or more of the total number of shares at the time outstanding
having the right to vote for such directors may call a special meeting of
shareholders to elect the entire Board of Directors. The term of office of any
director not elected by the shareholders shall terminate upon such election of a
successor.
(C) Any director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary or the Board of Directors of
the Corporation, unless the notice specifies a later time for the effectiveness
of such resignation. If the resignation is effective at a future time, then a
successor may be elected to take office when the resignation becomes effective.
SECTION 3.06. REMOVAL.
- ----------------------
(A) Any or all of the directors may be removed without cause if such
removal is approved by the outstanding shares of the Corporation, subject to the
following: (i) no director may be removed (unless the entire Board is
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<PAGE>
removed) when the votes cast against removal would be sufficient to elect such
director if voted cumulatively at an election at which the same total number of
votes were cast and the entire number of directors authorized at the time of the
director's most recent election were then being elected; and (ii) when by the
provisions of the Articles of Incorporation the holders of the shares of any
class or series, voting as a class or series, are entitled to elect one or more
directors, any director so elected may be removed only by the applicable vote of
the holders of the shares of that class or series.
SECTION 3.07. PLACE OF MEETING. Regular meetings of the Board of Directors
- -------------------------------
shall be held at any place within or without the State which has been designated
from time to time by resolution of the Board of Directors or by written consent
of all members of the Board given either before or after the meeting and filed
with the Secretary of the Corporation. In the absence of such designation
regular meetings shall be held at the principal office of the Corporation.
Special meetings of the Board of Directors may be held either at a place so
designated or at the principal office.
SECTION 3.08. REGULAR MEETINGS OF THE BOARD OF DIRECTORS. Regular meetings of
- ---------------------------------------------------------
the Board of Directors shall be held immediately following each annual meeting
of shareholders as provided in Section 2.02 of the Bylaws and at such other
times as the Board of Directors may by resolution determine. Notice of all such
regular meetings of the Board of Directors is hereby waived.
SECTION 3.09 SPECIAL MEETINGS.
- ------------------------------
(A) Special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the Chairman of the Board or the President
or, if the President is absent or unable or refuses to act, by any Vice-
President or by any two directors.
(B) Special meetings of the Board of Directors shall be held upon four
(4) days' written notice or forty-eight (48) hours' notice given personally or
by telephone, telegraph, telex or other similar means of communication. Any such
notice shall be addressed or delivered to each director at his address as it is
shown upon the records of the Corporation or as may have been given to the
Corporation by the director for purposes of notice or, if such address is not
shown on such records or is not readily ascertainable, then at the place where
the meetings of the directors are regularly held.
(C) Notice by mail shall be deemed to have been given at the time written
notice is deposited in the United States Mail, postage pre-paid. Any other
written notice shall be deemed to have been given at the time when personally
delivered to the recipient or delivered to a common carrier for transmission, or
actually transmitted by the person giving the notice by electronic means, to the
recipient. Oral notice shall be deemed to have been given at the time it is
communicated, in person or by telephone or wireless, to the recipient or a
person at the office of the recipient who the person giving the notice has
reason to believe will promptly communicate it to the recipient.
SECTION 3.10. WAIVER OF NOTICE. The transactions of any meeting of the Board
- -------------------------------
of Directors, however called and noticed and wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice, if a quorum is
present and if, either before or after the meeting, each of the directors not
present signs a written waiver of notice or a consent to the holding of such
meeting or an approval of the minutes thereof. All such waivers, consents or
approval shall be filed with the corporate records or made a part of the minutes
of the meeting.
SECTION 3.11. NOTICE OF ADJOURNMENT. A majority of the directors present,
- ------------------------------------
whether or not a quorum is present, may adjourn any meeting to another time and
place. If the meeting is adjourned for more than twenty-four (24) hours, notice
of any adjournment to another time or place shall be given before the adjourned
meeting to the directors who are not present at the time of the adjournment.
SECTION 3.12. QUORUM. A majority of the authorized number of directors
- ---------------------
constitutes a quorum of the Board of Directors for the transaction of business,
except to adjourn as hereinafter provided. Except as otherwise provided in the
Articles of Incorporation or Bylaws or in the General Corporation Law, every act
or decision done or made by the majority of the directors present at a meeting
duly held at which a quorum is present shall be regarded as the act of the Board
of Directors. A meeting at which a quorum is initially present may continue to
transact business, notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the quorum required for such
meeting.
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SECTION 3.13. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of
- ----------------------------------------------------------------
the Board of Directors may participate in a meeting through use of conference
telephone or similar communications equipment, so long as all members
participating in such a meeting can hear one another.
SECTION 3.14. ACTION WITHOUT MEETING. Any action under any provision of the
- -------------------------------------
California General Corporation Law required or permitted to be taken by the
Board of Directors, may be taken without a meeting if all members of the Board
individually or collectively consent in writing to such action. Such written
consent or consents shall be filed with the minutes of the proceedings of the
Board. Such action by written consent shall have the same force and effect as a
unanimous vote of the Board of Directors.
SECTION 3.15. FEES AND COMPENSATION. Directors and members of committees may
- ------------------------------------
receive such compensation for their services, and such reimbursement for
expenses, as may be fixed or determined by resolution of the Board of Directors.
SECTION 3.16. DIRECTORS' RIGHT TO INSPECT CORPORATE RECORDS. Every director
- ------------------------------------------------------------
shall have the absolute right at any time to inspect and copy all books,
records, documents of every kind, and to inspect the physical properties of the
Corporation and also of its subsidiary corporations, if any. Such inspection by
a director may be made in person or by agent or attorney, and the right of
inspection includes the right to copy and make extracts.
ARTICLE IV. OFFICERS
---------------------
SECTION 4.01. OFFICERS. The officers of the Corporation shall consist of a
- -----------------------
president, a vice-president, a secretary, a chief financial officer, and such
additional officers as may be elected or appointed in accordance with Section
4.03 of these Bylaws. One person may hold two or more offices, including the
offices of president and secretary.
SECTION 4.02. ELECTIONS. All officers of the Corporation, except such officers
- ------------------------
as may be appointed in accordance with Section 4.03, shall be chosen annually by
the Board of Directors, and each shall hold office until he resigns or is
removed or otherwise disqualified to serve, or until his successor is chosen and
qualified.
SECTION 4.03. OTHER OFFICERS. The Board of Directors, at their discretion, may
- -----------------------------
choose a chairman of the board, and may appoint, or empower the president to
appoint, one or more additional vice-presidents, one or more assistant
secretaries, one or more assistant financial officers, or such other officers as
the business of the Corporation may require, each of whom shall hold office for
such period, have such authority and perform such duties as the Board of
Directors may from time to time determine.
SECTION 4.04. REMOVAL AND RESIGNATION.
- --------------------------------------
(A) Any officer may be removed, either with or without cause, by the
Board of Directors, at any regular or special meeting thereof, or, except in the
case of an officer chosen by the Board of Directors, by any officer upon whom
such power of removal may be conferred by the Board of Directors. Any such
removal shall be without prejudice to the rights, if any, of the officer under
his contract of employment, if any.
(B) Any officer may resign at any time by giving written notice to the
Board of Directors, the president, or the secretary of the Corporation. Any such
resignation shall be without prejudice to the rights, if any, of the Corporation
under any contract to which the officer is a party, and shall take effect upon
receipt of such notice or at any later time specified therein. Unless otherwise
specified therein, acceptance of such resignation shall not be necessary to make
it effective.
SECTION 4.05. VACANCIES. A vacancy in any office because of death,
- ------------------------
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in the Bylaws for regular appointments to such office.
SECTION 4.06. CHAIRMAN OF THE BOARD. The chairman of the board, if there is
- ------------------------------------
such an officer, shall, if present, preside at all meetings of the Board of
Directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Directors or prescribed by the
Bylaws.
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SECTION 4.07. PRESIDENT. Subject to such supervisory powers, if any, as may be
- ------------------------
given by the Board of Directors to the chairman of the board, if there is such
an officer, the president shall be the chief executive officer of the
Corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
Corporation. He shall preside at all meetings of the shareholders and, in the
absence of the chairman of the board, or if there is no such officer, at all
meetings of the Board of Directors. He shall be ex officio a member of all the
-- -------
standing committees, including the executive committee, if any, and shall have
the general powers and duties of management usually vested in the office of
president of a corporation, and shall have such other powers and duties as may
be prescribed by the Board of Directors or the Bylaws.
SECTION 4.08. VICE-PRESIDENT. In the absence or disability of the president,
- -----------------------------
the vice-presidents in order of their rank as fixed by the Board of Directors
or, if not ranked, the vice-president designated by the Board of Directors,
shall perform all the duties of the President, and when so acting shall have all
the powers of, and be subject to all the restrictions upon, the president. The
vice-presidents shall have such other powers and perform such other duties as
from time to time may be prescribed for them by the president, the Board of
Directors or the Bylaws.
SECTION 4.09. SECRETARY.
- ------------------------
(A) The secretary shall keep or cause to be kept, at the principal
office or such other place as the Board of Directors may order, a book of
minutes of all meetings of shareholders, the Board of Directors, and its
committees with the time and place of holding, whether regular or special, and
if special, how authorized, the notice thereof given, the names of those present
at directors' meetings, the number of shares present or represented at the
shareholders' meetings, and the proceedings thereof.
(B) The secretary shall keep, or cause to be kept, at the principal
office or at the office of the Corporation's transfer agent, a share register,
or a duplicate share register, showing the names of the shareholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for shares, and the number and date of cancellation of every
certificate surrendered for cancellation.
(C) The corporate minutes shall be kept in written form. The other
information that the secretary shall keep or cause to be kept shall be kept
either in written form or in a form capable of being converted into written
form.
(D) The secretary shall give, or cause to be given, notice of all the
meetings of the shareholders and of the Board of Directors and of any committees
thereof required by the Bylaws or by law to be given, and shall have such other
powers and perform such other duties as may be prescribed by the Board of
Directors or by the Bylaws.
SECTION 4.10. CHIEF FINANCIAL OFFICER.
- --------------------------------------
(A) The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct accounts of the properties and
business transactions of the Corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, surplus and
shares. Any surplus, including earned surplus, paid-in surplus and surplus
arising from a reduction of stated capital, shall be classified according to
source and shown in a separate account. The books of account shall at all
reasonable times be open to inspection by any director.
(B) The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the Corporation with such
depositaries as may be designated by the Board of Directors. He shall disburse
the funds of the Corporation as may be ordered by the Board of Directors, shall
render to the president and directors, whenever they request it, an account of
all his transactions as chief financial officer and of the financial condition
of the Corporation, and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or the Bylaws.
ARTICLE V. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS
- ------------------------------------------------------------------------------
SECTION 5.01. AGENTS, PROCEEDINGS, AND EXPENSES. For the purposes of this
- ------------------------------------------------
Article, "agent" means any person who is or was a director, officer, employee,
or other agent of the Corporation or its predecessor, and any person who is or
was serving as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust or other enterprise at the
10
<PAGE>
request of the Corporation or its predecessor; "proceeding" means any
threatened, pending, or completed action or proceeding, whether civil, criminal,
administrative, or investigative; and "expenses" include but are not limited to
attorneys' fees and any expenses of establishing a right to indemnification
under this Article.
SECTION 5.02. LAWSUITS OTHER THAN BY THE CORPORATION. The Corporation shall
- -----------------------------------------------------
have the power to indemnify any person who was or is a party, or is threatened
to be made a party to any proceeding (other than an action by or in the right of
the Corporation to procure a judgment in its favor) by reason of the fact that
such person is or was an agent of the Corporation, against expenses, judgments,
fines, settlements, and other amounts actually and reasonably incurred in
connection with such proceeding, if the agent acted in good faith and in a
manner the agent reasonably believed to be in the best interests of the
Corporation. If there are criminal charges, the agent must have had no
reasonable cause to believe that his or her conduct was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction, or
plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that the agent did not act in good faith and in a manner that the
agent reasonably believed to be in the best interests of the Corporation, or
that the agent had reasonable cause to believe that his or her conduct was
unlawful.
SECTION 5.03. LAWSUITS BY OR ON BEHALF OF THE CORPORATION. The Corporation
- ----------------------------------------------------------
shall have the power to indemnify any person who was, is, or is threatened to be
made a party by reason of the fact that such person is or was an agent of the
Corporation, to any threatened, pending, or completed legal action by or in the
right of the Corporation to procure a judgment in its favor, against expenses
actually and reasonably incurred by the agent in connection with the defense or
settlement of that action, if the agent acted in good faith, in a manner the
agent believed to be in the best interests of the Corporation. However, the
Corporation shall not indemnify any amount paid with respect to a claim, issue,
or matter for which the agent has been adjudged liable to the Corporation in the
performance of his or her duty, except for any expenses (exclusive of judgment
or settlement amount) specifically authorized by the court in which the
proceeding is or was pending, in accordance with statutory requirements.
SECTION 5.04. APPROVAL; WHEN REQUIRED. Unless indemnification is mandatory
- --------------------------------------
because of the agent's successful defense on the merits as set forth in Section
5.05 of this Article, indemnification can be made only as to a specific case,
upon a determination that indemnification is proper in the circumstances because
the agent has met the applicable standard of conduct as set forth in Sections
5.02 or 5.03 of this Article, and must be authorized by one of the following:
(1) a majority vote of the Board with a quorum consisting of directors who are
not parties to the proceeding; (2) the affirmative vote of a majority of the
outstanding shares entitled to vote and present or represented at a duly held
meeting at which a quorum is present or by the written consent of a majority of
the outstanding shares entitled to vote (without counting shares owned by the
person seeking indemnification as either outstanding or entitled to vote); or
(3) the court in which the proceeding is or was pending, upon application by
the Corporation, the agent, the agent's attorney, or other person rendering
services in connection with the defense, regardless of whether the Corporation
opposes the application. Any amount paid in settling or otherwise disposing of
a threatened or pending lawsuit, and any expenses incurred in defending a
threatened or pending action that is settled or otherwise disposed of, must be
authorized by the court in which the proceeding is or was pending, upon
application by the Corporation, the agent, the agent's attorney, or other person
rendering services in connection with the defense, regardless of whether the
Corporation opposes the application.
SECTION 5.05, INDEMNIFICATION AGAINST EXPENSES. To the extent that an agent of
- -----------------------------------------------
the Corporation has been successful on the merits in defense of any proceeding
referred to in Section 5.02 or 5.03 of this Article or in defense of any claim,
issue or matter therein, he shall be indemnified against his expenses actually
and reasonably incurred in connection therewith.
SECTION 5.06. ADVANCE OF EXPENSES. Expenses incurred in defending any
- ----------------------------------
proceeding may be advanced by the Corporation before the final disposition of
such proceeding upon receipt of an undertaking by or on behalf of the agent to
repay such amount unless it shall be determined ultimately that the agent is
entitled to be indemnified as authorized in this Article.
SECTION 5.07. OTHER INDEMNIFICATION. No provision made by the Corporation to
- ------------------------------------
indemnify the directors or officers of the Corporation, or a subsidiary of the
Corporation for the defense of any proceeding, whether contained in the Articles
of Incorporation, Bylaws, a resolution of the shareholders or directors, an
agreement or otherwise, shall be valid unless consistent with Section 317 of the
California General Corporation Law. Nothing contained in this Article shall
affect any right to indemnification to which persons other than such directors
and officers may be entitled by contract or otherwise.
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SECTION 5.08. FORMS OF INDEMNIFICATION NOT PERMITTED. No indemnification or
- -----------------------------------------------------
advance shall be made under this Article, except as provided in Section 5.04 or
Section 5.05 of these Bylaws in any circumstance where it appears:
(A) that it would be inconsistent with a provision of the Articles of
Incorporation, Bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other amounts were paid, which
prohibits or otherwise limits indemnification; or
(B) that it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
SECTION 5.09. INSURANCE. The Corporation shall have the power to buy and
- ------------------------
maintain insurance on behalf of any agent of the Corporation of the Corporation
against any liability asserted against or incurred by the agent in such capacity
or arising out of the agent's status as such whether or not the Corporation
would have the power to indemnify the agent against such liability under the
provisions of this Article.
SECTION 5.10. NONAPPLICABILITY TO FIDUCIARIES OF EMPLOYEE BENEFIT PLANS. This
- ------------------------------------------------------------------------
Article does not apply to any proceeding against any trustee, investment manager
or other fiduciary of an employee benefit plan in his capacity as such, even
though he may also be an agent of the Corporation as defined in Section 5.01 of
these Bylaws. Nothing contained in this Article shall limit any right to
indemnification to which such a trustee, investment manager or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than Section 317 of the California
General Corporation Law.
ARTICLE VI. MISCELLANEOUS
--------------------------
SECTION 6.01. ANNUAL REPORT TO SHAREHOLDERS. The annual report to shareholders
- --------------------------------------------
referred to in Section 1501 of the California General Corporation Law is
expressly waived, but nothing herein shall be interpreted as prohibiting the
Board of Directors from issuing annual or other periodic reports to
shareholders.
SECTION 6.02. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
- ----------------------------------
payment of money, notes or other evidences of indebtedness, issued in the name
of the Corporation, shall be signed or endorsed by such person or persons and in
such manner as, from time to time, shall be determined by resolution of the
Board of Directors.
SECTION 6.03. AUTHORITY TO EXECUTE CONTRACTS. Subject to the provisions of
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applicable law, any note, mortgage, evidence of indebtedness, contract, share
certificate, conveyance or other instrument in writing , and any assignment or
endorsements thereof, executed or entered into between the Corporation and any
other person, when signed by the chairman of the board , if there is such an
officer, the president or any vice-president, and the secretary, any assistant
secretary, the chief financial officer or any assistant financial officer of the
Corporation shall be valid and binding on the Corporation unless the other
person knew that the signing officers had no authority to execute the same. Any
such instruments may be signed by any other person or persons and in such manner
as from time to time shall be determined by the Board of Directors and, unless
so authorized by the Board of Directors, no officer, agent or employee shall
have any power or authority to bind the Corporation by any contract or
engagement or to pledge its credit or to render it liable for any purpose or
amount.
SECTION 6.04. CERTIFICATES.
- ---------------------------
(A) Every holder of shares of the Corporation shall be entitled to have a
certificate signed in the name of the Corporation by the chairman of the board,
if there is such an officer, the president or a vice-president and by the chief
financial officer or an assistant financial officer or the secretary or an
assistant secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of the signatures on the certificate
may be facsimiles. If any officer, transfer agent, or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if such
person were an officer, transfer agent or registrar at the date of issue.
12
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(B) Certificates for shares may be issued before full payment under such
restrictions and for such purposes as the Board of Directors may provide;
provided, however, that on any certificate issued to represent any partly paid
shares, the total amount of the consideration to be paid therefor and the amount
paid thereon shall be stated.
(C) If the shares of the Corporation are ever classified, or if any
class of shares has two or more series, there shall appear on the certificate
one of the following:
(1) a statement of the rights, preferences, privileges and
restrictions granted to or imposed upon each class or series of shares
authorized to be issued upon the holders thereof;
(2) a summary of such rights, preferences, privileges and
restrictions with references to the provisions of the Articles of Incorporation
and any certificates of determination establishing the same; or
(3) a statement setting forth the office or agency of the Corpora-
tion from which shareholders may obtain, upon request and without charge, a copy
of the statement referred to in sub-division (1).
(D) There shall also appear on the certificate (unless stated or
summarized pursuant to sub-division (1) or (2) above or Section 417 of the
California General Corporation Law) the statements required by all of the
following clauses to the extent applicable:
(1) the fact that the shares are subject to restrictions on
transfer;
(2) if the shares are assessable or are not fully paid, a statement
that they are assessable or the statements required by sub-division (d) of
Section 409 of the California General Corporation Law if they are not fully
paid;
(3) the fact that the shares are subject to a voting agreement
under sub-division (a) of Section 706 of the California General Corporation Law
or an irrevocable proxy under sub-division (e) of Section 705 of the California
General Corporation Law or restrictions upon voting rights contractually imposed
by the Corporation;
(4) the fact that shares are redeemable; and
(5) the fact that the shares are convertible and the period of
conversion.
Unless stated on the certificate as required by this paragraph, no restriction
upon transfer, liability for assessment or for the unpaid portion of the
subscription price, right of redemption, voting agreement under sub-division (a)
of Section 706 of the California General Corporation Law, irrevocable proxy
under sub-division (e) of Section 705 of the California General Corporation Law
or voting restriction imposed by the Corporation shall be enforceable against a
transferee of the shares without actual knowledge of such restriction,
liability, right, agreement or proxy.
SECTION 6.05. TRANSFER OF CERTIFICATES. When a certificate for shares is
- ---------------------------------------
presented to the Corporation or its transfer clerk or transfer agent with a
request to register the transfer, the Corporation shall register the transfer,
cancel the certificate presented, and issue a new certificate if: (a) the
security is endorsed by the appropriate person or persons; (b) reasonable
assurance is given that those endorsements are genuine and effective; (c) the
Corporation has no notice of adverse claims or has discharged any duty to
inquire into such adverse claims; (d) any applicable law relating to the
collection of taxes has been complied with; and (e) the transfer is not in
violation of any federal or state securities law. Where a certificate has been
lost, destroyed or wrongfully taken, the Corporation shall issue a new
certificate in place of the original if the owner: (a) so requests before the
Corporation has notice that the certificate has been acquired by a bona fide
purchaser; (b) files with the Corporation a sufficient indemnity bond; and (c)
satisfies any other reasonable requirements as may be imposed by the Board of
Directors. Except as provided above, no new certificate for shares shall be
issued in lieu of an old certificate unless the Corporation is ordered to do so
by a court in the judgement in an action brought under Section 419(b) of the
California General Corporation Law.
13
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SECTION 6.06. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The president
- -------------------------------------------------------------
or any vice-president and the secretary or assistant secretary of the
Corporation are authorized to vote, represent and exercise on behalf of the
Corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of the Corporation. The authority herein
granted to said officers to vote or represent on behalf of the Corporation any
and all shares held by the Corporation in any other corporation or corporations
may be exercised either by such officers in person or by any other person
authorized so to do by proxy or power of attorney duly executed by said
officers.
SECTION 6.07. EMPLOYEE STOCK PURCHASE PLANS.
- --------------------------------------------
(A) The Corporation may adopt and carry out a stock purchase plan or
agreement or stock option plan or agreement, providing for the issuance and
sale, for such consideration as may be fixed, of its unissued shares, or of
issued shares re-acquired or to be re-acquired, to one or more of the employees
or directors of the Corporation or of a subsidiary or to a trustee on their
behalf and for the payment for such shares in installments or at one time, and
may provide for aiding any such persons in paying for such shares by
compensation for services rendered, promissory notes, or other rights.
(B) Any such stock purchase plan or agreement or stock option plan or
agreement may include, among other features, the fixing of eligibility for
participation therein, the class and price of shares to be issued or sold under
the plan or agreement, the number of shares which may be subscribed for, the
method of payment therefor, the reservation of title until full payment
therefor, the effect of the termination of employment, an option or obligation
on the part of the Corporation to repurchase the shares upon termination of
employment, subject to provisions of Chapter 5 of the California General
Corporation Law, restrictions upon transfer of the shares and the time limits of
and termination of the plan, and any other matters, not in violation of
applicable law, as may be included in the plan as approved or authorized by the
Board of Directors or any committee of the Board.
SECTION 6.08. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise
- -------------------------------------------
requires, the general provisions, rules of construction and definitions
contained in the California General Corporation Law shall govern the
construction of these Bylaws. Without limiting the generality of the foregoing,
the masculine gender includes the feminine and neuter, the singular number
includes the plural and the plural number includes the singular, and the term
"person" includes a corporation as well as a natural person.
SECTION 6.09. AMENDMENTS. Except as otherwise provided in the Articles of
- -------------------------
Incorporation or in Section 3.02 of these Bylaws, these Bylaws, or any of them,
may be altered, amended or repealed, and the new Bylaws may be made, (I) by the
Board of Directors, or (ii) by the affirmative vote of the holders of a majority
of the outstanding shares of voting stock of the Corporation. Any Bylaws made
or altered by the shareholders may be altered or repealed by the Board of
Directors or may be altered or repealed by the shareholders.
14
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EXHIBIT 10(F) - BANK OF LODI INCENTIVE COMPENSATION PLAN
BANK OF LODI
INCENTIVE COMPENSATION PLAN
I
PURPOSE
The purpose of this Incentive Compensation Plan (the "Plan") is to advance the
interests of the Bank of Lodi (hereinafter called the "Company") by
strengthening, through the payment of incentive bonuses, the ability of the
Company to attract and retain valued key employees upon whose judgment,
initiative and efforts the successful conduct and development of the Company
depends.
II
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(hereinafter called the "Board").
III
FUNDS
The maximum amount of bonuses which may be distributed under this Plan with
reference to any fiscal year ("maximum amount") shall be established by the
Board, as soon as practicable in such fiscal year, provided, however, that the
Company's net earnings before tax for the prior fiscal year meet a threshold
minimum.
IV
PERFORMANCE TARGETS
From time to time, the Board shall establish Company performance goals. The
maximum amount which may be distributed for any fiscal year under this Plan
shall be determined, in such manner as the Board shall prescribe, by the extend
to which the Company attains these goals.
V
ELIGIBILITY
The Board shall determine the key employees of the Company who shall participate
in the Plan for any fiscal year as soon as practicable following the close
thereof.
VI
AMOUNT OF BONUS
The amount of bonus to be paid to any participant hereunder shall be determined
by the Board.
VII
TERM OF PLAN
The Plan shall become effective when it shall have been approved by an
affirmative vote of the Board. The Plan shall remain in effect for the
designated plan period (January 1 through December 31).
VIII
AMENDMENT OF THE PLAN
The Board shall have the power at any time to amend or terminate the Plan, in
whole or in part.
1
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VIII
AMENDMENT OF THE PLAN
The Board shall have the power at any time to amend or terminate this Plan, in
whole or in part based upon consideration of the following:
Qualitative considerations:
Classified Assets:
* Loans:
* Classified assets (loans, OREO & securities -
substandard, doubtful and loss) should be less
than 50% of capital.
* Past due loans should be less than 5.00% of
outstanding loans - trend analysis should show
a static or improving condition. Consideration
should be given to decisions with regards to
nonaccrual and charge off activity.
* Securities:
* Classified assets (loans & securities) should
be less than 50% of capital.
Loan Underwriting Standards:
* Loan Origination and Processing:
* New loan review from outside examination
should indicate no adverse tend history.
Consider activity, exceptions and corrective
action taken.
Audits:
* OCC Examinations:
* CAMEL rating of 3 or better. Any decline
should be analyzed for purpose, negative
trends and corrective action.
* Garrett Reviews:
* Loan - should show static reports or improving
trends. Economic conditions should be
considered along with individual performance.
* Compliance - should show static or improving
reports. Trends should be flat or improving.
Exceptions should be isolated and resolved on
an individual or systemic basis.
* Peat Marwick Audits:
* Review for audit adjustments and management
letter issues.
* Mortgage:
* Freddie Mac exceptions and buyback (unable to
sell) issues should be considered.
* SBA:
* Consider impact of SBA review, guarantee
issues and concerns with the value of the
operations.
Risk Based Capital Ratios:
* Adequate Capital - should be within policy ranges and
above regulatory minimums. Any negative impact from
operations should be considered.
Earnings:
* Source of Earnings - eligible earnings must be from
recurring sources, excluding the cumulative effect of
adopting new accounting standards and non-trading
securities gains & losses.
Liquidity:
* Adequate Liquidity - no less than policy minimums.
Market Risk:
* Prudent interest Rate Risk Exposure - potential impact on
net interest, capital and earnings within policy ranges.
2
<PAGE>
EXHIBIT 10(G) - FIRST FINANCIAL BANCORP 401 (K) PROFIT SHARING PLAN
FIRST FINANCIAL BANCORP
401(K) PROFIT SHARING PLAN
ARTICLE I
DEFINITIONS
1.01 "Employer" means each employer who adopts this Plan by executing an
Adoption Agreement.
1.02 "Trustee" means the person or persons who as Trustee execute the
Employer's Adoption Agreement, or any successor in office who in writing accepts
the position of Trustee. The Employer must designate in its Adoption Agreement
whether the Trustee will administer the Trust as a discretionary Trustee or as a
nondiscretionary Trustee. If a person acts as a discretionary Trustee, the
Employer also may appoint a Custodian. See Article X.
1.03 "Plan" means the retirement plan established or continued by the Employer
in the form of this Agreement, including the Adoption Agreement under which the
Employer has elected to participate in this Prototype Plan. The Employer must
designate the name of the Plan in its Adoption Agreement. An Employer may
execute more than one Adoption Agreement offered under this Prototype Plan, each
of which will constitute a separate Plan and Trust established or continued by
that Employer. The Plan and the Trust created by each adopting Employer is a
separate Plan and a separate Trust, independent from the plan and the trust of
any other employer adopting this Prototype Plan. All section references within
the Plan are Plan section references unless the context clearly indicates
otherwise.
1.04 "Adoption Agreement" means the document executed by each Employer
adopting this Prototype Plan. The terms of this Prototype Plan as modified by
the terms of an adopting Employer's Adoption Agreement constitute a separate
Plan and Trust to be construed as a single Agreement. Each elective provision of
the Adoption Agreement corresponds by section reference to the section of the
Plan which grants the election. Each Adoption Agreement offered under this
Prototype Plan is either a Nonstandardized Plan or a Standardized Plan, as
identified in the preamble to that Adoption Agreement. The provisions of this
Prototype Plan apply equally to Nonstandardized Plans and to Standardized Plans
unless otherwise specified.
1.05 "Plan Administrator" is the Employer unless the Employer designates
another person to hold the position of Plan Administrator. In addition to his
other duties, the Plan Administrator has full responsibility for compliance with
the reporting and disclosure rules under ERISA as respects this Agreement.
1.06 "Advisory Committee" means the Employer's Advisory Committee as from time
to time constituted.
1.07 "Employee" means any employee (including a Self-Employed Individual) of
the Employer. The Employer must specify in its Adoption Agreement any Employee,
or class of Employees, not eligible to participate in the Plan. If the Employer
elects to exclude collective bargaining employees, the exclusion applies to any
employee of the Employer included in a unit of employees covered by an agreement
which the Secretary of Labor finds to be a collective bargaining agreement
between employee representatives and one or more employers unless the collective
bargaining agreement requires the employee to be included within the Plan. The
term "employee representatives" does not include any organization more than half
the members of which are owners, officers, or executives of the Employer.
1.08 "Self-Employed Individual/Owner-Employee." "Self-Employed Individual"
means an individual who has Earned Income (or who would have had Earned Income
but for the fact that the trade or business did not have net earnings) for the
taxable year from the trade or business for which the Plan is established.
"Owner-Employee" means a Self-Employed Individual who is the sole proprietor in
the case of a sole proprietorship. If the Employer is a partnership, "Owner-
Employee" means a Self-Employed Individual who is a partner and owns more than
10% of either the capital or profits interest of the partnership.
1
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1.09 "Highly Compensated Employee" means an Employee who, during the Plan Year
or during the preceding 12-month period:
(a) is a more than 5% owner of the Employer (applying the constructive ownership
rules of Code (S)318, and applying the principles of Code (S)318, for an
unincorporated entity);
(b) has Compensation in excess of $75,000 (as adjusted by the Commissioner of
Internal Revenue for the relevant year);
(c) has Compensation in excess of $50,000 (as adjusted by the Commissioner of
Internal Revenue for the relevant year) and is part of the top-paid 20% group of
employees (based on Compensation for the relevant year); or
(d) has Compensation in excess of 50% of the dollar amount prescribed in Code
(S)415(b)(1)(A) (relating to defined benefit plans) and is an officer of the
Employer.
If the Employee satisfies the definition in clause (b), (c) or (d) in the Plan
Year but does not satisfy clause (b), (c) or (d) during the preceding 12-month
period and does not satisfy clause (a) in either period, the Employee is a
Highly Compensated Employee only if he is one of the 100 most highly compensated
Employees for the Plan Year. The number of officers taken into account under
clause (d) will not exceed the greater of 3 or 10% of the total number (after
application of the Code (S)414(q) exclusions) of Employees, but no more than 50
officers. If no Employee satisfies the Compensation requirement in clause (d)
for the relevant year, the Advisory Committee will treat the highest paid
officer as satisfying clause (d) for that year.
For purposes of this Section 1.09, "Compensation" means Compensation as defined
in Section 1.12, except any exclusions from Compensation elected in the
Employer's Adoption Agreement Section 1.12 do not apply, and Compensation must
include "elective contributions" (as defined in Section 1.12). The Advisory
Committee must make the determination of who is a Highly Compensated Employee,
including the determinations of the number and identity of the top paid 20%
group, the top 100 paid Employees, the number of officers includible in clause
(d) and the relevant Compensation, consistent with Code (S)414(q) and
regulations issued under that Code section. The Employer may make a calendar
year election to determine the Highly Compensated Employees for the Plan Year,
as prescribed by Treasury regulations. A calendar year election must apply to
all plans and arrangements of the Employer. For purposes of applying any
nondiscrimination test required under the Plan or under the Code, in a manner
consistent with applicable Treasury regulations, the Advisory Committee will
treat a Highly Compensated Employee and all family members (a spouse, a lineal
ascendant or descendant, or a spouse of a lineal ascendant or descendant) as a
single Highly Compensated Employee, but only if the Highly Compensated Employee
is a more than 5% owner or is one of the 10 Highly Compensated Employees with
the greatest Compensation for the Plan Year. This aggregation rule applies to a
family member even if that family member is a Highly Compensated Employee
without family aggregation.
The term "Highly Compensated Employee" also includes any former Employee who
separated from Service (or has a deemed Separation from Service, as determined
under Treasury regulations) prior to the Plan Year, performs no Service for the
Employer during the Plan Year, and was a Highly Compensated Employee either for
the separation year or any Plan Year ending on or after his 55th birthday. If
the former Employee's Separation from Service occurred prior to January 1, 1987,
he is a Highly Compensated Employee only if he satisfied clause (a) of this
Section 1.09 or received Compensation in excess of $50,000 during: (1) the year
of his Separation from Service (or the prior year); or (2) any year ending after
his 54th birthday.
1.10 "Participant" is an Employee who is eligible to be and becomes a
Participant in accordance with the provisions of Section 2.01.
1.11 "Beneficiary" is a person designated by a Participant who is or may
become entitled to a benefit under the Plan. A Beneficiary who becomes entitled
to a benefit under the Plan remains a Beneficiary under the Plan until the
Trustee has fully distributed his benefit to him. A Beneficiary's right to (and
the Plan Administrator's, the Advisory Committee's or a Trustee's duty to
provide to the Beneficiary) information or data concerning the Plan does not
arise until he first becomes entitled to receive a benefit under the Plan.
1.12 "Compensation" means, except as provided in the Employer's Adoption
Agreement, the Participant's Earned Income, wages, salaries, fees for
professional service and other amounts received for personal services actually
rendered in
2
<PAGE>
the course of employment with the Employer maintaining the plan (including, but
not limited to, commissions paid salesmen, compensation for services on the
basis of a percentage of profits, commissions on insurance premiums, tips and
bonuses). The Employer must elect in its Adoption Agreement whether to include
elective contributions in the definition of Compensation. "Elective
contributions" are amounts excludible from the Employee's gross income under
Code (S)(S)125, 402(a)(8), 402(h) or 403(b), and contributed by the Employer, at
the Employee's election, to a Code (S)401(k) arrangement, a Simplified Employee
Pension, cafeteria plan or tax-sheltered annuity. The term "Compensation" does
not include:
(a) Employer contributions (other than "elective contributions," if includible
in the definition of Compensation under Section 1.12 of the Employer's Adoption
Agreement) to a plan of deferred compensation to the extent the contributions
are not included in the gross income of the Employee for the taxable year in
which contributed, on behalf of an Employee to a Simplified Employee Pension
Plan to the extent such contributions are excludible from the Employee's gross
income, and any distributions from a plan of deferred compensation, regardless
of whether such amounts are includible in the gross income of the Employee when
distributed.
(b) Amounts realized from the exercise of a non-qualified stock option, or
when restricted stock (or property) held by an 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 stock option described in Part II, Subchapter D, Chapter 1 of
the Code.
(d) Other amounts which receive special tax benefits, such as premiums for
group term life insurance (but only to the extent that the premiums are not
includible in the gross income of the Employee), or contributions made by an
Employer (whether or not under a salary reduction agreement) towards the
purchase of an annuity contract described in Code (S)403(b) (whether or not the
contributions are excludible from the gross income of the Employee), other than
"elective contributions," if elected in the Employer's Adoption Agreement.
Any reference in this Plan to Compensation is a reference to the definition in
this Section 1.12, unless the Plan reference specifies a modification to this
definition. The Advisory Committee will take into account only Compensation
actually paid for the relevant period. A Compensation payment includes
Compensation by the Employer through another person under the common paymaster
provisions in Code (S)(S)3121 and 3306.
(A) Limitations on Compensation.
(1) Compensation dollar limitation. For any Plan Year beginning after December
31, 1988, the Advisory Committee must take into account only the first $200,000
(or beginning January 1, 1990, such larger amount as the Commissioner of
Internal Revenue may prescribe) of any Participant's Compensation. For any Plan
Year beginning prior to January 1, 1989, this $200,000 limitation (but not the
family aggregation requirement described in the next paragraph) applies only if
the Plan is top heavy for such Plan Year or operates as a deemed top heavy plan
for such Plan Year.
(2) Application of compensation limitation to certain family members. The
$200,000 Compensation limitation applies to the combined Compensation of the
Employee and of any family member aggregated with the Employee under Section
1.09 who is either (i) the Employee's spouse; or (ii) the Employee's lineal
descendant under the age of 19. If, for a Plan Year, the combined Compensation
of the Employee and such family members who are Participants entitled to an
allocation for that Plan Year exceeds the $200,000 (or adjusted) limitation,
"Compensation" for each such Participant, for purposes of the contribution and
allocation provisions of Article III, means his Adjusted Compensation. Adjusted
Compensation is the amount which bears the same ratio to the $200,000 (or
adjusted) limitation as the affected Participant's Compensation (without regard
to the $200,000 Compensation limitation) bears to the combined Compensation of
all the affected Participants in the family unit. If the Plan uses permitted
disparity, the Advisory Committee must determine the integration level of each
affected family member Participant prior to the proration of the $200,000
Compensation limitation, but the combined integration level of the affected
Participants may not exceed $200,000 (or the adjusted limitation). The combined
Excess Compensation of the affected Participants in the family unit may not
exceed $200,000 (or the adjusted limitation) minus the affected Participants'
combined integration level (as determined under the preceding sentence). If the
combined Excess Compensation exceeds this limitation, the Advisory Committee
will prorate the Excess Compensation limitation among the affected Participants
in the family unit in proportion to each such individual's Adjusted Compensation
minus his
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integration level. If the Employer's Plan is a Nonstandardized Plan,
the Employer may elect to use a different method in determining the Adjusted
Compensation of the affected Participants by specifying that method in an
addendum to the Adoption Agreement, numbered Section 1.12.
(B) Nondiscrimination. For purposes of determining whether the Plan
discriminates in favor of Highly Compensated Employees, Compensation means
Compensation as defined in this Section 1.12, except: (1) the Employer may elect
to include or to exclude elective contributions, irrespective of the Employer's
election in its Adoption Agreement regarding elective contributions; and (2) the
Employer will not give effect to any elections made in the "modifications to
Compensation definition" section of Adoption Agreement Section 1.12. The
Employer's election described in clause (1) must be consistent and uniform with
respect to all Employees and all plans of the Employer for any particular Plan
Year. If the Employer's Plan is a Nonstandardized Plan, the Employer,
irrespective of clause (2), may elect to exclude from this nondiscrimination
definition of Compensation any items of Compensation excludible under Code
(S)414(s) and the applicable Treasury regulations, provided such adjusted
definition conforms to the nondiscrimination requirements of those regulations.
1.13 "Earned Income" means net earnings from self-employment in the trade or
business with respect to which the Employer has established the Plan, provided
personal services of the individual are a material income producing factor. The
Advisory Committee will determine net earnings without regard to items excluded
from gross income and the deductions allocable to those items. The Advisory
Committee will determine net earnings after the deduction allowed to the Self-
Employed Individual for all contributions made by the Employer to a qualified
plan and, for Plan Years beginning after December 31, 1989, the deduction
allowed to the Self-Employed under Code (S)164(f) for self-employment taxes.
1.14 "Account" means the separate account(s) which the Advisory Committee or
the Trustee maintains for a Participant under the Employer's Plan.
1.15 "Accrued Benefit" means the amount standing in a Participant's Account(s)
as of any date derived from both Employer contributions and Employee
contributions, if any.
1.16 "Nonforfeitable" means a Participant's or Beneficiary's unconditional
claim, legally enforceable against the Plan, to the Participant's Accrued
Benefit.
1.17 "Plan Year" means the fiscal year of the Plan, the consecutive month
period specified in the Employer's Adoption Agreement. The Employer's Adoption
Agreement also must specify the "Limitation Year" applicable to the limitations
on allocations described in Article III. If the Employer maintains Paired Plans,
each Plan must have the same Plan Year.
1.18 "Effective Date" of this Plan is the date specified in the Employer's
Adoption Agreement.
1.19 "Plan Entry Date" means the date(s) specified in Section 2.01 of the
Employer's Adoption Agreement.
1.20 "Accounting Date" is the last day of an Employer's Plan Year. Unless
otherwise specified in the Plan, the Advisory Committee will make all Plan
allocations for a particular Plan Year as of the Accounting Date of that Plan
Year.
1.21 "Trust" means the separate Trust created under the Employer's Plan.
1.22 "Trust Fund" means all property of every kind held or acquired by the
Employer's Plan, other than incidental benefit insurance contracts.
1.23 "Nontransferable Annuity" means an annuity which by its terms provides
that it may not be sold, assigned, discounted, pledged as collateral for a loan
or security for the performance of an obligation or for any purpose to any
person other than the insurance company. If the Plan distributes an annuity
contract, the contract must be a Nontransferable Annuity.
1.24 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
1.25 "Code" means the Internal Revenue Code of 1986, as amended.
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1.26 "Service" means any period of time the Employee is in the employ of the
Employer, including any period the Employee is on an unpaid leave of absence
authorized by the Employer under a uniform, nondiscriminatory policy applicable
to all Employees. "Separation from Service" means the Employee no longer has an
employment relationship with the Employer maintaining this Plan.
1.27 "Hour of Service" means:
(a) Each Hour of Service for which the Employer, either directly or
indirectly, pays an Employee, or for which the Employee is entitled to payment,
for the performance of duties. The Advisory Committee credits Hours of Service
under this paragraph (a) to the Employee for the computation period in which the
Employee performs the duties, irrespective of when paid;
(b) Each Hour of Service for back pay, irrespective of mitigation of damages,
to which the Employer has agreed or for which the Employee has received an
award. The Advisory Committee credits Hours of Service under this paragraph (b)
to the Employee for the computation period(s) to which the award or the
agreement pertains rather than for the computation period in which the award,
agreement or payment is made; and
(c) Each Hour of Service for which the Employer, either directly or
indirectly, pays an Employee, or for which the Employee is entitled to payment
(irrespective of whether the employment relationship is terminated), for reasons
other than for the performance of duties during a computation period, such as
leave of absence, vacation, holiday, sick leave, illness, incapacity (including
disability), layoff, jury duty or military duty. The Advisory Committee will
credit no more than 501 Hours of Service under this paragraph (c) to an Employee
on account of any single continuous period during which the Employee does not
perform any duties (whether or not such period occurs during a single
computation period). The Advisory Committee credits Hours of Service under this
paragraph (c) in accordance with the rules of paragraphs (b) and (c) of Labor
Reg. (S)2530.200b-2, which the Plan, by this reference, specifically
incorporates in full within this paragraph (c).
The Advisory Committee will not credit an Hour of Service under more than one of
the above paragraphs. A computation period for purposes of this Section 1.27 is
the Plan Year, Year of Service period, Break in Service period or other period,
as determined under the Plan provision for which the Advisory Committee is
measuring an Employee's Hours of Service. The Advisory Committee will resolve
any ambiguity with respect to the crediting of an Hour of Service in favor of
the Employee.
(A) Method of crediting Hours of Service. The Employer must elect in its
Adoption Agreement the method the Advisory Committee will use in crediting an
Employee with Hours of Service. For purposes of the Plan, "actual" method means
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.
If the Employer elects to apply an "equivalency" method, for each equivalency
period for which the Advisory Committee would credit the Employee with at least
one Hour of Service, the Advisory Committee will credit the Employee with: (i)
10 Hours of Service for a daily equivalency; (ii) 45 Hours of Service for a
weekly equivalency; (iii) 95 Hours of Service for a semimonthly payroll period
equivalency; and (iv) 190 Hours of Service for a monthly equivalency.
(B) Maternity/paternity leave. Solely for purposes of determining whether the
Employee incurs a Break in Service under any provision of this Plan, the
Advisory Committee must credit Hours of Service during an Employee's unpaid
absence period due to maternity or paternity leave. The Advisory Committee
considers an Employee on maternity or paternity leave if the Employee's absence
is due to the Employee's pregnancy, the birth of the Employee's child, the
placement with the Employee of an adopted child, or the care of the Employee's
child immediately following the child's birth or placement. The Advisory
Committee credits Hours of Service under this paragraph on the basis of the
number of Hours of Service the Employee would receive if he were paid during the
absence period or, if the Advisory Committee cannot determine the number of
Hours of Service the Employee would receive, on the basis of 8 hours per day
during the absence period. The Advisory Committee will credit only the number
(not exceeding 501) of Hours of Service necessary to prevent an Employee's Break
in Service. The Advisory Committee credits all Hours of Service described in
this paragraph to the computation period in which the absence period begins or,
if the Employee does not need these Hours of Service to prevent a Break in
Service in the computation period in which his absence period begins, the
Advisory Committee credits these Hours of Service to the immediately following
computation period.
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1.28 "Disability" means the Participant, because of a physical or mental
disability, will be unable to perform the duties of his customary position of
employment (or is unable to engage in any substantial gainful activity) for an
indefinite period which the Advisory Committee considers will be of long
continued duration. A Participant also is disabled if he incurs the permanent
loss or loss of use of a member or function of the body, or is permanently
disfigured, and incurs a Separation from Service. The Plan considers a
Participant disabled on the date the Advisory Committee determines the
Participant satisfies the definition of disability. The Advisory Committee may
require a Participant to submit to a physical examination in order to confirm
disability. The Advisory Committee will apply the provisions of this Section
1.28 in a nondiscriminatory, consistent and uniform manner. If the Employer's
Plan is a Nonstandardized Plan, the Employer may provide an alternate definition
of disability in an addendum to its Adoption Agreement, numbered Section 1.28.
1.29 SERVICE FOR PREDECESSOR EMPLOYER. If the Employer maintains the plan of a
predecessor employer, the Plan treats service of the Employee with the
predecessor employer as service with the Employer. If the Employer does not
maintain the plan of a predecessor employer, the Plan does not credit service
with the predecessor employer, unless the Employer identifies the predecessor in
its Adoption Agreement and specifies the purposes for which the Plan will credit
service with that predecessor employer.
1.30 RELATED EMPLOYERS. A related group is a controlled group of corporations
(as defined in Code (S)414(b)), trades or businesses (whether or not
incorporated) which are under common control (as defined in Code (S)414(c)) or
an affiliated service group (as defined in Code (S)414(m) or in Code (S)414(o)).
If the Employer is a member of a related group, the term "Employer" includes the
related group members for purposes of crediting Hours of Service, determining
Years of Service and Breaks in Service under Articles II and V, applying the
Participation Test and the Coverage Test under Section 3.06(E), applying the
limitations on allocations in Part 2 of Article III, applying the top heavy
rules and the minimum allocation requirements of Article III, the definitions of
Employee, Highly Compensated Employee, Compensation and Leased Employee, and for
any other purpose required by the applicable Code section or by a Plan
provision. However, an Employer may contribute to the Plan only by being a
signatory to the Execution Page of the Adoption Agreement or to a Participation
Agreement to the Employer's Adoption Agreement. If one or more of the Employer's
related group members become Participating Employers by executing a
Participation Agreement to the Employer's Adoption Agreement, the term
"Employer" includes the participating related group members for all purposes of
the Plan, and "Plan Administrator" means the Employer that is the signatory to
the Execution Page of the Adoption Agreement.
If the Employer's Plan is a Standardized Plan, all Employees of the Employer or
of any member of the Employer's related group, are eligible to participate in
the Plan, irrespective of whether the related group member directly employing
the Employee is a Participating Employer. If the Employer's Plan is a
Nonstandardized Plan, the Employer must specify in Section 1.07 of its Adoption
Agreement, whether the Employees of related group members that are not
Participating Employers are eligible to participate in the Plan. Under a
Nonstandardized Plan, the Employer may elect to exclude from the definition of
"Compensation" for allocation purposes any Compensation received from a related
employer that has not executed a Participation Agreement and whose Employees are
not eligible to participate in the Plan.
1.31 LEASED EMPLOYEES. The Plan treats a Leased Employee as an Employee of the
Employer. A Leased Employee is an individual (who otherwise is not an Employee
of the Employer) who, pursuant to a leasing agreement between the Employer and
any other person, has performed services for the Employer (or for the Employer
and any persons related to the Employer within the meaning of Code (S)144(a)(3))
on a substantially full time basis for at least one year and who performs
services historically performed by employees in the Employer's business field.
If a Leased Employee is treated as an Employee by reason of this Section 1.31 of
the Plan, "Compensation" includes Compensation from the leasing organization
which is attributable to services performed for the Employer.
(A) Safe harbor plan exception. The Plan does not treat a Leased Employee as
an Employee if the leasing organization covers the employee in a safe harbor
plan and, prior to application of this safe harbor plan exception, 20% or less
of the Employer's Employees (other than Highly Compensated Employees) are Leased
Employees. A safe harbor plan is a money purchase pension plan providing
immediate participation, full and immediate vesting, and a nonintegrated
contribution formula equal to at least 10% of the employee's compensation
without regard to employment by the leasing organization on a specified date.
The safe harbor plan must determine the 10% contribution on the basis of
compensation as defined in Code (S)415(c)(3) plus elective contributions (as
defined in Section 1.12).
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(B) Other requirements. The Advisory Committee must apply this Section 1.31 in
a manner consistent with Code (S)(S)414(n) and 414(o) and the regulations issued
under those Code sections. The Employer must specify in the Adoption Agreement
the manner in which the Plan will determine the allocation of Employer
contributions and Participant forfeitures on behalf of a Participant if the
Participant is a Leased Employee covered by a plan maintained by the leasing
organization.
1.32 SPECIAL RULES FOR OWNER-EMPLOYEES. The following special provisions and
restrictions apply to Owner-Employees:
(a) If the Plan provides contributions or benefits for an Owner-Employee or
for a group of Owner-Employees who controls the trade or business with respect
to which this Plan is established and the Owner-Employee or Owner-Employees also
control as Owner-Employees one or more other trades or businesses, plans must
exist or be established with respect to all the controlled trades or businesses
so that when the plans are combined they form a single plan which satisfies the
requirements of Code (S)401(a) and Code (S)401(d) with respect to the employees
of the controlled trades or businesses.
(b) The Plan excludes an Owner-Employee or group of Owner-Employees if the
Owner-Employee or group of Owner-Employees controls any other trade or business,
unless the employees of the other controlled trade or business participate in a
plan which satisfies the requirements of Code (S)401(a) and Code (S)401(d). The
other qualified plan must provide contributions and benefits which are not less
favorable than the contributions and benefits provided for the Owner-Employee or
group of Owner-Employees under this Plan, or if an Owner-Employee is covered
under another qualified plan as an Owner-Employee, then the plan established
with respect to the trade or business he does control must provide contributions
or benefits as favorable as those provided under the most favorable plan of the
trade or business he does not control. If the exclusion of this paragraph (b)
applies and the Employer's Plan is a Standardized Plan, the Employer may not
participate or continue to participate in this Prototype Plan and the Employer's
Plan becomes an individually-designed plan for purposes of qualification
reliance.
(c) For purposes of paragraphs (a) and (b) of this Section 1.32, an Owner-
Employee or group of Owner-Employees controls a trade or business if the Owner-
Employee or Owner-Employees together (1) own the entire interest in an
unincorporated trade or business, or (2) in the case of a partnership, own more
than 50% of either the capital interest or the profits interest in the
partnership.
1.33 DETERMINATION OF TOP HEAVY STATUS. If this Plan is the only qualified plan
maintained by the Employer, the Plan is top heavy for a Plan Year if the top
heavy ratio as of the Determination Date exceeds 60%. The top heavy ratio is a
fraction, the numerator of which is the sum of the present value of Accrued
Benefits of all Key Employees as of the Determination Date and the denominator
of which is a similar sum determined for all Employees. The Advisory Committee
must include in the top heavy ratio, as part of the present value of Accrued
Benefits, any contribution not made as of the Determination Date but includible
under Code (S)416 and the applicable Treasury regulations, and distributions
made within the Determination Period. The Advisory Committee must calculate the
top heavy ratio by disregarding the Accrued Benefit (and distributions, if any,
of the Accrued Benefit) of any Non-Key Employee who was formerly a Key Employee,
and by disregarding the Accrued Benefit (including distributions, if any, of the
Accrued Benefit) of an individual who has not received credit for at least one
Hour of Service with the Employer during the Determination Period. The Advisory
Committee must calculate the top heavy ratio, including the extent to which it
must take into account distributions, rollovers and transfers, in accordance
with Code (S)416 and the regulations under that Code section.
If the Employer maintains other qualified plans (including a simplified employee
pension plan), or maintained another such plan which now is terminated, this
Plan is top heavy only if it is part of the Required Aggregation Group, and the
top heavy ratio for the Required Aggregation Group and for the Permissive
Aggregation Group, if any, each exceeds 60%. The Advisory Committee will
calculate the top heavy ratio in the same manner as required by the first
paragraph of this Section 1.33, taking into account all plans within the
Aggregation Group. To the extent the Advisory Committee must take into account
distributions to a Participant, the Advisory Committee must include
distributions from a terminated plan which would have been part of the Required
Aggregation Group if it were in existence on the Determination Date. The
Advisory Committee will calculate the present value of accrued benefits under
defined benefit plans or simplified employee pension plans included within the
group in accordance with the terms of those plans, Code (S)416 and the
regulations under that Code section. If a Participant in a defined benefit plan
is a Non-Key Employee, the Advisory Committee will determine his accrued benefit
under the accrual method, if any, which is applicable uniformly to all defined
benefit plans maintained by the
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Employer or, if there is no uniform method, in accordance with the slowest
accrual rate permitted under the fractional rule accrual method described in
Code (S)411(b)(1)(C). If the Employer maintains a defined benefit plan, the
Employer must specify in Adoption Agreement Section 3.18 the actuarial
assumptions (interest and mortality only) the Advisory Committee will use to
calculate the present value of benefits from a defined benefit plan. If an
aggregated plan does not have a valuation date coinciding with the Determination
Date, the Advisory Committee must value the Accrued Benefits in the aggregated
plan as of the most recent valuation date falling within the twelve-month period
ending on the Determination Date, except as Code (S)416 and applicable Treasury
regulations require for the first and second plan year of a defined benefit
plan. The Advisory Committee will calculate the top heavy ratio with reference
to the Determination Dates that fall within the same calendar year.
(A) Standardized Plan. If the Employer's Plan is a Standardized Plan, the Plan
operates as a deemed top heavy plan in all Plan Years, except, if the
Standardized Plan includes a Code (S)401(k) arrangement, the Employer may elect
to apply the top heavy requirements only in Plan Years for which the Plan
actually is top heavy. Under a deemed top heavy plan, the Advisory Committee
need not determine whether the Plan actually is top heavy. However, if the
Employer, in Adoption Agreement Section 3.18, elects to override the 100%
limitation, the Advisory Committee will need to determine whether a deemed top
heavy Plan's top heavy ratio for a Plan Year exceeds 90%.
(B) Definitions. For purposes of applying the provisions of this Section 1.33:
(1) "Key Employee" means, as of any Determination Date, any Employee or former
Employee (or Beneficiary of such Employee) who, for any Plan Year in the
Determination Period: (i) has Compensation in excess of 50% of the dollar amount
prescribed in Code (S)415(b)(1)(A) (relating to defined benefit plans) and is an
officer of the Employer; (ii) has Compensation in excess of the dollar amount
prescribed in Code (S)415(c)(1)(A) (relating to defined contribution plans) and
is one of the Employees owning the ten largest interests in the Employer; (iii)
is a more than 5% owner of the Employer; or (iv) is a more than 1% owner of the
Employer and has Compensation of more than $150,000. The constructive ownership
rules of Code (S)318 (or the principles of that section, in the case of an
unincorporated Employer,) will apply to determine ownership in the Employer. The
number of officers taken into account under clause (i) will not exceed the
greater of 3 or 10% of the total number (after application of the Code (S)414(q)
exclusions) of Employees, but no more than 50 officers. The Advisory Committee
will make the determination of who is a Key Employee in accordance with Code
(S)416(i)(1) and the regulations under that Code section.
(2) "Non-Key Employee" is an employee who does not meet the definition of Key
Employee.
(3) "Compensation" means Compensation as determined under Section 1.09 for
purposes of identifying Highly Compensated Employees.
(4) "Required Aggregation Group" means: (i) each qualified plan of the
Employer in which at least one Key Employee participates at any time during the
Determination Period; and (ii) any other qualified plan of the Employer which
enables a plan described in clause (i) to meet the requirements of Code
(S)401(a)(4) or of Code (S)410.
(5) "Permissive Aggregation Group" is the Required Aggregation Group plus any
other qualified plans maintained by the Employer, but only if such group would
satisfy in the aggregate the requirements of Code (S)401(a)(4) and of Code
(S)410. The Advisory Committee will determine the Permissive Aggregation Group.
(6) "Employer" means the Employer that adopts this Plan and any related
employers described in Section 1.30.
(7) "Determination Date" for any Plan Year is the Accounting Date of the
preceding Plan Year or, in the case of the first Plan Year of the Plan, the
Accounting Date of that Plan Year. The "Determination Period" is the 5 year
period ending on the Determination Date.
1.34 "Paired Plans" means the Employer has adopted two Standardized Plan
Adoption Agreements offered with this Prototype Plan, one Adoption Agreement
being a Paired Profit Sharing Plan and one Adoption Agreement being a Paired
Pension Plan. A Paired Profit Sharing Plan may include a Code (S)401(k)
arrangement. A Paired Pension Plan must be a money purchase pension plan or a
target benefit pension plan. Paired Plans must be the subject of a favorable
opinion letter
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issued by the National Office of the Internal Revenue Service.
This Prototype Plan does not pair any of its Standardized Plan Adoption
Agreements with Standardized Plan Adoption Agreements under a defined benefit
prototype plan.
* * * * * * * * * * * * * * *
ARTICLE II
EMPLOYEE PARTICIPANTS
2.01 ELIGIBILITY. Each Employee becomes a Participant in the Plan in
accordance with the participation option selected by the Employer in its
Adoption Agreement. If this Plan is a restated Plan, each Employee who was a
Participant in the Plan on the day before the Effective Date continues as a
Participant in the Plan, irrespective of whether he satisfies the participation
conditions in the restated Plan, unless otherwise provided in the Employer's
Adoption Agreement.
2.02 YEAR OF SERVICE -PARTICIPATION. For purposes of an Employee's
participation in the Plan under Adoption Agreement Section 2.01, the Plan takes
into account all of his Years of Service with the Employer, except as provided
in Section 2.03. "Year of Service" means an eligibility computation period
during which the Employee completes not less than the number of Hours of Service
specified in the Employer's Adoption Agreement. The initial eligibility
computation period is the first 12 consecutive month period measured from the
Employment Commencement Date. The Plan measures succeeding eligibility
computation periods in accordance with the option selected by the Employer in
its Adoption Agreement. If the Employer elects to measure subsequent periods on
a Plan Year basis, an Employee who receives credit for the required number of
Hours of Service during the initial eligibility computation period and during
the first applicable Plan Year will receive credit for two Years of Service
under Article II. "Employment Commencement Date" means the date on which the
Employee first performs an Hour of Service for the Employer. If the Employer
elects a service condition under Adoption Agreement Section 2.01 based on
months, the Plan does not apply any Hour of Service requirement after the
completion of the first Hour of Service.
2.03 BREAK IN SERVICE - PARTICIPATION. An Employee incurs a "Break in
Service" if during any 12 consecutive month period he does not complete more
than 500 Hours of Service with the Employer. The "12 consecutive month period"
under this Section 2.03 is the same 12 consecutive month period for which the
Plan measures "Years of Service" under Section 2.02.
(A) 2-year Eligibility. If the Employer elects a 2 years of service condition
for eligibility purposes under Adoption Agreement Section 2.01, the Plan treats
an Employee who incurs a one year Break in Service and who has never become a
Participant as a new Employee on the date he first performs an Hour of Service
for the Employer after the Break in Service.
(B) Suspension of Years of Service. The Employer must elect in its Adoption
Agreement whether a Participant will incur a suspension of Years of Service
after incurring a one year Break in Service. If this rule applies under the
Employer's Plan, the Plan disregards a Participant's Years of Service (as
defined in Section 2.02) earned prior to a Break in Service until the
Participant completes another Year of Service and the Plan suspends the
Participant's participation in the Plan. If the Participant completes a Year of
Service following his Break in Service, the Plan restores that Participant's
pre-Break Years of Service (and the Participant resumes active participation in
the Plan) retroactively to the first day of the computation period in which the
Participant earns the first post-Break Year of Service. The initial computation
period under this Section 2.03(B) is the 12 consecutive month period measured
from the date the Participant first receives credit for an Hour of Service
following the one year Break in Service period. The Plan measures any subsequent
periods, if necessary, in a manner consistent with the computation period
selection in Adoption Agreement Section 2.02. This Section 2.03(B) does not
affect a Participant's vesting credit under Article V and, during a suspension
period, the Participant's Account continues to share fully in Trust Fund
allocations under Section 9.11. Furthermore, this Section 2.03(B) will not
result in the restoration of any Year of Service disregarded under the Break in
Service rule of Section 2.03(A).
2.04 PARTICIPATION UPON RE-EMPLOYMENT. A Participant whose employment with the
Employer terminates will re-enter the Plan as a Participant on the date of his
re-employment, subject to the Break in Service rule, if applicable, under
Section 2.03(B). An Employee who satisfies the Plan's eligibility conditions but
who terminates employment with the Employer prior to becoming a Participant will
become a Participant on the later of the Plan Entry Date on which he would have
entered the Plan had he not terminated employment or the date of his re-
employment, subject to the
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Break in Service rule, if applicable, under Section
2.03(B). Any Employee who terminates employment prior to satisfying the Plan's
eligibility conditions becomes a Participant in accordance with Adoption
Agreement Section 2.01.
2.05 CHANGE IN EMPLOYEE STATUS. If a Participant has not incurred a
Separation from Service but ceases to be eligible to participate in the Plan, by
reason of employment within an employment classification excluded by the
Employer under Adoption Agreement Section 1.07, the Advisory Committee must
treat the Participant as an Excluded Employee during the period such a
Participant is subject to the Adoption Agreement exclusion. The Advisory
Committee determines a Participant's sharing in the allocation of Employer
contributions and Participant forfeitures, if applicable, by disregarding his
Compensation paid by the Employer for services rendered in his capacity as an
Excluded Employee. However, during such period of exclusion, the Participant,
without regard to employment classification, continues to receive credit for
vesting under Article V for each included Year of Service and the Participant's
Account continues to share fully in Trust Fund allocations under Section 9.11.
If an Excluded Employee who is not a Participant becomes eligible to participate
in the Plan by reason of a change in employment classification, he will
participate in the Plan immediately if he has satisfied the eligibility
conditions of Section 2.01 and would have been a Participant had he not been an
Excluded Employee during his period of Service. Furthermore, the Plan takes into
account all of the Participant's included Years of Service with the Employer as
an Excluded Employee for purposes of vesting credit under Article V.
2.06 ELECTION NOT TO PARTICIPATE. If the Employer's Plan is a Standardized
Plan, the Plan does not permit an otherwise eligible Employee nor any
Participant to elect not to participate in the Plan. If the Employer's Plan is a
Nonstandardized Plan, the Employer must specify in its Adoption Agreement
whether an Employee eligible to participate, or any present Participant, may
elect not to participate in the Plan. For an election to be effective for a
particular Plan Year, the Employee or Participant must file the election in
writing with the Plan Administrator not later than the time specified in the
Employer's Adoption Agreement. The Employer may not make a contribution under
the Plan for the Employee or for the Participant for the Plan Year for which the
election is effective, nor for any succeeding Plan Year, unless the Employee or
Participant re-elects to participate in the Plan. After an Employee's or
Participant's election not to participate has been effective for at least the
minimum period prescribed by the Employer's Adoption Agreement, the Employee or
Participant may re-elect to participate in the Plan for any Plan Year and
subsequent Plan Years. An Employee or Participant may re-elect to participate in
the Plan by filing his election in writing with the Plan Administrator not later
than the time specified in the Employer's Adoption Agreement. An Employee or
Participant who re-elects to participate may again elect not to participate only
as permitted in the Employer's Adoption Agreement. If an Employee is a Self-
Employed Individual, the Employee's election (except as permitted by Treasury
regulations without creating a Code (S)401(k) arrangement with respect to that
Self-Employed Individual) must be effective no later than the date the Employee
first would become a Participant in the Plan and the election is irrevocable.
The Plan Administrator must furnish an Employee or a Participant any form
required for purposes of an election under this Section 2.06. An election timely
filed is effective for the entire Plan Year.
A Participant who elects not to participate may not receive a distribution of
his Accrued Benefit attributable either to Employer or to Participant
contributions except as provided under Article IV or under Article VI. However,
for each Plan Year for which a Participant's election not to participate is
effective, the Participant's Account, if any, continues to share in Trust Fund
allocations under Article IX. Furthermore, the Employee or the Participant
receives vesting credit under Article V for each included Year of Service during
the period the election not to participate is effective.
* * * * * * * * * * * * * * *
ARTICLE III
EMPLOYER CONTRIBUTIONS AND FORFEITURES
Part 1. Amount of Employer Contributions and Plan Allocations: Sections 3.01
through 3.06
3.01 AMOUNT. For each Plan Year, the Employer contributes to the Trust the
amount determined by application of the contribution option selected by the
Employer in its Adoption Agreement. The Employer may not make a contribution to
the Trust for any Plan Year to the extent the contribution would exceed the
Participants' Maximum Permissible Amounts.
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The Employer contributes to this Plan on the condition its contribution is not
due to a mistake of fact and the Revenue Service will not disallow the deduction
for its contribution. The Trustee, upon written request from the Employer, must
return to the Employer the amount of the Employer's contribution made by the
Employer by mistake of fact or the amount of the Employer's contribution
disallowed as a deduction under Code (S)404. The Trustee will not return any
portion of the Employer's contribution under the provisions of this paragraph
more than one year after:
(a) The Employer made the contribution by mistake of fact; or
(b) The disallowance of the contribution as a deduction, and then, only to
the extent of the disallowance.
The Trustee will not increase the amount of the Employer contribution returnable
under this Section 3.01 for any earnings attributable to the contribution, but
the Trustee will decrease the Employer contribution returnable for any losses
attributable to it. The Trustee may require the Employer to furnish it whatever
evidence the Trustee deems necessary to enable the Trustee to confirm the amount
the Employer has requested be returned is properly returnable under ERISA.
3.02 DETERMINATION OF CONTRIBUTION. The Employer, from its records,
determines the amount of any contributions to be made by it to the Trust under
the terms of the Plan.
3.03 TIME OF PAYMENT OF CONTRIBUTION. The Employer may pay its contribution
for each Plan Year in one or more installments without interest. The Employer
must make its contribution to the Plan within the time prescribed by the Code or
applicable Treasury regulations. Subject to the consent of the Trustee, the
Employer may make its contribution in property rather than in cash, provided the
contribution of property is not a prohibited transaction under the Code or under
ERISA.
3.04 CONTRIBUTION ALLOCATION.
(A) Method of Allocation. The Employer must specify in its Adoption Agreement
the manner of allocating each annual Employer contribution to this Trust.
(B) Top Heavy Minimum Allocation. The Plan must comply with the provisions of
this Section 3.04(B), subject to the elections in the Employer's Adoption
Agreement.
(1) Top Heavy Minimum Allocation Under Standardized Plan. Subject to the
Employer's election under Section 3.04(B)(3), the top heavy minimum allocation
requirement applies to a Standardized Plan for each Plan Year, irrespective of
whether the Plan is top heavy.
(a) Each Participant employed by the Employer on the last day of the Plan
Year will receive a top heavy minimum allocation for that Plan Year. The
Employer may elect in Section 3.04 of its Adoption Agreement to apply this
paragraph (a) only to a Participant who is a Non-Key Employee.
(b) Subject to any overriding elections in Section 3.18 of the Employer's
Adoption Agreement, the top heavy minimum allocation is the lesser of 3% of the
Participant's Compensation for the Plan Year or the highest contribution rate
for the Plan Year made on behalf of any Participant for the Plan Year. However,
if the Employee participates in Paired Plans, the top heavy minimum allocation
is 3% of his Compensation. If, under Adoption Agreement Section 3.04, the
Employer elects to apply paragraph (a) only to a Participant who is a Non-Key
Employee, the Advisory Committee will determine the "highest contribution rate"
described in the first sentence of this paragraph (b) by reference only to the
contribution rates of Participants who are Key Employees for the Plan Year.
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(2) Top Heavy Minimum Allocation Under Nonstandardized Plan. The top heavy
minimum allocation requirement applies to a Nonstandardized Plan only in Plan
Years for which the Plan is top heavy. Except as provided in the Employer's
Adoption Agreement, if the Plan is top heavy in any Plan Year:
(a) Each Non-Key Employee who is a Participant and is employed by the
Employer on the last day of the Plan Year will receive a top heavy minimum
allocation for that Plan Year, irrespective of whether he satisfies the Hours of
Service condition under Section 3.06 of the Employer's Adoption Agreement; and
(b) The top heavy minimum allocation is the lesser of 3% of the Non-Key
Employee's Compensation for the Plan Year or the highest contribution rate for
the Plan Year made on behalf of any Key Employee. However, if a defined benefit
plan maintained by the Employer which benefits a Key Employee depends on this
Plan to satisfy the antidiscrimination rules of Code (S)401(a)(4) or the
coverage rules of Code (S)410 (or another plan benefiting the Key Employee so
depends on such defined benefit plan), the top heavy minimum allocation is 3% of
the Non-Key Employee's Compensation regardless of the contribution rate for the
Key Employees.
(3) Special Election for Standardized Code (S)401(k) Plan. If the Employer's
Plan is a Standardized Code (S)401(k) Plan, the Employer may elect in Adoption
Agreement Section 3.04 to apply the top heavy minimum allocation requirements of
Section 3.04(B)(1) only for Plan Years in which the Plan actually is a top heavy
plan.
(4) Special Definitions. For purposes of this Section 3.04(B), the term
"Participant" includes any Employee otherwise eligible to participate in the
Plan but who is not a Participant because of his Compensation level or because
of his failure to make elective deferrals under a Code (S)401(k) arrangement or
because of his failure to make mandatory contributions. For purposes of
subparagraph (1)(b) or (2)(b), "Compensation" means Compensation as defined in
Section 1.12, except Compensation does not include elective contributions,
irrespective of whether the Employer has elected to include these amounts in
Section 1.12 of its Adoption Agreement, any exclusion selected in Section 1.12
of the Adoption Agreement (other than the exclusion of elective contributions)
does not apply, and any modification to the definition of Compensation in
Section 3.06 does not apply.
(5) Determining Contribution Rates. For purposes of this Section 3.04(B), a
Participant's contribution rate is the sum of all Employer contributions (not
including Employer contributions to Social Security) and forfeitures allocated
to the Participant's Account for the Plan Year divided by his Compensation for
the entire Plan Year. However, for purposes of satisfying a Participant's top
heavy minimum allocation in Plan Years beginning after December 31, 1988, the
Participant's contribution rate does not include any elective contributions
under a Code (S)401(k) arrangement nor any Employer matching contributions
allocated on the basis of those elective contributions or on the basis of
employee contributions, except a Nonstandardized Plan may include in the
contribution rate any matching contributions not necessary to satisfy the
nondiscrimination requirements of Code (S)401(k) or of Code (S)401(m).
If the Employee is a Participant in Paired Plans, the Advisory Committee will
consider the Paired Plans as a single Plan to determine a Participant's
contribution rate and to determine whether the Plans satisfy this top heavy
minimum allocation requirement. To determine a Participant's contribution rate
under a Nonstandardized Plan, the Advisory Committee must treat all qualified
top heavy defined contribution plans maintained by the Employer (or by any
related Employers described in Section 1.30) as a single plan.
(6) No Allocations. If, for a Plan Year, there are no allocations of Employer
contributions or forfeitures for any Participant (for purposes of Section 3.04
(B)(1)(b)) or for any Key Employee (for purposes of Section 3.04(B)(2)(b)), the
Plan does not require any top heavy minimum allocation for the Plan Year, unless
a top heavy minimum allocation applies because of the maintenance by the
Employer of more than one plan.
(7) Election of Method. The Employer must specify in its Adoption Agreement
the manner in which the Plan will satisfy the top heavy minimum allocation
requirement.
(a) If the Employer elects to make any necessary additional contribution to
this Plan, the Advisory Committee first will allocate the Employer contributions
(and Participant forfeitures, if any) for the Plan Year in accordance with the
provisions of Adoption Agreement Section 3.04. The Employer then will contribute
an additional amount for the Account of any Participant entitled under this
Section 3.04(B) to a top heavy minimum allocation and whose contribution rate
for the Plan Year, under this Plan and any other plan aggregated under paragraph
(5), is less than the top heavy minimum allocation. The additional amount is the
amount necessary to increase the Participant's contribution rate to the top
heavy minimum
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allocation. The Advisory Committee will allocate the additional contribution to
the Account of the Participant on whose behalf the Employer makes the
contribution.
(b) If the Employer elects to guarantee the top heavy minimum allocation
under another plan, this Plan does not provide the top heavy minimum allocation
and the Advisory Committee will allocate the annual Employer contributions
(and Participant forfeitures) under the Plan solely in accordance with the
allocation method selected under Adoption Agreement Section 3.04.
3.05 FORFEITURE ALLOCATION. The amount of a Participant's Accrued Benefit
forfeited under the Plan is a Participant forfeiture. The Advisory Committee
will allocate Participant forfeitures in the manner specified by the Employer in
its Adoption Agreement. The Advisory Committee will continue to hold the
undistributed, non-vested portion of a terminated Participant's Accrued Benefit
in his Account solely for his benefit until a forfeiture occurs at the time
specified in Section 5.09 or if applicable, until the time specified in Section
9.14. Except as provided under Section 5.04, a Participant will not share in the
allocation of a forfeiture of any portion of his Accrued Benefit.
3.06 ACCRUAL OF BENEFIT. The Advisory Committee will determine the accrual of
benefit (Employer contributions and Participant forfeitures) on the basis of the
Plan Year in accordance with the Employer's elections in its Adoption Agreement.
(A) Compensation Taken Into Account. The Employer must specify in its
Adoption Agreement the Compensation the Advisory Committee is to take into
account in allocating an Employer contribution to a Participant's Account for
the Plan Year in which the Employee first becomes a Participant. For all other
Plan Years, the Advisory Committee will take into account only the Compensation
determined for the portion of the Plan Year in which the Employee actually is a
Participant. The Advisory Committee must take into account the Employee's entire
Compensation for the Plan Year to determine whether the Plan satisfies the top
heavy minimum allocation requirement of Section 3.04(B). The Employer, in an
addendum to its Adoption Agreement numbered 3.06(A), may elect to measure
Compensation for the Plan Year for allocation purposes on the basis of a
specified period other than the Plan Year.
(B) Hours of Service Requirement. Subject to the applicable minimum
allocation requirement of Section 3.04, the Advisory Committee will not allocate
any portion of an Employer contribution for a Plan Year to any Participant's
Account if the Participant does not complete the applicable minimum Hours of
Service requirement specified in the Employer's Adoption Agreement.
(C) Employment Requirement. If the Employer's Plan is a Standardized Plan, a
Participant who, during a particular Plan Year, completes the accrual
requirements of Adoption Agreement Section 3.06 will share in the allocation of
Employer contributions for that Plan Year without regard to whether he is
employed by the Employer on the Accounting Date of that Plan Year. If the
Employer's Plan is a Nonstandardized Plan, the Employer must specify in its
Adoption Agreement whether the Participant will accrue a benefit if he is not
employed by the Employer on the Accounting Date of the Plan Year. If the
Employer's Plan is a money purchase plan or a target benefit plan, whether
Nonstandardized or Standardized, the Plan conditions benefit accrual on
employment with the Employer on the last day of the Plan Year for the Plan Year
in which the Employer terminates the Plan.
(D) Other Requirements. If the Employer's Adoption Agreement includes options
for other requirements affecting the Participant's accrual of benefits under the
Plan, the Advisory Committee will apply this Section 3.06 in accordance with the
Employer's Adoption Agreement selections.
(E) Suspension of Accrual Requirements Under Nonstandardized Plan. If the
Employer's Plan is a Nonstandardized Plan, the Employer may elect in its
Adoption Agreement to suspend the accrual requirements elected under Adoption
Agreement Section 3.06 if, for any Plan Year beginning after December 31, 1989,
the Plan fails to satisfy the Participation Test or the Coverage Test. A Plan
satisfies the Participation Test if, on each day of the Plan Year, the number of
Employees who benefit under the Plan is at least equal to the lesser of 50 or
40% of the total number of Includible Employees as of such day. A Plan satisfies
the Coverage Test if, on the last day of each quarter of the Plan Year, the
number of Nonhighly Compensated Employees who benefit under the Plan is at least
equal to 70% of the total number of Includible Nonhighly Compensated Employees
as of such day. "Includible" Employees are all Employees other than: (1) those
Employees
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excluded from participating in the Plan for the entire Plan Year by reason of
the collective bargaining unit exclusion or the nonresident alien exclusion
under Adoption Agreement Section 1.07 or by reason of the participation
requirements of Sections 2.01 and 2.03; and (2) any Employee who incurs a
Separation from Service during the Plan Year and fails to complete at least 501
Hours of Service for the Plan Year. A "Nonhighly Compensated Employee" is an
Employee who is not a Highly Compensated Employee and who is not a family member
aggregated with a Highly Compensated Employee pursuant to Section 1.09 of the
Plan.
For purposes of the Participation Test and the Coverage Test, an Employee is
benefiting under the Plan on a particular date if, under Adoption Agreement
Section 3.04, he is entitled to an allocation for the Plan Year. Under the
Participation Test, when determining whether an Employee is entitled to an
allocation under Adoption Agreement Section 3.04, the Advisory Committee will
disregard any allocation required solely by reason of the top heavy minimum
allocation, unless the top heavy minimum allocation is the only allocation made
under the Plan for the Plan Year.
If this Section 3.06(E) applies for a Plan Year, the Advisory Committee will
suspend the accrual requirements for the Includible Employees who are
Participants, beginning first with the Includible Employee(s) employed with the
Employer on the last day of the Plan Year, then the Includible Employee(s) who
have the latest Separation from Service during the Plan Year, and continuing to
suspend in descending order the accrual requirements for each Includible
Employee who incurred an earlier Separation from Service, from the latest to the
earliest Separation from Service date, until the Plan satisfies both the
Participation Test and the Coverage Test for the Plan Year. If two or more
Includible Employees have a Separation from Service on the same day, the
Advisory Committee will suspend the accrual requirements for all such Includible
Employees, irrespective of whether the Plan can satisfy the Participation Test
and the Coverage Test by accruing benefits for fewer than all such Includible
Employees. If the Plan suspends the accrual requirements for an Includible
Employee, that Employee will share in the allocation of Employer contributions
and Participant forfeitures, if any, without regard to the number of Hours of
Service he has earned for the Plan Year and without regard to whether he is
employed by the Employer on the last day of the Plan Year. If the Employer's
Plan includes Employer matching contributions subject to Code (S)401(m), this
suspension of accrual requirements applies separately to the Code (S)401(m)
portion of the Plan, and the Advisory Committee will treat an Employee as
benefiting under that portion of the Plan if he is an Eligible Employee for
purposes of the Code (S)401(m) nondiscrimination test. The Employer may modify
the operation of this Section 3.06(E) by electing appropriate modifications in
Section 3.06 of its Adoption Agreement.
Part 2. Limitations On Allocations: Sections 3.07 through 3.19
[Note: Sections 3.07 through 3.10 apply only to Participants in this Plan who do
not participate, and who have never participated, in another qualified plan or
in a welfare benefit fund (as defined in Code (S)419(e)) maintained by the
Employer.]
3.07 The amount of Annual Additions which the Advisory Committee may allocate
under this Plan on a Participant's behalf for a Limitation Year may not exceed
the Maximum Permissible Amount. If the amount the Employer otherwise would
contribute to the Participant's Account would cause the Annual Additions for the
Limitation Year to exceed the Maximum Permissible Amount, the Employer will
reduce the amount of its contribution so the Annual Additions for the Limitation
Year will equal the Maximum Permissible Amount. If an allocation of Employer
contributions, pursuant to Section 3.04, would result in an Excess Amount (other
than an Excess Amount resulting from the circumstances described in Section
3.10) to the Participant's Account, the Advisory Committee will reallocate the
Excess Amount to the remaining Participants who are eligible for an allocation
of Employer contributions for the Plan Year in which the Limitation Year ends.
The Advisory Committee will make this reallocation on the basis of the
allocation method under the Plan as if the Participant whose Account otherwise
would receive the Excess Amount is not eligible for an allocation of Employer
contributions.
3.08 Prior to the determination of the Participant's actual Compensation for a
Limitation Year, the Advisory Committee may determine the Maximum Permissible
Amount on the basis of the Participant's estimated annual Compensation for such
Limitation Year. The Advisory Committee must make this determination on a
reasonable and uniform basis for all Participants similarly situated. The
Advisory Committee must reduce any Employer contributions (including any
allocation of forfeitures) based on estimated annual Compensation by any Excess
Amounts carried over from prior years.
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3.09 As soon as is administratively feasible after the end of the Limitation
Year, the Advisory Committee will determine the Maximum Permissible Amount for
such Limitation Year on the basis of the Participant's actual Compensation for
such Limitation Year.
3.10 If, pursuant to Section 3.09, or because of the allocation of
forfeitures, there is an Excess Amount with respect to a Participant for a
Limitation Year, the Advisory Committee will dispose of such Excess Amount as
follows:
(a) The Advisory Committee will return any nondeductible voluntary Employee
contributions to the Participant to the extent the return would reduce the
Excess Amount.
(b) If, after the application of paragraph (a), an Excess Amount still
exists, and the Plan covers the Participant at the end of the Limitation Year,
then the Advisory Committee will use the Excess Amount(s) to reduce future
Employer contributions (including any allocation of forfeitures) under the Plan
for the next Limitation Year and for each succeeding Limitation Year, as is
necessary, for the Participant. If the Employer's Plan is a profit sharing plan,
the Participant may elect to limit his Compensation for allocation purposes to
the extent necessary to reduce his allocation for the Limitation Year to the
Maximum Permissible Amount and eliminate the Excess Amount.
(c) If, after the application of paragraph (a), an Excess Amount still
exists, and the Plan does not cover the Participant at the end of the Limitation
Year, then the Advisory Committee will hold the Excess Amount unallocated in a
suspense account. The Advisory Committee will apply the suspense account to
reduce Employer Contributions (including allocation of forfeitures) for all
remaining Participants in the next Limitation Year, and in each succeeding
Limitation Year if necessary. Neither the Employer nor any Employee may
contribute to the Plan for any Limitation Year in which the Plan is unable to
allocate fully a suspense account maintained pursuant to this paragraph (c).
(d) The Advisory Committee will not distribute any Excess Amount(s) to
Participants or to former Participants.
[Note: Sections 3.11 through 3.16 apply only to Participants who, in addition to
this Plan, participate in one or more plans (including Paired Plans), all of
which are qualified Master or Prototype defined contribution plans or welfare
benefit funds (as defined in Code (S)419(e)) maintained by the Employer during
the Limitation Year.]
3.11 The amount of Annual Additions which the Advisory Committee may allocate
under this Plan on a Participant's behalf for a Limitation Year may not exceed
the Maximum Permissible Amount, reduced by the sum of any Annual Additions
allocated to the Participant's Accounts for the same Limitation Year under this
Plan and such other defined contribution plan. If the amount the Employer
otherwise would contribute to the Participant's Account under this Plan would
cause the Annual Additions for the Limitation Year to exceed this limitation,
the Employer will reduce the amount of its contribution so the Annual Additions
under all such plans for the Limitation Year will equal the Maximum Permissible
Amount. If an allocation of Employer contributions, pursuant to Section 3.04,
would result in an Excess Amount (other than an Excess Amount resulting from the
circumstances described in Section 3.10) to the Participant's Account, the
Advisory Committee will reallocate the Excess Amount to the remaining
Participants who are eligible for an allocation of Employer contributions for
the Plan Year in which the Limitation Year ends. The Advisory Committee will
make this reallocation on the basis of the allocation method under the Plan as
if the Participant whose Account otherwise would receive the Excess Amount is
not eligible for an allocation of Employer contributions.
3.12 Prior to the determination of the Participant's actual Compensation for
the Limitation Year, the Advisory Committee may determine the amounts referred
to in 3.11 above on the basis of the Participant's estimated annual Compensation
for such Limitation Year. The Advisory Committee will make this determination on
a reasonable and uniform basis for all Participants similarly situated. The
Advisory Committee must reduce any Employer contribution (including allocation
of forfeitures) based on estimated annual Compensation by any Excess Amounts
carried over from prior years.
3.13 As soon as is administratively feasible after the end of the Limitation
Year, the Advisory Committee will determine the amounts referred to in 3.11 on
the basis of the Participant's actual Compensation for such Limitation Year.
3.14 If pursuant to Section 3.13, or because of the allocation of forfeitures,
a Participant's Annual Additions under this Plan and all such other plans result
in an Excess Amount, such Excess Amount will consist of the Amounts last
allocated.
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The Advisory Committee will determine the Amounts last allocated by
treating the Annual Additions attributable to a welfare benefit fund as
allocated first, irrespective of the actual allocation date under the welfare
benefit fund.
3.15 The Employer must specify in its Adoption Agreement the Excess Amount
attributed to this Plan, if the Advisory Committee allocates an Excess Amount to
a Participant on an allocation date of this Plan which coincides with an
allocation date of another plan.
3.16 The Advisory Committee will dispose of any Excess Amounts attributed to
this Plan as provided in Section 3.10.
[Note: Section 3.17 applies only to Participants who, in addition to this Plan,
participate in one or more qualified plans which are qualified defined
contribution plans other than a Master or Prototype plan maintained by the
Employer during the Limitation Year.]
3.17 SPECIAL ALLOCATION LIMITATION. The amount of Annual Additions which the
Advisory Committee may allocate under this Plan on behalf of any Participant are
limited in accordance with the provisions of Section 3.11 through 3.16, as
though the other plan were a Master or Prototype plan, unless the Employer
provides other limitations in an addendum to the Adoption Agreement, numbered
Section 3.17.
3.18 DEFINED BENEFIT PLAN LIMITATION. If the Employer maintains a defined
benefit plan, or has ever maintained a defined benefit plan which the Employer
has terminated, then the sum of the defined benefit plan fraction and the
defined contribution plan fraction for any Participant for any Limitation Year
must not exceed 1.0. The Employer must provide in Adoption Agreement Section
3.18 the manner in which the Plan will satisfy this limitation. The Employer
also must provide in its Adoption Agreement Section 3.18 the manner in which the
Plan will satisfy the top heavy requirements of Code (S)416 after taking into
account the existence (or prior maintenance) of the defined benefit plan.
3.19 DEFINITIONS - ARTICLE III. For purposes of Article III, the following
terms mean:
(a) "Annual Addition" - The sum of the following amounts allocated on behalf
of a Participant for a Limitation Year, of (i) all Employer contributions; (ii)
all forfeitures; and (iii) all Employee contributions. Except to the extent
provided in Treasury regulations, Annual Additions include excess contributions
described in Code (S)401(k), excess aggregate contributions described in Code
(S)401(m) and excess deferrals described in Code (S)402(g), irrespective of
whether the plan distributes or forfeits such excess amounts. Annual Additions
also include Excess Amounts reapplied to reduce Employer contributions under
Section 3.10. Amounts allocated after March 31, 1984, to an individual medical
account (as defined in Code (S)415(l)(2)) included as part of a defined benefit
plan maintained by the Employer are Annual Additions. Furthermore, Annual
Additions include contributions paid or accrued after December 31, 1985, for
taxable years ending after December 31, 1985, attributable to post-retirement
medical benefits allocated to the separate account of a key employee (as defined
in Code (S)419A(d)(3)) under a welfare benefit fund (as defined in Code
(S)419(e)) maintained by the Employer.
(b) "Compensation" - For purposes of applying the limitations of Part 2 of
this Article III, "Compensation" means Compensation as defined in Section 1.12,
except Compensation does not include elective contributions, irrespective of
whether the Employer has elected to include these amounts as Compensation under
Section 1.12 of its Adoption Agreement, and any exclusion selected in Section
1.12 of the Adoption Agreement (other than the exclusion of elective
contributions) does not apply.
(c) "Employer" - The Employer that adopts this Plan and any related employers
described in Section 1.30. Solely for purposes of applying the limitations of
Part 2 of this Article III, the Advisory Committee will determine related
employers described in Section 1.30 by modifying Code (S)(S)414(b) and (c) in
accordance with Code (S)415(h).
(d) "Excess Amount" -The excess of the Participant's Annual Additions for the
Limitation Year over the Maximum Permissible Amount.
(e) "Limitation Year" -The period selected by the Employer under Adoption
Agreement Section 1.17. All qualified plans of the Employer must use the same
Limitation Year. If the Employer amends the Limitation Year to a different 12
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consecutive month period, the new Limitation Year must begin on a date within
the Limitation Year for which the Employer makes the amendment, creating a short
Limitation Year.
(f) "Master or Prototype Plan" -A plan the form of which is the subject of a
favorable notification letter or a favorable opinion letter from the Internal
Revenue Service.
(g) "Maximum Permissible Amount" -The lesser of (i) $30,000 (or, if greater,
one-fourth of the defined benefit dollar limitation under Code (S)415(b)(1)(A)),
or (ii) 25% of the Participant's Compensation for the Limitation Year. If there
is a short Limitation Year because of a change in Limitation Year, the Advisory
Committee will multiply the $30,000 (or adjusted) limitation by the following
fraction:
Number of months in the short Limitation Year
12
(h) "Defined contribution plan" - A retirement plan which provides for an
individual account for each participant and for benefits based solely on the
amount contributed to the participant's account, and any income, expenses, gains
and losses, and any forfeitures of accounts of other participants which the plan
may allocate to such participant's account. The Advisory Committee must treat
all defined contribution plans (whether or not terminated) maintained by the
Employer as a single plan. Solely for purposes of the limitations of Part 2 of
this Article III, the Advisory Committee will treat employee contributions made
to a defined benefit plan maintained by the Employer as a separate defined
contribution plan. The Advisory Committee also will treat as a defined
contribution plan an individual medical account (as defined in Code
(S)415(l)(2)) included as part of a defined benefit plan maintained by the
Employer and, for taxable years ending after December 31, 1985, a welfare
benefit fund under Code (S)419(e) maintained by the Employer to the extent there
are post-retirement medical benefits allocated to the separate account of a key
employee (as defined in Code (S)419A(d)(3)).
(i) "Defined benefit plan" -A retirement plan which does not provide for
individual accounts for Employer contributions. The Advisory Committee must
treat all defined benefit plans (whether or not terminated) maintained by the
Employer as a single plan.
[Note: The definitions in paragraphs (j), (k) and (l) apply only if the
limitation described in Section 3.18 applies to the Employer's Plan.]
(j) "Defined benefit plan fraction" -
Projected annual benefit of the Participant under the defined benefit
plan(s)
The lesser of (i) 125% (subject to the "100% limitation" in paragraph (l)) of
the dollar limitation in effect under Code (S) 415(b)(1)(A) for the Limitation
Year, or (ii) 140% of the Participant's average Compensation for his high three
(3) consecutive Years of Service
To determine the denominator of this fraction, the Advisory Committee will make
any adjustment required under Code (S)415(b) and will determine a Year of
Service, unless otherwise provided in an addendum to Adoption Agreement Section
3.18, as a Plan Year in which the Employee completed at least 1,000 Hours of
Service. The "projected annual benefit" is the annual retirement benefit
(adjusted to an actuarially equivalent straight life annuity if the plan
expresses such benefit in a form other than a straight life annuity or qualified
joint and survivor annuity) of the Participant under the terms of the defined
benefit plan on the assumptions he continues employment until his normal
retirement age (or current age, if later) as stated in the defined benefit plan,
his compensation continues at the same rate as in effect in the Limitation Year
under consideration until the date of his normal retirement age and all other
relevant factors used to determine benefits under the defined benefit plan
remain constant as of the current Limitation Year for all future Limitation
Years.
Current Accrued Benefit. If the Participant accrued benefits in one or more
defined benefit plans maintained by the Employer which were in existence on May
6, 1986, the dollar limitation used in the denominator of this fraction will not
be less than the Participant's Current Accrued Benefit. A Participant's Current
Accrued Benefit is the sum of the annual benefits under such defined benefit
plans which the Participant had accrued as of the end of the 1986 Limitation
17
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Year (the last Limitation Year beginning before January 1, 1987), determined
without regard to any change in the terms or conditions of the Plan made after
May 5, 1986, and without regard to any cost of living adjustment occurring after
May 5, 1986. This Current Accrued Benefit rule applies only if the defined
benefit plans individually and in the aggregate satisfied the requirements of
Code (S)415 as in effect at the end of the 1986 Limitation Year.
(k) "Defined contribution plan fraction" -
The sum, as of the close of the Limitation Year, of the Annual Additions
to the Participant's Account under the defined contribution plan(s)
The sum of the lesser of the following amounts determined for the Limitation
Year and for each prior Year of Service with the Employer:(i) 125% (subject to
the "100% limitation" in paragraph (l)) of the dollar limitation in effect under
Code (S)415(c)(1)(A) for the Limitation Year (determined without regard to the
special dollar limitations for employee stock ownership plans), or (ii) 35% of
the Participant's Compensation for the Limitation Year
For purposes of determining the defined contribution plan fraction, the Advisory
Committee will not recompute Annual Additions in Limitation Years beginning
prior to January 1, 1987, to treat all Employee contributions as Annual
Additions. If the Plan satisfied Code (S)415 for Limitation Years beginning
prior to January 1, 1987, the Advisory Committee will redetermine the defined
contribution plan fraction and the defined benefit plan fraction as of the end
of the 1986 Limitation Year, in accordance with this Section 3.19. If the sum of
the redetermined fractions exceeds 1.0, the Advisory Committee will subtract
permanently from the numerator of the defined contribution plan fraction an
amount equal to the product of (1) the excess of the sum of the fractions over
1.0, times (2) the denominator of the defined contribution plan fraction. In
making the adjustment, the Advisory Committee must disregard any accrued benefit
under the defined benefit plan which is in excess of the Current Accrued
Benefit. This Plan continues any transitional rules applicable to the
determination of the defined contribution plan fraction under the Employer's
Plan as of the end of the 1986 Limitation Year.
(l) "100% limitation." If the 100% limitation applies, the Advisory Committee
must determine the denominator of the defined benefit plan fraction and the
denominator of the defined contribution plan fraction by substituting 100% for
125%. If the Employer's Plan is a Standardized Plan, the 100% limitation applies
in all Limitation Years, subject to any override provisions under Section 3.18
of the Employer's Adoption Agreement. If the Employer overrides the 100%
limitation under a Standardized Plan, the Employer must specify in its Adoption
Agreement the manner in which the Plan satisfies the extra minimum benefit
requirement of Code (S)416(h) and the 100% limitation must continue to apply if
the Plan's top heavy ratio exceeds 90%. If the Employer's Plan is a
Nonstandardized Plan, the 100% limitation applies only if: (i) the Plan's top
heavy ratio exceeds 90%; or (ii) the Plan's top heavy ratio is greater than 60%,
and the Employer does not elect in its Adoption Agreement Section 3.18 to
provide extra minimum benefits which satisfy Code (S)416(h)(2).
* * * * * * * * * * * * * * *
ARTICLE IV
PARTICIPANT CONTRIBUTIONS
4.01 PARTICIPANT NONDEDUCTIBLE CONTRIBUTIONS. This Plan does not permit
Participant nondeductible contributions unless the Employer maintains its Plan
under a Code (S)401(k) Adoption Agreement. If the Employer does not maintain its
Plan under a Code (S)401(k) Adoption Agreement and, prior to the adoption of
this Prototype Plan, the Plan accepted Participant nondeductible contributions
for a Plan Year beginning after December 31, 1986, those contributions must
satisfy the requirements of Code (S)401(m). This Section 4.01 does not prohibit
the Plan's acceptance of Participant nondeductible contributions prior to the
first Plan Year commencing after the Plan Year in which the Employer adopts this
Prototype Plan.
4.02 PARTICIPANT DEDUCTIBLE CONTRIBUTIONS. A qualified Plan may not accept
Participant deductible contributions after April 15, 1987. If the Employer's
Plan includes Participant deductible contributions ("DECs") made prior to April
16, 1987, the Advisory Committee must maintain a separate accounting for the
Participant's Accrued Benefit attributable to DECs, including DECs which are
part of a rollover contribution described in Section 4.03. The Advisory
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Committee will treat the accumulated DECs as part of the Participant's Accrued
Benefit for all purposes of the Plan, except for purposes of determining the top
heavy ratio under Section 1.33. The Advisory Committee may not use DECs to
purchase life insurance on the Participant's behalf.
4.03 PARTICIPANT ROLLOVER CONTRIBUTIONS. Any Participant, with the Employer's
written consent and after filing with the Trustee the form prescribed by the
Advisory Committee, may contribute cash or other property to the Trust other
than as a voluntary contribution if the contribution is a "rollover
contribution" which the Code permits an employee to transfer either directly or
indirectly from one qualified plan to another qualified plan. Before accepting a
rollover contribution, the Trustee may require an Employee to furnish
satisfactory evidence that the proposed transfer is in fact a "rollover
contribution" which the Code permits an employee to make to a qualified plan. A
rollover contribution is not an Annual Addition under Part 2 of Article III.
The Trustee will invest the rollover contribution in a segregated investment
Account for the Participant's sole benefit unless the Trustee (or the Named
Fiduciary, in the case of a nondiscretionary Trustee designation), in its sole
discretion, agrees to invest the rollover contribution as part of the Trust
Fund. The Trustee will not have any investment responsibility with respect to a
Participant's segregated rollover Account. The Participant, however, from time
to time, may direct the Trustee in writing as to the investment of his
segregated rollover Account in property, or property interests, of any kind,
real, personal or mixed; provided however, the Participant may not direct the
Trustee to make loans to his Employer. A Participant's segregated rollover
Account alone will bear any extraordinary expenses resulting from investments
made at the direction of the Participant. As of the Accounting Date (or other
valuation date) for each Plan Year, the Advisory Committee will allocate and
credit the net income (or net loss) from a Participant's segregated rollover
Account and the increase or decrease in the fair market value of the assets of a
segregated rollover Account solely to that Account. The Trustee is not liable
nor responsible for any loss resulting to any Beneficiary, nor to any
Participant, by reason of any sale or investment made or other action taken
pursuant to and in accordance with the direction of the Participant. In all
other respects, the Trustee will hold, administer and distribute a rollover
contribution in the same manner as any Employer contribution made to the Trust.
An eligible Employee, prior to satisfying the Plan's eligibility conditions, may
make a rollover contribution to the Trust to the same extent and in the same
manner as a Participant. If an Employee makes a rollover contribution to the
Trust prior to satisfying the Plan's eligibility conditions, the Advisory
Committee and Trustee must treat the Employee as a Participant for all purposes
of the Plan except the Employee is not a Participant for purposes of sharing in
Employer contributions or Participant forfeitures under the Plan until he
actually becomes a Participant in the Plan. If the Employee has a Separation
from Service prior to becoming a Participant, the Trustee will distribute his
rollover contribution Account to him as if it were an Employer contribution
Account.
4.04 PARTICIPANT CONTRIBUTION -FORFEITABILITY. A Participant's Accrued Benefit
is, at all times, 100% Nonforfeitable to the extent the value of his Accrued
Benefit is derived from his Participant contributions described in this Article
IV.
4.05 PARTICIPANT CONTRIBUTION - WITHDRAWAL/DISTRIBUTION. A Participant, by
giving prior written notice to the Trustee, may withdraw all or any part of the
value of his Accrued Benefit derived from his Participant contributions
described in this Article IV. A distribution of Participant contributions must
comply with the joint and survivor requirements described in Article VI, if
those requirements apply to the Participant. A Participant may not exercise his
right to withdraw the value of his Accrued Benefit derived from his Participant
contributions more than once during any Plan Year. The Trustee, in accordance
with the direction of the Advisory Committee, will distribute a Participant's
unwithdrawn Accrued Benefit attributable to his Participant contributions in
accordance with the provisions of Article VI applicable to the distribution of
the Participant's Nonforfeitable Accrued Benefit.
4.06 PARTICIPANT CONTRIBUTION -ACCRUED BENEFIT. The Advisory Committee must
maintain a separate Account(s) in the name of each Participant to reflect the
Participant's Accrued Benefit under the Plan derived from his Participant
contributions. A Participant's Accrued Benefit derived from his Participant
contributions as of any applicable date is the balance of his separate
Participant contribution Account(s).
* * * * * * * * * * * * * * *
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ARTICLE V
TERMINATION OF SERVICE -PARTICIPANT VESTING
5.01 NORMAL RETIREMENT AGE. The Employer must define Normal Retirement Age in
its Adoption Agreement. A Participant's Accrued Benefit derived from Employer
contributions is 100% Nonforfeitable upon and after his attaining Normal
Retirement Age (if employed by the Employer on or after that date).
5.02 PARTICIPANT DISABILITY OR DEATH. The Employer may elect in its Adoption
Agreement to provide a Participant's Accrued Benefit derived from Employer
contributions will be 100% Nonforfeitable if the Participant's Separation from
Service is a result of his death or his disability.
5.03 VESTING SCHEDULE. Except as provided in Sections 5.01 and 5.02, for each
Year of Service, a Participant's Nonforfeitable percentage of his Accrued
Benefit derived from Employer contributions equals the percentage in the vesting
schedule completed by the Employer in its Adoption Agreement.
(A) Election of Special Vesting Formula. If the Trustee makes a distribution
(other than a cash-out distribution described in Section 5.04) to a partially-
vested Participant, and the Participant has not incurred a Forfeiture Break in
Service at the relevant time, the Advisory Committee will establish a separate
Account for the Participant's Accrued Benefit. At any relevant time following
the distribution, the Advisory Committee will determine the Participant's
Nonforfeitable Accrued Benefit derived from Employer contributions in accordance
with the following formula: P(AB + (R x D)) - (R x D).
To apply this formula, "P" is the Participant's current vesting percentage at
the relevant time, "AB" is the Participant's Employer-derived Accrued Benefit at
the relevant time, "R" is the ratio of "AB" to the Participant's Employer-
derived Accrued Benefit immediately following the earlier distribution and "D"
is the amount of the earlier distribution. If, under a restated Plan, the Plan
has made distribution to a partially-vested Participant prior to its restated
Effective Date and is unable to apply the cash-out provisions of Section 5.04 to
that prior distribution, this special vesting formula also applies to that
Participant's remaining Account. The Employer, in an addendum to its Adoption
Agreement, numbered Section 5.03, may elect to modify this formula to read as
follows: P(AB + D) - D.
5.04 CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS/ RESTORATION OF
FORFEITED ACCRUED BENEFIT. If, pursuant to Article VI, a partially-vested
Participant receives a cash-out distribution before he incurs a Forfeiture Break
in Service (as defined in Section 5.08), the cash-out distribution will result
in an immediate forfeiture of the nonvested portion of the Participant's Accrued
Benefit derived from Employer contributions. See Section 5.09. A partially-
vested Participant is a Participant whose Nonforfeitable Percentage determined
under Section 5.03 is less than 100%. A cash-out distribution is a distribution
of the entire present value of the Participant's Nonforfeitable Accrued Benefit.
(A) Restoration and Conditions upon Restoration. A partially-vested Participant
who is re-employed by the Employer after receiving a cash-out distribution of
the Nonforfeitable percentage of his Accrued Benefit may repay the Trustee the
amount of the cash-out distribution attributable to Employer contributions,
unless the Participant no longer has a right to restoration by reason of the
conditions of this Section 5.04(A). If a partially-vested Participant makes the
cash-out distribution repayment, the Advisory Committee, subject to the
conditions of this Section 5.04(A), must restore his Accrued Benefit
attributable to Employer contributions to the same dollar amount as the dollar
amount of his Accrued Benefit on the Accounting Date, or other valuation date,
immediately preceding the date of the cash-out distribution, unadjusted for any
gains or losses occurring subsequent to that Accounting Date, or other valuation
date. Restoration of the Participant's Accrued Benefit includes restoration of
all Code (S)411(d)(6) protected benefits with respect to that restored Accrued
Benefit, in accordance with applicable Treasury regulations. The Advisory
Committee will not restore a re-employed Participant's Accrued Benefit under
this paragraph if:
(1) 5 years have elapsed since the Participant's first re-employment date
with the Employer following the cash-out distribution; or
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(2) The Participant incurred a Forfeiture Break in Service (as defined in
Section 5.08). This condition also applies if the Participant makes repayment
within the Plan Year in which he incurs the Forfeiture Break in Service and that
Forfeiture Break in Service would result in a complete forfeiture of the amount
the Advisory Committee otherwise would restore.
(B) Time and Method of Restoration. If neither of the two conditions preventing
restoration of the Participant's Accrued Benefit applies, the Advisory Committee
will restore the Participant's Accrued Benefit as of the Plan Year Accounting
Date coincident with or immediately following the repayment. To restore the
Participant's Accrued Benefit, the Advisory Committee, to the extent necessary,
will allocate to the Participant's Account:
(1) First, the amount, if any, of Participant forfeitures the Advisory
Committee would otherwise allocate under Section 3.05;
(2) Second, the amount, if any, of the Trust Fund net income or gain for the
Plan Year; and
(3) Third, the Employer contribution for the Plan Year to the extent made
under a discretionary formula.
In an addendum to its Adoption Agreement numbered 5.04(B), the Employer may
eliminate as a means of restoration any of the amounts described in clauses (1),
(2) and (3) or may change the order of priority of these amounts. To the extent
the amounts described in clauses (1), (2) and (3) are insufficient to enable the
Advisory Committee to make the required restoration, the Employer must
contribute, without regard to any requirement or condition of Section 3.01, the
additional amount necessary to enable the Advisory Committee to make the
required restoration. If, for a particular Plan Year, the Advisory Committee
must restore the Accrued Benefit of more than one re-employed Participant, then
the Advisory Committee will make the restoration allocations to each such
Participant's Account in the same proportion that a Participant's restored
amount for the Plan Year bears to the restored amount for the Plan Year of all
re-employed Participants. The Advisory Committee will not take into account any
allocation under this Section 5.04 in applying the limitation on allocations
under Part 2 of Article III.
(C) 0% Vested Participant. The Employer must specify in its Adoption Agreement
whether the deemed cash-out rule applies to a 0% vested Participant. A 0% vested
Participant is a Participant whose Accrued Benefit derived from Employer
contributions is entirely forfeitable at the time of his Separation from
Service. If the Participant's Account is not entitled to an allocation of
Employer contributions for the Plan Year in which he has a Separation from
Service, the Advisory Committee will apply the deemed cash-out rule as if the 0%
vested Participant received a cash-out distribution on the date of the
Participant's Separation from Service. If the Participant's Account is entitled
to an allocation of Employer contributions or Participant forfeitures for the
Plan Year in which he has a Separation from Service, the Advisory Committee will
apply the deemed cash-out rule as if the 0% vested Participant received a cash-
out distribution on the first day of the first Plan Year beginning after his
Separation from Service. For purposes of applying the restoration provisions of
this Section 5.04, the Advisory Committee will treat the 0% vested Participant
as repaying his cash-out "distribution" on the first date of his re-employment
with the Employer. If the deemed cash-out rule does not apply to the Employer's
Plan, a 0% vested Participant will not incur a forfeiture until he incurs a
Forfeiture Break in Service.
5.05 SEGREGATED ACCOUNT FOR REPAID AMOUNT. Until the Advisory Committee
restores the Participant's Accrued Benefit, as described in Section 5.04, the
Trustee will invest the cash-out amount the Participant has repaid in a
segregated Account maintained solely for that Participant. The Trustee must
invest the amount in the Participant's segregated Account in Federally insured
interest bearing savings account(s) or time deposit(s) (or a combination of
both), or in other fixed income investments. Until commingled with the balance
of the Trust Fund on the date the Advisory Committee restores the Participant's
Accrued Benefit, the Participant's segregated Account remains a part of the
Trust, but it alone shares in any income it earns and it alone bears any expense
or loss it incurs. Unless the repayment qualifies as a rollover contribution,
the Advisory Committee will direct the Trustee to repay to the Participant as
soon as is administratively practicable the full amount of the Participant's
segregated Account if the Advisory Committee determines either of the conditions
of Section 5.04(A) prevents restoration as of the applicable Accounting Date,
notwithstanding the Participant's repayment.
5.06 YEAR OF SERVICE -VESTING. For purposes of vesting under Section 5.03,
Year of Service means any 12-consecutive month period designated in the
Employer's Adoption Agreement during which an Employee completes not less
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than the number of Hours of Service (not exceeding 1,000) specified in the
Employer's Adoption Agreement. A Year of Service includes any Year of Service
earned prior to the Effective Date of the Plan, except as provided in Section
5.08.
5.07 BREAK IN SERVICE -VESTING. For purposes of this Article V, a Participant
incurs a "Break in Service" if during any vesting computation period he does not
complete more than 500 Hours of Service. If, pursuant to Section 5.06, the Plan
does not require more than 500 Hours of Service to receive credit for a Year of
Service, a Participant incurs a Break in Service in a vesting computation period
in which he fails to complete a Year of Service.
5.08 INCLUDED YEARS OF SERVICE -VESTING. For purposes of determining "Years of
Service" under Section 5.06, the Plan takes into account all Years of Service an
Employee completes with the Employer except:
(a) For the sole purpose of determining a Participant's Nonforfeitable
percentage of his Accrued Benefit derived from Employer contributions which
accrued for his benefit prior to a Forfeiture Break in Service, the Plan
disregards any Year of Service after the Participant first incurs a Forfeiture
Break in Service. The Participant incurs a Forfeiture Break in Service when he
incurs 5 consecutive Breaks in Service.
(b) The Plan disregards any Year of Service excluded under the Employer's
Adoption Agreement.
The Plan does not apply the Break in Service rule under Code (S)411(a)(6)(B).
Therefore, an Employee need not complete a Year of Service after a Break in
Service before the Plan takes into account the Employee's otherwise includible
Years of Service under this Article V.
5.09 FORFEITURE OCCURS. A Participant's forfeiture, if any, of his Accrued
Benefit derived from Employer contributions occurs under the Plan on the earlier
of:
(a) The last day of the vesting computation period in which the Participant
first incurs a Forfeiture Break in Service; or
(b) The date the Participant receives a cash-out distribution.
The Advisory Committee determines the percentage of a Participant's Accrued
Benefit forfeiture, if any, under this Section 5.09 solely by reference to the
vesting schedule of Section 5.03. A Participant does not forfeit any portion of
his Accrued Benefit for any other reason or cause except as expressly provided
by this Section 5.09 or as provided under Section 9.14.
* * * * * * * * * * * * * * *
ARTICLE VI
TIME AND METHOD OF PAYMENT OF BENEFITS
6.01 TIME OF PAYMENT OF ACCRUED BENEFIT. Unless, pursuant to Section 6.03, the
Participant or the Beneficiary elects in writing to a different time or method
of payment, the Advisory Committee will direct the Trustee to commence
distribution of a Participant's Nonforfeitable Accrued Benefit in accordance
with this Section 6.01. A Participant must consent, in writing, to any
distribution required under this Section 6.01 if the present value of the
Participant's Nonforfeitable Accrued Benefit, at the time of the distribution to
the Participant, exceeds $3,500 and the Participant has not attained the later
of Normal Retirement Age or age 62. Furthermore, the Participant's spouse also
must consent, in writing, to any distribution, for which Section 6.04 requires
the spouse's consent. For all purposes of this Article VI, the term "annuity
starting date" means the first day of the first period for which the Plan pays
an amount as an annuity or in any other form. A distribution date under this
Article VI, unless otherwise specified within the Plan, is the date or dates the
Employer specifies in the Adoption Agreement, or as soon as administratively
practicable following that distribution date. For purposes of the consent
requirements under this Article VI, if the present value of the Participant's
Nonforfeitable Accrued Benefit, at the time of any distribution, exceeds $3,500,
the Advisory Committee must treat that present value as exceeding $3,500 for
purposes of all subsequent Plan distributions to the Participant.
(A) Separation from Service For a Reason Other Than Death.
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(1) Participant's Nonforfeitable Accrued Benefit Not Exceeding $3,500. If
the Participant's Separation from Service is for any reason other than death,
the Advisory Committee will direct the Trustee to distribute the Participant's
Nonforfeitable Accrued Benefit in a lump sum, on the distribution date the
Employer specifies in the Adoption Agreement, but in no event later than the
60th day following the close of the Plan Year in which the Participant attains
Normal Retirement Age. If the Participant has attained Normal Retirement Age at
the time of his Separation from Service, the distribution under this paragraph
will occur no later than the 60th day following the close of the Plan Year in
which the Participant's Separation from Service occurs.
(2) Participant's Nonforfeitable Accrued Benefit Exceeds $3,500. If the
Participant's Separation from Service is for any reason other than death, the
Advisory Committee will direct the Trustee to commence distribution of the
Participant's Nonforfeitable Accrued Benefit in a form and at the time elected
by the Participant, pursuant to Section 6.03. In the absence of an election by
the Participant, the Advisory Committee will direct the Trustee to distribute
the Participant's Nonforfeitable Accrued Benefit in a lump sum (or, if
applicable, the normal annuity form of distribution required under Section
6.04), on the 60th day following the close of the Plan Year in which the latest
of the following events occurs: (a) the Participant attains Normal Retirement
Age; (b) the Participant attains age 62; or (c) the Participant's Separation
from Service.
(3) Disability. If the Participant's Separation from Service is because of
his disability, the Advisory Committee will direct the Trustee to pay the
Participant's Nonforfeitable Accrued Benefit in lump sum, on the distribution
date the Employer specifies in the Adoption Agreement, subject to the notice and
consent requirements of this Article VI and subject to the applicable mandatory
commencement dates described in Paragraphs (1) and (2).
(4) Hardship. Prior to the time at which the Participant may receive
distribution under Paragraphs (1), (2) or (3), the Participant may request a
distribution from his Nonforfeitable Accrued Benefit in an amount necessary to
satisfy a hardship, if the Employer elects in the Adoption Agreement to permit
hardship distributions. Unless the Employer elects otherwise in the Adoption
Agreement, a hardship distribution must be on account of any of the following:
(a) medical expenses; (b) the purchase (excluding mortgage payments) of the
Participant's principal residence; (c) post-secondary education tuition, for the
next semester or quarter, for the Participant or for the Participant's spouse,
children or dependents; (d) to prevent the eviction of the Participant from his
principal residence or the foreclosure on the mortgage of the Participant's
principal residence; (e) funeral expenses of the Participant's family member; or
(f) the Participant's disability. A partially-vested Participant may not receive
a hardship distribution described in this Paragraph (A)(4) prior to incurring a
Forfeiture Break in Service, unless the hardship distribution is a cash-out
distribution (as defined in Article V). The Advisory Committee will direct the
Trustee to make the hardship distribution as soon as administratively
practicable after the Participant makes a valid request for the hardship
distribution.
(B) Required Beginning Date. If any distribution commencement date described
under Paragraph (A) of this Section 6.01, either by Plan provision or by
Participant election (or nonelection), is later than the Participant's Required
Beginning Date, the Advisory Committee instead must direct the Trustee to make
distribution on the Participant's Required Beginning Date, subject to the
transitional election, if applicable, under Section 6.03(D). A Participant's
Required Beginning Date is the April 1 following the close of the calendar year
in which the Participant attains age 70 1/2. However, if the Participant, prior
to incurring a Separation from Service, attained age 70 1/2 by January 1, 1988,
and, for the five Plan Year period ending in the calendar year in which he
attained age 70 1/2 and for all subsequent years, the Participant was not a more
than 5% owner, the Required Beginning Date is the April 1 following the close of
the calendar year in which the Participant separates from Service or, if
earlier, the April 1 following the close of the calendar year in which the
Participant becomes a more than 5% owner. Furthermore, if a Participant who was
not a more than 5% owner attained age 70 1/2 during 1988 and did not incur a
Separation from Service prior to January 1, 1989, his Required Beginning Date is
April 1, 1990. A mandatory distribution at the Participant's Required Beginning
Date will be in lump sum (or, if applicable, the normal annuity form of
distribution required under Section 6.04) unless the Participant, pursuant to
the provisions of this Article VI, makes a valid election to receive an
alternative form of payment.
(C) Death of the Participant. The Advisory Committee will direct the Trustee, in
accordance with this Section 6.01(C), to distribute to the Participant's
Beneficiary the Participant's Nonforfeitable Accrued Benefit remaining in the
Trust at the time of the Participant's death. Subject to the requirements of
Section 6.04, the Advisory Committee will determine the death
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benefit by reducing the Participant's Nonforfeitable Accrued Benefit by any
security interest the Plan has against that Nonforfeitable Accrued Benefit by
reason of an outstanding Participant loan.
(1) Deceased Participant's Nonforfeitable Accrued Benefit Does Not Exceed
$3,500. The Advisory Committee, subject to the requirements of Section 6.04,
must direct the Trustee to distribute the deceased Participant's Nonforfeitable
Accrued Benefit in a single sum, as soon as administratively practicable
following the Participant's death or, if later, the date on which the Advisory
Committee receives notification of or otherwise confirms the Participant's
death.
(2) Deceased Participant's Nonforfeitable Accrued Benefit Exceeds $3,500. The
Advisory Committee will direct the Trustee to distribute the deceased
Participant's Nonforfeitable Accrued Benefit at the time and in the form elected
by the Participant or, if applicable by the Beneficiary, as permitted under this
Article VI. In the absence of an election, subject to the requirements of
Section 6.04, the Advisory Committee will direct the Trustee to distribute the
Participant's undistributed Nonforfeitable Accrued Benefit in a lump sum on the
first distribution date following the close of the Plan Year in which the
Participant's death occurs or, if later, the first distribution date following
the date the Advisory Committee receives notification of or otherwise confirms
the Participant's death.
If the death benefit is payable in full to the Participant's surviving spouse,
the surviving spouse, in addition to the distribution options provided in this
Section 6.01(C), may elect distribution at any time or in any form (other than a
joint and survivor annuity) this Article VI would permit for a Participant.
6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT. Subject to the annuity distribution
requirements, if any, prescribed by Section 6.04, and any restrictions
prescribed by Section 6.03, a Participant or Beneficiary may elect distribution
under one, or any combination, of the following methods: (a) by payment in a
lump sum; or (b) by payment in monthly, quarterly or annual installments over a
fixed reasonable period of time, not exceeding the life expectancy of the
Participant, or the joint life and last survivor expectancy of the Participant
and his Beneficiary. The Employer may elect in its Adoption Agreement to modify
the methods of payment available under this Section 6.02.
The distribution options permitted under this Section 6.02 are available only if
the present value of the Participant Nonforfeitable Accrued Benefit, at the time
of the distribution to the Participant, exceeds $3,500. To facilitate
installment payments under this Article VI, the Advisory Committee may direct
the Trustee to segregate all or any part of the Participant's Accrued Benefit in
a separate Account. The Trustee will invest the Participant's segregated Account
in Federally insured interest bearing savings account(s) or time deposit(s) (or
a combination of both), or in other fixed income investments. A segregated
Account remains a part of the Trust, but it alone shares in any income it earns,
and it alone bears any expense or loss it incurs. A Participant or Beneficiary
may elect to receive an installment distribution in the form of a
Nontransferable Annuity Contract. Under an installment distribution, the
Participant or Beneficiary, at any time, may elect to accelerate the payment of
all, or any portion, of the Participant's unpaid Nonforfeitable Accrued Benefit,
subject to the requirements of Section 6.04.
(A) Minimum Distribution Requirements for Participants. The Advisory Committee
may not direct the Trustee to distribute the Participant's Nonforfeitable
Accrued Benefit, nor may the Participant elect to have the Trustee distribute
his Nonforfeitable Accrued Benefit, under a method of payment which, as of the
Required Beginning Date, does not satisfy the minimum distribution requirements
under Code (S)401(a)(9) and the applicable Treasury regulations. The minimum
distribution for a calendar year equals the Participant's Nonforfeitable Accrued
Benefit as of the latest valuation date preceding the beginning of the calendar
year divided by the Participant's life expectancy or, if applicable, the joint
and last survivor expectancy of the Participant and his designated Beneficiary
(as determined under Article VIII, subject to the requirements of the Code
(S)401(a)(9) regulations). The Advisory Committee will increase the
Participant's Nonforfeitable Accrued Benefit, as determined on the relevant
valuation date, for contributions or forfeitures allocated after the valuation
date and by December 31 of the valuation calendar year, and will decrease the
valuation by distributions made after the valuation date and by December 31 of
the valuation calendar year. For purposes of this valuation, the Advisory
Committee will treat any portion of the minimum distribution for the first
distribution calendar year made after the close of that year as a distribution
occurring in that first distribution calendar year. In computing a minimum
distribution, the Advisory Committee must use the unisex life expectancy
multiples under Treas. Reg. (S)1.72-9. The Advisory Committee, only upon the
Participant's written request, will compute the minimum distribution for a
calendar year subsequent to the first calendar year for which the Plan requires
a minimum distribution by redetermining the applicable life expectancy. However,
the Advisory
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Committee may not redetermine the joint life and last survivor expectancy of the
Participant and a nonspouse designated Beneficiary in a manner which takes into
account any adjustment to a life expectancy other than the Participant's life
expectancy.
If the Participant's spouse is not his designated Beneficiary, a method of
payment to the Participant (whether by Participant election or by Advisory
Committee direction) may not provide more than incidental benefits to the
Beneficiary. For Plan Years beginning after December 31, 1988, the Plan must
satisfy the minimum distribution incidental benefit ("MDIB") requirement in the
Treasury regulations issued under Code (S)401(a)(9) for distributions made on or
after the Participant's Required Beginning Date and before the Participant's
death. To satisfy the MDIB requirement, the Advisory Committee will compute the
minimum distribution required by this Section 6.02(A) by substituting the
applicable MDIB divisor for the applicable life expectancy factor, if the MDIB
divisor is a lesser number. Following the Participant's death, the Advisory
Committee will compute the minimum distribution required by this Section 6.02(A)
solely on the basis of the applicable life expectancy factor and will disregard
the MDIB factor. For Plan Years beginning prior to January 1, 1989, the Plan
satisfies the incidental benefits requirement if the distributions to the
Participant satisfied the MDIB requirement or if the present value of the
retirement benefits payable solely to the Participant is greater than 50% of the
present value of the total benefits payable to the Participant and his
Beneficiaries. The Advisory Committee must determine whether benefits to the
Beneficiary are incidental as of the date the Trustee is to commence payment of
the retirement benefits to the Participant, or as of any date the Trustee
redetermines the payment period to the Participant.
The minimum distribution for the first distribution calendar year is due by the
Participant's Required Beginning Date. The minimum distribution for each
subsequent distribution calendar year, including the calendar year in which the
Participant's Required Beginning Date occurs, is due by December 31 of that
year. If the Participant receives distribution in the form of a Nontransferable
Annuity Contract, the distribution satisfies this Section 6.02(A) if the
contract complies with the requirements of Code (S)401(a)(9) and the applicable
Treasury regulations.
(B) Minimum Distribution Requirements for Beneficiaries. The method of
distribution to the Participant's Beneficiary must satisfy Code (S)401(a)(9) and
the applicable Treasury regulations. If the Participant's death occurs after his
Required Beginning Date or, if earlier, the date the Participant commences an
irrevocable annuity pursuant to Section 6.04, the method of payment to the
Beneficiary must provide for completion of payment over a period which does not
exceed the payment period which had commenced for the Participant. If the
Participant's death occurs prior to his Required Beginning Date, and the
Participant had not commenced an irrevocable annuity pursuant to Section 6.04,
the method of payment to the Beneficiary, subject to Section 6.04, must provide
for completion of payment to the Beneficiary over a period not exceeding: (i) 5
years after the date of the Participant's death; or (ii) if the Beneficiary is a
designated Beneficiary, the designated Beneficiary's life expectancy. The
Advisory Committee may not direct payment of the Participant's Nonforfeitable
Accrued Benefit over a period described in clause (ii) unless the Trustee will
commence payment to the designated Beneficiary no later than the December 31
following the close of the calendar year in which the Participant's death
occurred or, if later, and the designated Beneficiary is the Participant's
surviving spouse, December 31 of the calendar year in which the Participant
would have attained age 70 1/2. If the Trustee will make distribution in
accordance with clause (ii), the minimum distribution for a calendar year equals
the Participant's Nonforfeitable Accrued Benefit as of the latest valuation date
preceding the beginning of the calendar year divided by the designated
Beneficiary's life expectancy. The Advisory Committee must use the unisex life
expectancy multiples under Treas. Reg. (S)1.72-9 for purposes of applying this
paragraph. The Advisory Committee, only upon the written request of the
Participant or of the Participant's surviving spouse, will recalculate the life
expectancy of the Participant's surviving spouse not more frequently than
annually, but may not recalculate the life expectancy of a nonspouse designated
Beneficiary after the Trustee commences payment to the designated Beneficiary.
The Advisory Committee will apply this paragraph by treating any amount paid to
the Participant's child, which becomes payable to the Participant's surviving
spouse upon the child's attaining the age of majority, as paid to the
Participant's surviving spouse. Upon the Beneficiary's written request, the
Advisory Committee must direct the Trustee to accelerate payment of all, or any
portion, of the Participant's unpaid Accrued Benefit, as soon as
administratively practicable following the effective date of that request.
6.03 BENEFIT PAYMENT ELECTIONS. Not earlier than 90 days, but not later than
30 days, before the Participant's annuity starting date, the Advisory Committee
must provide a benefit notice to a Participant who is eligible to make an
election under this Section 6.03. The benefit notice must explain the optional
forms of benefit in the Plan, including the
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<PAGE>
material features and relative values of those options, and the Participant's
right to defer distribution until he attains the later of Normal Retirement Age
or age 62.
If a Participant or Beneficiary makes an election prescribed by this Section
6.03, the Advisory Committee will direct the Trustee to distribute the
Participant's Nonforfeitable Accrued Benefit in accordance with that election.
Any election under this Section 6.03 is subject to the requirements of Section
6.02 and of Section 6.04. The Participant or Beneficiary must make an election
under this Section 6.03 by filing his election with the Advisory Committee at
any time before the Trustee otherwise would commence to pay a Participant's
Accrued Benefit in accordance with the requirements of Article VI.
(A) Participant Elections After Separation from Service. If the present value of
a Participant's Nonforfeitable Accrued Benefit exceeds $3,500, he may elect to
have the Trustee commence distribution as of any distribution date permitted
under the Employer's Adoption Agreement Section 6.03. The Participant may
reconsider an election at any time prior to the annuity starting date and elect
to commence distribution as of any other distribution date permitted under the
Employer's Adoption Agreement Section 6.03. If the Participant is partially-
vested in his Accrued Benefit, an election under this Paragraph (A) to
distribute prior to the Participant's incurring a Forfeiture Break in Service
(as defined in Section 5.08), must be in the form of a cash-out distribution (as
defined in Article V). A Participant may not receive a cash-out distribution if,
prior to the time the Trustee actually makes the cash-out distribution, the
Participant returns to employment with the Employer. Following his attainment of
Normal Retirement Age, a Participant who has separated from Service may elect
distribution as of any distribution date, irrespective of the elections under
Adoption Agreement Section 6.03.
(B) Participant Elections Prior to Separation from Service. The Employer must
specify in its Adoption Agreement the distribution election rights, if any, a
Participant has prior to his Separation from Service. A Participant must make an
election under this Section 6.03(B) on a form prescribed by the Advisory
Committee at any time during the Plan Year for which his election is to be
effective. In his written election, the Participant must specify the percentage
or dollar amount he wishes the Trustee to distribute to him. The Participant's
election relates solely to the percentage or dollar amount specified in his
election form and his right to elect to receive an amount, if any, for a
particular Plan Year greater than the dollar amount or percentage specified in
his election form terminates on the Accounting Date. The Trustee must make a
distribution to a Participant in accordance with his election under this Section
6.03(B) within the 90 day period (or as soon as administratively practicable)
after the Participant files his written election with the Trustee. The Trustee
will distribute the balance of the Participant's Accrued Benefit not distributed
pursuant to his election(s) in accordance with the other distribution provisions
of this Plan.
(C) Death Benefit Elections. If the present value of the deceased Participant's
Nonforfeitable Accrued Benefit exceeds $3,500, the Participant's Beneficiary may
elect to have the Trustee distribute the Participant's Nonforfeitable Accrued
Benefit in a form and within a period permitted under Section 6.02. The
Beneficiary's election is subject to any restrictions designated in writing by
the Participant and not revoked as of his date of death.
(D) Transitional Elections. Notwithstanding the provisions of Sections 6.01 and
6.02, if the Participant (or Beneficiary) signed a written distribution
designation prior to January 1, 1984, the Advisory Committee must distribute the
Participant's Nonforfeitable Accrued Benefit in accordance with that
designation, subject however, to the survivor requirements, if applicable, of
Sections 6.04, 6.05 and 6.06. This Section 6.03(D) does not apply to a pre-1984
distribution designation, and the Advisory Committee will not comply with that
designation, if any of the following applies: (1) the method of distribution
would have disqualified the Plan under Code (S)401(a)(9) as in effect on
December 31, 1983; (2) the Participant did not have an Accrued Benefit as of
December 31, 1983; (3) the distribution designation does not specify the timing
and form of the distribution and the death Beneficiaries (in order of priority);
(4) the substitution of a Beneficiary modifies the payment period of the
distribution; or, (5) the Participant (or Beneficiary) modifies or revokes the
distribution designation. In the event of a revocation, the Plan must
distribute, no later than December 31 of the calendar year following the year of
revocation, the amount which the Participant would have received under Section
6.02(A) if the distribution designation had not been in effect or, if the
Beneficiary revokes the distribution designation, the amount which the
Beneficiary would have received under Section 6.02(B) if the distribution
designation had not been in effect. The Advisory Committee will apply this
Section 6.03(D) to rollovers and transfers in accordance with Part J of the Code
(S)401(a)(9) Treasury regulations.
6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES.
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(A) Joint and Survivor Annuity. The Advisory Committee must direct the
Trustee to distribute a married or unmarried Participant's Nonforfeitable
Accrued Benefit in the form of a qualified joint and survivor annuity, unless
the Participant makes a valid waiver election (described in Section 6.05) within
the 90 day period ending on the annuity starting date. If, as of the annuity
starting date, the Participant is married, a qualified joint and survivor
annuity is an immediate annuity which is purchasable with the Participant's
Nonforfeitable Accrued Benefit and which provides a life annuity for the
Participant and a survivor annuity payable for the remaining life of the
Participant's surviving spouse equal to 50% of the amount of the annuity payable
during the life of the Participant. If, as of the annuity starting date, the
Participant is not married, a qualified joint and survivor annuity is an
immediate life annuity for the Participant which is purchasable with the
Participant's Nonforfeitable Accrued Benefit. On or before the annuity starting
date, the Advisory Committee, without Participant or spousal consent, must
direct the Trustee to pay the Participant's Nonforfeitable Accrued Benefit in a
lump sum, in lieu of a qualified joint and survivor annuity, in accordance with
Section 6.01, if the Participant's Nonforfeitable Accrued Benefit is not greater
than $3,500. This Section 6.04(A) applies only to a Participant who has
completed at least one Hour of Service with the Employer after August 22, 1984.
(B) Preretirement Survivor Annuity. If a married Participant dies prior to his
annuity starting date, the Advisory Committee will direct the Trustee to
distribute a portion of the Participant's Nonforfeitable Accrued Benefit to the
Participant's surviving spouse in the form of a preretirement survivor annuity,
unless the Participant has a valid waiver election (as described in Section
6.06) in effect, or unless the Participant and his spouse were not married
throughout the one year period ending on the date of his death. A preretirement
survivor annuity is an annuity which is purchasable with 50% of the
Participant's Nonforfeitable Accrued Benefit (determined as of the date of the
Participant's death) and which is payable for the life of the Participant's
surviving spouse. The value of the preretirement survivor annuity is
attributable to Employer contributions and to Employee contributions in the same
proportion as the Participant's Nonforfeitable Accrued Benefit is attributable
to those contributions. The portion of the Participant's Nonforfeitable Accrued
Benefit not payable under this paragraph is payable to the Participant's
Beneficiary, in accordance with the other provisions of this Article VI. If the
present value of the preretirement survivor annuity does not exceed $3,500, the
Advisory Committee, on or before the annuity starting date, must direct the
Trustee to make a lump sum distribution to the Participant's surviving spouse,
in lieu of a preretirement survivor annuity. This Section 6.04(B) applies only
to a Participant who dies after August 22, 1984, and either (i) completes at
least one Hour of Service with the Employer after August 22, 1984, or (ii)
separated from Service with at least 10 Years of Service (as defined in Section
5.06) and completed at least one Hour of Service with the Employer in a Plan
Year beginning after December 31, 1975.
(C) Surviving Spouse Elections. If the present value of the preretirement
survivor annuity exceeds $3,500, the Participant's surviving spouse may elect to
have the Trustee commence payment of the preretirement survivor annuity at any
time following the date of the Participant's death, but not later than the
mandatory distribution periods described in Section 6.02, and may elect any of
the forms of payment described in Section 6.02, in lieu of the preretirement
survivor annuity. In the absence of an election by the surviving spouse, the
Advisory Committee must direct the Trustee to distribute the preretirement
survivor annuity on the first distribution date following the close of the Plan
Year in which the latest of the following events occurs: (i) the Participant's
death; (ii) the date the Advisory Committee receives notification of or
otherwise confirms the Participant's death; (iii) the date the Participant would
have attained Normal Retirement Age; or (iv) the date the Participant would have
attained age 62.
(D) Special Rules. If the Participant has in effect a valid waiver election
regarding the qualified joint and survivor annuity or the preretirement survivor
annuity, the Advisory Committee must direct the Trustee to distribute the
Participant's Nonforfeitable Accrued Benefit in accordance with Sections 6.01,
6.02 and 6.03. The Advisory Committee will reduce the Participant's
Nonforfeitable Accrued Benefit by any security interest (pursuant to any offset
rights authorized by Section 10.03[E]) held by the Plan by reason of a
Participant loan to determine the value of the Participant's Nonforfeitable
Accrued Benefit distributable in the form of a qualified joint and survivor
annuity or preretirement survivor annuity, provided any post-August 18, 1985,
loan satisfied the spousal consent requirement described in Section 10.03[E] of
the Plan. For purposes of applying this Article VI, the Advisory Committee
treats a former spouse as the Participant's spouse or surviving spouse to the
extent provided under a qualified domestic relations order described in Section
6.07. The provisions of this Section 6.04, and of Sections 6.05 and 6.06, apply
separately to the portion of the Participant's Nonforfeitable Accrued Benefit
subject to the qualified domestic relations order and to the portion of the
Participant's Nonforfeitable Accrued Benefit not subject to that order.
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<PAGE>
(E) Profit Sharing Plan Election. If this Plan is a profit sharing plan, the
Employer must elect the extent to which the preceding provisions of Section 6.04
apply. If the Employer elects to apply this Section 6.04 only to a Participant
described in this Section 6.04(E), the preceding provisions of this Section 6.04
apply only to the following Participants: (1) a Participant as respects whom the
Plan is a direct or indirect transferee from a plan subject to the Code (S)417
requirements and the Plan received the transfer after December 31, 1984, unless
the transfer is an elective transfer described in Section 13.06; (2) a
Participant who elects a life annuity distribution (if Section 6.02 or Section
13.02 of the Plan requires the Plan to provide a life annuity distribution
option); and (3) a Participant whose benefits under a defined benefit plan
maintained by the Employer are offset by benefits provided under this Plan. If
the Employer elects to apply this Section 6.04 to all Participants, the
preceding provisions of this Section 6.04 apply to all Participants described in
the first two paragraphs of this Section 6.04, without regard to the limitations
of this Section 6.04(E). Sections 6.05 and 6.06 only apply to Participants to
whom the preceding provisions of this Section 6.04 apply.
6.05 WAIVER ELECTION -QUALIFIED JOINT AND SURVIVOR ANNUITY. Not earlier than
90 days, but not later than 30 days, before the Participant's annuity starting
date, the Advisory Committee must provide the Participant a written explanation
of the terms and conditions of the qualified joint and survivor annuity, the
Participant's right to make, and the effect of, an election to waive the joint
and survivor form of benefit, the rights of the Participant's spouse regarding
the waiver election and the Participant's right to make, and the effect of, a
revocation of a waiver election. The Plan does not limit the number of times the
Participant may revoke a waiver of the qualified joint and survivor annuity or
make a new waiver during the election period.
A married Participant's waiver election is not valid unless (a) the
Participant's spouse (to whom the survivor annuity is payable under the
qualified joint and survivor annuity), after the Participant has received the
written explanation described in this Section 6.05, has consented in writing to
the waiver election, the spouse's consent acknowledges the effect of the
election, and a notary public or the Plan Administrator (or his representative)
witnesses the spouse's consent, (b) the spouse consents to the alternate form of
payment designated by the Participant or to any change in that designated form
of payment, and (c) unless the spouse is the Participant's sole primary
Beneficiary, the spouse consents to the Participant's Beneficiary designation or
to any change in the Participant's Beneficiary designation. The spouse's consent
to a waiver of the qualified joint and survivor annuity is irrevocable, unless
the Participant revokes the waiver election. The spouse may execute a blanket
consent to any form of payment designation or to any Beneficiary designation
made by the Participant, if the spouse acknowledges the right to limit that
consent to a specific designation but, in writing, waives that right. The
consent requirements of this Section 6.05 apply to a former spouse of the
Participant, to the extent required under a qualified domestic relations order
described in Section 6.07.
The Advisory Committee will accept as valid a waiver election which does not
satisfy the spousal consent requirements if the Advisory Committee establishes
the Participant does not have a spouse, the Advisory Committee is not able to
locate the Participant's spouse, the Participant is legally separated or has
been abandoned (within the meaning of State law) and the Participant has a court
order to that effect, or other circumstances exist under which the Secretary of
the Treasury will excuse the consent requirement. If the Participant's spouse is
legally incompetent to give consent, the spouse's legal guardian (even if the
guardian is the Participant) may give consent.
6.06 WAIVER ELECTION - PRERETIREMENT SURVIVOR ANNUITY. The Advisory
Committee must provide a written explanation of the preretirement survivor
annuity to each married Participant, within the following period which ends
last: (1) the period beginning on the first day of the Plan Year in which the
Participant attains age 32 and ending on the last day of the Plan Year in which
the Participant attains age 34; (2) a reasonable period after an Employee
becomes a Participant; (3) a reasonable period after the joint and survivor
rules become applicable to the Participant; or (4) a reasonable period after a
fully subsidized preretirement survivor annuity no longer satisfies the
requirements for a fully subsidized benefit. A reasonable period described in
clauses (2), (3) and (4) is the period beginning one year before and ending one
year after the applicable event. If the Participant separates from Service
before attaining age 35, clauses (1), (2), (3) and (4) do not apply and the
Advisory Committee must provide the written explanation within the period
beginning one year before and ending one year after the Separation from Service.
The written explanation must describe, in a manner consistent with Treasury
regulations, the terms and conditions of the preretirement survivor annuity
comparable to the explanation of the qualified joint and survivor annuity
required under Section 6.05. The Plan does not limit the number of times the
Participant may revoke a waiver of the preretirement survivor annuity or make a
new waiver during the election period.
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A Participant's waiver election of the preretirement survivor annuity is not
valid unless (a) the Participant makes the waiver election no earlier than the
first day of the Plan Year in which he attains age 35 and (b) the Participant's
spouse (to whom the preretirement survivor annuity is payable) satisfies the
consent requirements described in Section 6.05, except the spouse need not
consent to the form of benefit payable to the designated Beneficiary. The
spouse's consent to the waiver of the preretirement survivor annuity is
irrevocable, unless the Participant revokes the waiver election. Irrespective of
the time of election requirement described in clause (a), if the Participant
separates from Service prior to the first day of the Plan Year in which he
attains age 35, the Advisory Committee will accept a waiver election as respects
the Participant's Accrued Benefit attributable to his Service prior to his
Separation from Service. Furthermore, if a Participant who has not separated
from Service makes a valid waiver election, except for the timing requirement of
clause (a), the Advisory Committee will accept that election as valid, but only
until the first day of the Plan Year in which the Participant attains age 35. A
waiver election described in this paragraph is not valid unless made after the
Participant has received the written explanation described in this Section 6.06.
6.07 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS. Nothing contained in this
Plan prevents the Trustee, in accordance with the direction of the Advisory
Committee, from complying with the provisions of a qualified domestic relations
order (as defined in Code (S)414(p)). This Plan specifically permits
distribution to an alternate payee under a qualified domestic relations order at
any time, irrespective of whether the Participant has attained his earliest
retirement age (as defined under Code (S)414(p)) under the Plan. A distribution
to an alternate payee prior to the Participant's attainment of earliest
retirement age is available only if: (1) the order specifies distribution at
that time or permits an agreement between the Plan and the alternate payee to
authorize an earlier distribution; and (2) if the present value of the alternate
payee's benefits under the Plan exceeds $3,500, and the order requires, the
alternate payee consents to any distribution occurring prior to the
Participant's attainment of earliest retirement age. The Employer, in an
addendum to its Adoption Agreement numbered 6.07, may elect to limit
distribution to an alternate payee only when the Participant has attained his
earliest retirement age under the Plan. Nothing in this Section 6.07 gives 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.
The Advisory Committee must establish reasonable procedures to determine the
qualified status of a domestic relations order. Upon receiving a domestic
relations order, the Advisory Committee promptly will notify the Participant and
any alternate payee named in the order, in writing, of the receipt of the order
and the Plan's procedures for determining the qualified status of the order.
Within a reasonable period of time after receiving the domestic relations order,
the Advisory Committee must determine the qualified status of the order and must
notify the Participant and each alternate payee, in writing, of its
determination. The Advisory Committee must provide notice under this paragraph
by mailing to the individual's address specified in the domestic relations
order, or in a manner consistent with Department of Labor regulations.
If any portion of the Participant's Nonforfeitable Accrued Benefit is payable
during the period the Advisory Committee is making its determination of the
qualified status of the domestic relations order, the Advisory Committee must
make a separate accounting of the amounts payable. If the Advisory Committee
determines the order is a qualified domestic relations order within 18 months of
the date amounts first are payable following receipt of the order, the Advisory
Committee will direct the Trustee to distribute the payable amounts in
accordance with the order. If the Advisory Committee does not make its
determination of the qualified status of the order within the 18-month
determination period, the Advisory Committee will direct the Trustee to
distribute the payable amounts in the manner the Plan would distribute if the
order did not exist and will apply the order prospectively if the Advisory
Committee later determines the order is a qualified domestic relations order.
To the extent it is not inconsistent with the provisions of the qualified
domestic relations order, the Advisory Committee may direct the Trustee to
invest any partitioned amount in a segregated subaccount or separate account and
to invest the account in Federally insured, interest-bearing savings account(s)
or time deposit(s) (or a combination of both), or in other fixed income
investments. A segregated subaccount remains a part of the Trust, but it alone
shares in any income it earns, and it alone bears any expense or loss it incurs.
The Trustee will make any payments or distributions required under this Section
6.07 by separate benefit checks or other separate distribution to the alternate
payee(s).
* * * * * * * * * * * * * * *
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ARTICLE VII
EMPLOYER ADMINISTRATIVE PROVISIONS
7.01 INFORMATION TO COMMITTEE. The Employer must supply current information
to the Advisory Committee as to the name, date of birth, date of employment,
annual compensation, leaves of absence, Years of Service and date of termination
of employment of each Employee who is, or who will be eligible to become, a
Participant under the Plan, together with any other information which the
Advisory Committee considers necessary. The Employer's records as to the current
information the Employer furnishes to the Advisory Committee are conclusive as
to all persons.
7.02 NO LIABILITY. The Employer assumes no obligation or responsibility to any
of its Employees, Participants or Beneficiaries for any act of, or failure to
act, on the part of its Advisory Committee (unless the Employer is the Advisory
Committee), the Trustee, the Custodian, if any, or the Plan Administrator
(unless the Employer is the Plan Administrator).
7.03 INDEMNITY OF CERTAIN FIDUCIARIES. The Employer indemnifies and saves
harmless the Plan Administrator and the members of the Advisory Committee, and
each of them, from and against any and all loss resulting from liability to
which the Plan Administrator and the Advisory Committee, or the members of the
Advisory Committee, may be subjected by reason of any act or conduct (except
willful misconduct or gross negligence) in their official capacities in the
administration of this Trust or Plan or both, including all expenses reasonably
incurred in their defense, in case the Employer fails to provide such defense.
The indemnification provisions of this Section 7.03 do not relieve the Plan
Administrator or any Advisory Committee member from any liability he may have
under ERISA for breach of a fiduciary duty. Furthermore, the Plan Administrator
and the Advisory Committee members and the Employer may execute a letter
agreement further delineating the indemnification agreement of this Section
7.03, provided the letter agreement must be consistent with and does not violate
ERISA. The indemnification provisions of this Section 7.03 extend to the Trustee
(or to a Custodian, if any) solely to the extent provided by a letter agreement
executed by the Trustee (or Custodian) and the Employer.
7.04 EMPLOYER DIRECTION OF INVESTMENT. The Employer has the right to direct
the Trustee with respect to the investment and re-investment of assets
comprising the Trust Fund only if the Trustee consents in writing to permit such
direction. If the Trustee consents to Employer direction of investment, the
Trustee and the Employer must execute a letter agreement as a part of this Plan
containing such conditions, limitations and other provisions they deem
appropriate before the Trustee will follow any Employer direction as respects
the investment or re-investment of any part of the Trust Fund.
7.05 AMENDMENT TO VESTING SCHEDULE. Though the Employer reserves the right to
amend the vesting schedule at any time, the Advisory Committee will not apply
the amended vesting schedule to reduce the Nonforfeitable percentage of any
Participant's Accrued Benefit derived from Employer contributions (determined as
of the later of the date the Employer adopts the amendment, or the date the
amendment becomes effective) to a percentage less than the Nonforfeitable
percentage computed under the Plan without regard to the amendment. An amended
vesting schedule will apply to a Participant only if the Participant receives
credit for at least one Hour of Service after the new schedule becomes
effective.
If the Employer makes a permissible amendment to the vesting schedule, each
Participant having at least 3 Years of Service with the Employer may elect to
have the percentage of his Nonforfeitable Accrued Benefit computed under the
Plan without regard to the amendment. For Plan Years beginning prior to January
1, 1989, the election described in the preceding sentence applies only to
Participants having at least 5 Years of Service with the Employer. The
Participant must file his election with the Advisory Committee within 60 days of
the latest of (a) the Employer's adoption of the amendment; (b) the effective
date of the amendment; or (c) his receipt of a copy of the amendment. The
Advisory Committee, as soon as practicable, must forward a true copy of any
amendment to the vesting schedule to each affected Participant, together with an
explanation of the effect of the amendment, the appropriate form upon which the
Participant may make an election to remain under the vesting schedule provided
under the Plan prior to the amendment and notice of the time within which the
Participant must make an election to remain under the prior vesting schedule.
The election described in this Section 7.05 does not apply to a Participant if
the amended vesting schedule provides for vesting at least as rapid at all times
as the vesting schedule in effect prior to the amendment. For purposes of this
Section 7.05, an amendment to the vesting schedule includes any Plan amendment
which directly or indirectly affects the computation of the Nonforfeitable
percentage of an Employee's rights to
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his Employer derived Accrued Benefit. Furthermore, the Advisory Committee must
treat any shift in the vesting schedule, due to a change in the Plan's top heavy
status, as an amendment to the vesting schedule for purposes of this Section
7.05.
* * * * * * * * * * * * * * *
ARTICLE VIII
PARTICIPANT ADMINISTRATIVE PROVISIONS
8.01 BENEFICIARY DESIGNATION. Any Participant may from time to time designate,
in writing, any person or persons, contingently or successively, to whom the
Trustee will pay his Nonforfeitable Accrued Benefit (including any life
insurance proceeds payable to the Participant's Account) in the event of his
death and the Participant may designate the form and method of payment. The
Advisory Committee will prescribe the form for the written designation of
Beneficiary and, upon the Participant's filing the form with the Advisory
Committee, the form effectively revokes all designations filed prior to that
date by the same Participant.
(A) Coordination with survivor requirements. If the joint and survivor
requirements of Article VI apply to the Participant, this Section 8.01 does not
impose any special spousal consent requirements on the Participant's Beneficiary
designation. However, in the absence of spousal consent (as required by Article
VI) to the Participant's Beneficiary designation: (1) any waiver of the joint
and survivor annuity or of the preretirement survivor annuity is not valid; and
(2) if the Participant dies prior to his annuity starting date, the
Participant's Beneficiary designation will apply only to the portion of the
death benefit which is not payable as a preretirement survivor annuity.
Regarding clause (2), if the Participant's surviving spouse is a primary
Beneficiary under the Participant's Beneficiary designation, the Trustee will
satisfy the spouse's interest in the Participant's death benefit first from the
portion which is payable as a preretirement survivor annuity.
(B) Profit sharing plan exception. If the Plan is a profit sharing plan, the
Beneficiary designation of a married Exempt Participant is not valid unless the
Participant's spouse consents (in a manner described in Section 6.05) to the
Beneficiary designation. An "Exempt Participant" is a Participant who is not
subject to the joint and survivor requirements of Article VI. The spousal
consent requirement in this paragraph does not apply if the Exempt Participant
and his spouse are not married throughout the one year period ending on the date
of the Participant's death, or if the Participant's spouse is the Participant's
sole primary Beneficiary.
8.02 NO BENEFICIARY DESIGNATION/DEATH OF BENEFICIARY. If a Participant fails
to name a Beneficiary in accordance with Section 8.01, or if the Beneficiary
named by a Participant predeceases him, then the Trustee will pay the
Participant's Nonforfeitable Accrued Benefit in accordance with Section 6.02 in
the following order of priority, unless the Employer specifies a different order
of priority in an addendum to its Adoption Agreement, to:
(a) The Participant's surviving spouse;
(b) The Participant's surviving children, including adopted children, in
equal shares;
(c) The Participant's surviving parents, in equal shares; or
(d) The Participant's estate.
If the Beneficiary does not predecease the Participant, but dies prior to
distribution of the Participant's entire Nonforfeitable Accrued Benefit, the
Trustee will pay the remaining Nonforfeitable Accrued Benefit to the
Beneficiary's estate unless the Participant's Beneficiary designation provides
otherwise or unless the Employer provides otherwise in its Adoption Agreement.
If the Plan is a profit sharing plan, and the Plan includes Exempt Participants,
the Employer may not specify a different order of priority in the Adoption
Agreement unless the Participant's surviving spouse will be first in the
different order of priority. The Advisory Committee will direct the Trustee as
to the method and to whom the Trustee will make payment under this Section 8.02.
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8.03 PERSONAL DATA TO COMMITTEE. Each Participant and each Beneficiary of a
deceased Participant must furnish to the Advisory Committee such evidence, data
or information as the Advisory Committee considers necessary or desirable for
the purpose of administering the Plan. The provisions of this Plan are effective
for the benefit of each Participant upon the condition precedent that each
Participant will furnish promptly full, true and complete evidence, data and
information when requested by the Advisory Committee, provided the Advisory
Committee advises each Participant of the effect of his failure to comply with
its request.
8.04 ADDRESS FOR NOTIFICATION. Each Participant and each Beneficiary of a
deceased Participant must file with the Advisory Committee from time to time, in
writing, his post office address and any change of post office address. Any
communication, statement or notice addressed to a Participant, or Beneficiary,
at his last post office address filed with the Advisory Committee, or as shown
on the records of the Employer, binds the Participant, or Beneficiary, for all
purposes of this Plan.
8.05 ASSIGNMENT OR ALIENATION. Subject to Code (S)414(p) relating to qualified
domestic relations orders, neither a Participant nor a Beneficiary may
anticipate, assign or alienate (either at law or in equity) any benefit provided
under the Plan, and the Trustee will not recognize any such anticipation,
assignment or alienation. Furthermore, a benefit under the Plan is not subject
to attachment, garnishment, levy, execution or other legal or equitable process.
8.06 NOTICE OF CHANGE IN TERMS. The Plan Administrator, within the time
prescribed by ERISA and the applicable regulations, must furnish all
Participants and Beneficiaries a summary description of any material amendment
to the Plan or notice of discontinuance of the Plan and all other information
required by ERISA to be furnished without charge.
8.07 LITIGATION AGAINST THE TRUST. A court of competent jurisdiction may
authorize any appropriate equitable relief to redress violations of ERISA or to
enforce any provisions of ERISA or the terms of the Plan. A fiduciary may
receive reimbursement of expenses properly and actually incurred in the
performance of his duties with the Plan.
8.08 INFORMATION AVAILABLE. Any Participant in the Plan or any Beneficiary
may examine copies of the Plan description, latest annual report, any
bargaining agreement, this Plan and Trust, contract or any other instrument
under which the Plan was established or is operated. The Plan Administrator will
maintain all of the items listed in this Section 8.08 in his office, or in such
other place or places as he may designate from time to time in order to comply
with the regulations issued under ERISA, for examination during reasonable
business hours. Upon the written request of a Participant or Beneficiary the
Plan Administrator must furnish him with a copy of any item listed in this
Section 8.08. The Plan Administrator may make a reasonable charge to the
requesting person for the copy so furnished.
8.09 APPEAL PROCEDURE FOR DENIAL OF BENEFITS. A Participant or a Beneficiary
("Claimant") may file with the Advisory Committee a written claim for benefits,
if the Participant or Beneficiary determines the distribution procedures of the
Plan have not provided him his proper Nonforfeitable Accrued Benefit. The
Advisory Committee must render a decision on the claim within 60 days of the
Claimant's written claim for benefits. The Plan Administrator must provide
adequate notice in writing to the Claimant whose claim for benefits under the
Plan the Advisory Committee has denied. The Plan Administrator's notice to the
Claimant must set forth:
(a) The specific reason for the denial;
(b) Specific references to pertinent Plan provisions on which the Advisory
Committee based its denial;
(c) A description of any additional material and information needed for the
Claimant to perfect his claim and an explanation of why the material or
information is needed; and
(d) That any appeal the Claimant wishes to make of the adverse determination
must be in writing to the Advisory Committee within 75 days after receipt of the
Plan Administrator's notice of denial of benefits. The Plan Administrator's
notice must further advise the Claimant that his failure to appeal the action to
the Advisory Committee in writing within the 75-day period will render the
Advisory Committee's determination final, binding and conclusive.
If the Claimant should appeal to the Advisory Committee, he, or his duly
authorized representative, may submit, in writing, whatever issues and comments
he, or his duly authorized representative, feels are pertinent. The Claimant, or
his duly
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authorized representative, may review pertinent Plan documents. The
Advisory Committee will re-examine all facts related to the appeal and make a
final determination as to whether the denial of benefits is justified under the
circumstances. The Advisory Committee must advise the Claimant of its decision
within 60 days of the Claimant's written request for review, unless special
circumstances (such as a hearing) would make the rendering of a decision within
the 60-day limit unfeasible, but in no event may the Advisory Committee render a
decision respecting a denial for a claim for benefits later than 120 days after
its receipt of a request for review.
The Plan Administrator's notice of denial of benefits must identify the name of
each member of the Advisory Committee and the name and address of the Advisory
Committee member to whom the Claimant may forward his appeal.
8.10 PARTICIPANT DIRECTION OF INVESTMENT. A Participant has the right to
direct the Trustee with respect to the investment or re-investment of the assets
comprising the Participant's individual Account only if the Trustee consents in
writing to permit such direction. If the Trustee consents to Participant
direction of investment, the Trustee will accept direction from each Participant
on a written election form (or other written agreement), as a part of this Plan,
containing such conditions, limitations and other provisions the parties deem
appropriate. The Trustee or, with the Trustee's consent, the Advisory Committee,
may establish written procedures, incorporated specifically as part of this
Plan, relating to Participant direction of investment under this Section 8.10.
The Trustee will maintain a segregated investment Account to the extent a
Participant's Account is subject to Participant self-direction. The Trustee is
not liable for any loss, nor is the Trustee liable for any breach, resulting
from a Participant's direction of the investment of any part of his directed
Account.
The Advisory Committee, to the extent provided in a written loan policy adopted
under Section 9.04, will treat a loan made to a Participant as a Participant
direction of investment under this Section 8.10. To the extent of the loan
outstanding at any time, the borrowing Participant's Account alone shares in any
interest paid on the loan, and it alone bears any expense or loss it incurs in
connection with the loan. The Trustee may retain any principal or interest paid
on the borrowing Participant's loan in an interest bearing segregated Account on
behalf of the borrowing Participant until the Trustee (or the Named Fiduciary,
in the case of a nondiscretionary Trustee) deems it appropriate to add the
amount paid to the Participant's separate Account under the Plan.
If the Trustee consents to Participant direction of investment of his Account,
the Plan treats any post-December 31, 1981, investment by a Participant's
directed Account in collectibles (as defined by Code (S)408(m)) as a deemed
distribution to the Participant for Federal income tax purposes.
* * * * * * * * * * * * * * *
ARTICLE IX
ADVISORY COMMITTEE -DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS
9.01 MEMBERS' COMPENSATION, EXPENSES. The Employer must appoint an Advisory
Committee to administer the Plan, the members of which may or may not be
Participants in the Plan, or which may be the Plan Administrator acting alone.
In the absence of an Advisory Committee appointment, the Plan Administrator
assumes the powers, duties and responsibilities of the Advisory Committee. The
members of the Advisory Committee will serve without compensation for services
as such, but the Employer will pay all expenses of the Advisory Committee,
except to the extent the Trust properly pays for such expenses, pursuant to
Article X.
9.02 TERM. Each member of the Advisory Committee serves until the appointment
of his successor.
9.03 POWERS. In case of a vacancy in the membership of the Advisory Committee,
the remaining members of the Advisory Committee may exercise any and all of the
powers, authority, duties and discretion conferred upon the Advisory Committee
pending the filling of the vacancy.
9.04 GENERAL. The Advisory Committee has the following powers and duties:
(a) To select a Secretary, who need not be a member of the Advisory
Committee;
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(b) To determine the rights of eligibility of an Employee to participate in
the Plan, the value of a Participant's Accrued Benefit and the Nonforfeitable
percentage of each Participant's Accrued Benefit;
(c) To adopt rules of procedure and regulations necessary for the proper and
efficient administration of the Plan provided the rules are not inconsistent
with the terms of this Agreement;
(d) To construe and enforce the terms of the Plan and the rules and
regulations it adopts, including interpretation of the Plan documents and
documents related to the Plan's operation;
(e) To direct the Trustee as respects the crediting and distribution of the
Trust;
(f) To review and render decisions respecting a claim for (or denial of a
claim for) a benefit under the Plan;
(g) To furnish the Employer with information which the Employer may require
for tax or other purposes;
(h) To engage the service of agents whom it may deem advisable to assist it
with the performance of its duties;
(i) To engage the services of an Investment Manager or Managers (as defined
in ERISA (S)3(38)), each of whom will have full power and authority to manage,
acquire or dispose (or direct the Trustee with respect to acquisition or
disposition) of any Plan asset under its control;
(j) To establish, in its sole discretion, a nondiscriminatory policy (see
Section 9.04(A)) which the Trustee must observe in making loans, if any, to
Participants and Beneficiaries; and
(k) To establish and maintain a funding standard account and to make credits
and charges to the account to the extent required by and in accordance with the
provisions of the Code.
The Advisory Committee must exercise all of its powers, duties and discretion
under the Plan in a uniform and nondiscriminatory manner.
(A) Loan Policy. If the Advisory Committee adopts a loan policy, pursuant to
paragraph (j), the loan policy must be a written document and must include: (1)
the identity of the person or positions authorized to administer the participant
loan program; (2) a procedure for applying for the loan; (3) the criteria for
approving or denying a loan; (4) the limitations, if any, on the types and
amounts of loans available; (5) the procedure for determining a reasonable rate
of interest; (6) the types of collateral which may secure the loan; and (7) the
events constituting default and the steps the Plan will take to preserve plan
assets in the event of default. This Section 9.04 specifically incorporates a
written loan policy as part of the Employer's Plan.
9.05 FUNDING POLICY. The Advisory Committee will review, not less often than
annually, all pertinent Employee information and Plan data in order to
establish the funding policy of the Plan and to determine the appropriate
methods of carrying out the Plan's objectives. The Advisory Committee must
communicate periodically, as it deems appropriate, to the Trustee and to any
Plan Investment Manager the Plan's short-term and long-term financial needs so
investment policy can be coordinated with Plan financial requirements.
9.06 MANNER OF ACTION. The decision of a majority of the members appointed and
qualified controls.
9.07 AUTHORIZED REPRESENTATIVE. The Advisory Committee may authorize
any one of its members, or its Secretary, to sign on its behalf any notices,
directions, applications, certificates, consents, approvals, waivers, letters or
other documents. The Advisory Committee must evidence this authority by an
instrument signed by all members and filed with the Trustee.
9.08 INTERESTED MEMBER. No member of the Advisory Committee may decide or
determine any matter concerning the distribution, nature or method of settlement
of his own benefits under the Plan, except in exercising an
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election available to that member in his capacity as a Participant, unless the
Plan Administrator is acting alone in the capacity of the Advisory Committee.
9.09 INDIVIDUAL ACCOUNTS. The Advisory Committee will maintain, or direct
the Trustee to maintain, a separate Account, or multiple Accounts, in the name
of each Participant to reflect the Participant's Accrued Benefit under the Plan.
If a Participant re-enters the Plan subsequent to his having a Forfeiture Break
in Service, the Advisory Committee, or the Trustee, must maintain a separate
Account for the Participant's pre-Forfeiture Break in Service Accrued Benefit
and a separate Account for his post-Forfeiture Break in Service Accrued Benefit,
unless the Participant's entire Accrued Benefit under the Plan is 100%
Nonforfeitable.
The Advisory Committee will make its allocations, or request the Trustee to make
its allocations, to the Accounts of the Participants in accordance with the
provisions of Section 9.11. The Advisory Committee may direct the Trustee to
maintain a temporary segregated investment Account in the name of a Participant
to prevent a distortion of income, gain or loss allocations under Section 9.11.
The Advisory Committee must maintain records of its activities.
9.10 VALUE OF PARTICIPANT'S ACCRUED BENEFIT. The value of each Participant's
Accrued Benefit consists of that proportion of the net worth (at fair market
value) of the Employer's Trust Fund which the net credit balance in his Account
(exclusive of the cash value of incidental benefit insurance contracts) bears to
the total net credit balance in the Accounts (exclusive of the cash value of the
incidental benefit insurance contracts) of all Participants plus the cash
surrender value of any incidental benefit insurance contracts held by the
Trustee on the Participant's life.
For purposes of a distribution under the Plan, the value of a Participant's
Accrued Benefit is its value as of the valuation date immediately preceding the
date of the distribution. Any distribution (other than a distribution from a
segregated Account) made to a Participant (or to his Beneficiary) more than 90
days after the most recent valuation date may include interest on the amount of
the distribution as an expense of the Trust Fund. The interest, if any, accrues
from such valuation date to the date of the distribution at the rate established
in the Employer's Adoption Agreement.
9.11 ALLOCATION AND DISTRIBUTION OF NET INCOME GAIN OR LOSS. A "valuation
date" under this Plan is each Accounting Date and each interim valuation date
determined under Section 10.14. As of each valuation date the Advisory Committee
must adjust Accounts to reflect net income, gain or loss since the last
valuation date. The valuation period is the period beginning the day after the
last valuation date and ending on the current valuation date.
(A) Trust Fund Accounts. The allocation provisions of this paragraph apply to
all Participant Accounts other than segregated investment Accounts. The Advisory
Committee first will adjust the Participant Accounts, as those Accounts stood at
the beginning of the current valuation period, by reducing the Accounts for any
forfeitures arising under Section 5.09 or under Section 9.14, for amounts
charged during the valuation period to the Accounts in accordance with Section
9.13 (relating to distributions) and Section 11.01 (relating to insurance
premiums), and for the cash value of incidental benefit insurance contracts. The
Advisory Committee then, subject to the restoration allocation requirements of
Section 5.04 or of Section 9.14, will allocate the net income, gain or loss pro
rata to the adjusted Participant Accounts. The allocable net income, gain or
loss is the net income (or net loss), including the increase or decrease in the
fair market value of assets, since the last valuation date.
(B) Segregated investment Accounts. A segregated investment Account receives
all income it earns and bears all expense or loss it incurs. The Advisory
Committee will adopt uniform and nondiscriminatory procedures for determining
income or loss of a segregated investment Account in a manner which reasonably
reflects investment directions relating to pooled investments and investment
directions occurring during a valuation period. As of the valuation date, the
Advisory Committee must reduce a segregated Account for any forfeiture arising
under Section 5.09 after the Advisory Committee has made all other allocations,
changes or adjustments to the Account for the Plan Year.
(C) Additional rules. An Excess Amount or suspense account described in Part
2 of Article III does not share in the allocation of net income, gain or loss
described in this Section 9.11. If the Employer maintains its Plan under a Code
(S)401(k) Adoption Agreement, the Employer may specify in its Adoption Agreement
alternate valuation provisions authorized by that Adoption Agreement. This
Section 9.11 applies solely to the allocation of net income, gain or loss of the
Trust. The Advisory Committee will allocate the Employer contributions and
Participant forfeitures, if any, in accordance with Article III.
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9.12 INDIVIDUAL STATEMENT. As soon as practicable after the Accounting Date of
each Plan Year, but within the time prescribed by ERISA and the regulations
under ERISA, the Plan Administrator will deliver to each Participant (and to
each Beneficiary) a statement reflecting the condition of his Accrued Benefit in
the Trust as of that date and such other information ERISA requires be furnished
the Participant or Beneficiary. No Participant, except a member of the Advisory
Committee, has the right to inspect the records reflecting the Account of any
other Participant.
9.13 ACCOUNT CHARGED. The Advisory Committee will charge a Participant's
Account for all distributions made from that Account to the Participant, to his
Beneficiary or to an alternate payee. The Advisory Committee also will charge a
Participant's Account for any administrative expenses incurred by the Plan
directly related to that Account.
9.14 UNCLAIMED ACCOUNT PROCEDURE. The Plan does not require either
the Trustee or the Advisory Committee to search for, or to ascertain the
whereabouts of, any Participant or Beneficiary. At the time the Participant's or
Beneficiary's benefit becomes distributable under Article VI, the Advisory
Committee, by certified or registered mail addressed to his last known address
of record with the Advisory Committee or the Employer, must notify any
Participant, or Beneficiary, that he is entitled to a distribution under this
Plan. The notice must quote the provisions of this Section 9.14 and otherwise
must comply with the notice requirements of Article VI. If the Participant, or
Beneficiary, fails to claim his distributive share or make his whereabouts known
in writing to the Advisory Committee within 6 months from the date of mailing of
the notice, the Advisory Committee will treat the Participant's or Beneficiary's
unclaimed payable Accrued Benefit as forfeited and will reallocate the unclaimed
payable Accrued Benefit in accordance with Section 3.05. A forfeiture under this
paragraph will occur at the end of the notice period or, if later, the earliest
date applicable Treasury regulations would permit the forfeiture. Pending
forfeiture, the Advisory Committee, following the expiration of the notice
period, may direct the Trustee to segregate the Nonforfeitable Accrued Benefit
in a segregated Account and to invest that segregated Account in Federally
insured interest bearing savings accounts or time deposits (or in a combination
of both), or in other fixed income investments.
If a Participant or Beneficiary who has incurred a forfeiture of his Accrued
Benefit under the provisions of the first paragraph of this Section 9.14 makes a
claim, at any time, for his forfeited Accrued Benefit, the Advisory Committee
must restore the Participant's or Beneficiary's forfeited Accrued Benefit to the
same dollar amount as the dollar amount of the Accrued Benefit forfeited,
unadjusted for any gains or losses occurring subsequent to the date of the
forfeiture. The Advisory Committee will make the restoration during the Plan
Year in which the Participant or Beneficiary makes the claim, first from the
amount, if any, of Participant forfeitures the Advisory Committee otherwise
would allocate for the Plan Year, then from the amount, if any, of the Trust
Fund net income or gain for the Plan Year and then from the amount, or
additional amount, the Employer contributes to enable the Advisory Committee to
make the required restoration. The Advisory Committee must direct the Trustee to
distribute the Participant's or Beneficiary's restored Accrued Benefit to him
not later than 60 days after the close of the Plan Year in which the Advisory
Committee restores the forfeited Accrued Benefit. The forfeiture provisions of
this Section 9.14 apply solely to the Participant's or to the Beneficiary's
Accrued Benefit derived from Employer contributions.
* * * * * * * * * * * * * * *
ARTICLE X
TRUSTEE AND CUSTODIAN, POWERS AND DUTIES
10.01 ACCEPTANCE. The Trustee accepts the Trust created under the Plan and
agrees to perform the obligations imposed. The Trustee must provide bond for the
faithful performance of its duties under the Trust to the extent required by
ERISA.
10.02 RECEIPT OF CONTRIBUTIONS. The Trustee is accountable to the Employer for
the funds contributed to it by the Employer, but does not have any duty to see
that the contributions received comply with the provisions of the Plan. The
Trustee is not obliged to collect any contributions from the Employer, nor is
obliged to see that funds deposited with it are deposited according to the
provisions of the Plan.
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10.03 INVESTMENT POWERS.
[A] Discretionary Trustee Designation. If the Employer, in Adoption Agreement
Section 1.02, designates the Trustee to administer the Trust as a discretionary
Trustee, then the Trustee has full discretion and authority with regard to the
investment of the Trust Fund, except with respect to a Plan asset under the
control or direction of a properly appointed Investment Manager or with respect
to a Plan asset properly subject to Employer, Participant or Advisory Committee
direction of investment. The Trustee must coordinate its investment policy with
Plan financial needs as communicated to it by the Advisory Committee. The
Trustee is authorized and empowered, but not by way of limitation, with the
following powers, rights and duties:
(a) To invest any part or all of the Trust Fund in any common or preferred
stocks, open-end or closed-end mutual funds, put and call options traded on a
national exchange, United States retirement plan bonds, corporate bonds,
debentures, convertible debentures, commercial paper, U.S. Treasury bills, U.S.
Treasury notes and other direct or indirect obligations of the United States
Government or its agencies, improved or unimproved real estate situated in the
United States, limited partnerships, insurance contracts of any type, mortgages,
notes or other property of any kind, real or personal, to buy or sell options on
common stock on a nationally recognized exchange with or without holding the
underlying common stock, to buy and sell commodities, commodity options and
contracts for the future delivery of commodities, and to make any other
investments the Trustee deems appropriate, as a prudent man would do under like
circumstances with due regard for the purposes of this Plan. Any investment made
or retained by the Trustee in good faith is proper but must be of a kind
constituting a diversification considered by law suitable for trust investments.
(b) To retain in cash so much of the Trust Fund as it may deem advisable to
satisfy liquidity needs of the Plan and to deposit any cash held in the Trust
Fund in a bank account at reasonable interest.
(c) To invest, if the Trustee is a bank or similar financial institution
supervised by the United States or by a State, in any type of deposit of the
Trustee (or of a bank related to the Trustee within the meaning of Code
(S)414(b)) at a reasonable rate of interest or in a common trust fund, as
described in Code (S)584, or in a collective investment fund, the provisions of
which govern the investment of such assets and which the Plan incorporates by
this reference, which the Trustee (or its affiliate, as defined in Code (S)1504)
maintains exclusively for the collective investment of money contributed by the
bank (or the affiliate) in its capacity as trustee and which conforms to the
rules of the Comptroller of the Currency.
(d) To manage, sell, contract to sell, grant options to purchase, convey,
exchange, transfer, abandon, improve, repair, insure, lease for any term even
though commencing in the future or extending beyond the term of the Trust, and
otherwise deal with all property, real or personal, in such manner, for such
considerations and on such terms and conditions as the Trustee decides.
(e) To credit and distribute the Trust as directed by the Advisory Committee.
The Trustee is not obliged to inquire as to whether any payee or distributee is
entitled to any payment or whether the distribution is proper or within the
terms of the Plan, or as to the manner of making any payment or distribution.
The Trustee is accountable only to the Advisory Committee for any payment or
distribution made by it in good faith on the order or direction of the Advisory
Committee.
(f) To borrow money, to assume indebtedness, extend mortgages and encumber by
mortgage or pledge.
(g) To compromise, contest, arbitrate or abandon claims and demands, in its
discretion.
(h) To have with respect to the Trust all of the rights of an individual
owner, including the power to give proxies, to participate in any voting trusts,
mergers, consolidations or liquidations, and to exercise or sell stock
subscriptions or conversion rights.
(i) To lease for oil, gas and other mineral purposes and to create mineral
severances by grant or reservation; to pool or unitize interests in oil, gas and
other minerals; and to enter into operating agreements and to execute division
and transfer orders.
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(j) To hold any securities or other property in the name of the Trustee or
its nominee, with depositories or agent depositories or in another form as it
may deem best, with or without disclosing the trust relationship.
(k) To perform any and all other acts in its judgment necessary or
appropriate for the proper and advantageous management, investment and
distribution of the Trust.
(l) To retain any funds or property subject to any dispute without liability
for the payment of interest, and to decline to make payment or delivery of
the funds or property until final adjudication is made by a court of
competent jurisdiction.
(m) To file all tax returns required of the Trustee.
(n) To furnish to the Employer, the Plan Administrator and the Advisory
Committee an annual statement of account showing the condition of the Trust Fund
and all investments, receipts, disbursements and other transactions effected by
the Trustee during the Plan Year covered by the statement and also stating the
assets of the Trust held at the end of the Plan Year, which accounts are
conclusive on all persons, including the Employer, the Plan Administrator and
the Advisory Committee, except as to any act or transaction concerning which the
Employer, the Plan Administrator or the Advisory Committee files with the
Trustee written exceptions or objections within 90 days after the receipt of the
accounts or for which ERISA authorizes a longer period within which to object.
(o) To begin, maintain or defend any litigation necessary in connection with
the administration of the Plan, except that the Trustee is not obliged or
required to do so unless indemnified to its satisfaction.
[B] Nondiscretionary Trustee Designation/Appointment of Custodian. If the
Employer, in its Adoption Agreement Section 1.02, designates the Trustee to
administer the Trust as a nondiscretionary Trustee, then the Trustee will not
have any discretion or authority with regard to the investment of the Trust
Fund, but must act solely as a directed trustee of the funds contributed to it.
A nondiscretionary Trustee, as directed trustee of the funds held by it under
the Employer's Plan, is authorized and empowered, by way of limitation, with the
following powers, rights and duties, each of which the nondiscretionary Trustee
exercises solely as directed trustee in accordance with the written direction of
the Named Fiduciary (except to the extent a Plan asset is subject to the control
and management of a properly appointed Investment Manager or subject to Advisory
Committee or Participant direction of investment):
(a) To invest any part or all of the Trust Fund in any common or preferred
stocks, open-end or closed-end mutual funds, put and call options traded on a
national exchange, United States retirement plan bonds, corporate bonds,
debentures, convertible debentures, commercial paper, U.S. Treasury bills, U.S.
Treasury notes and other direct or indirect obligations of the United States
Government or its agencies, improved or unimproved real estate situated in the
United States, limited partnerships, insurance contracts of any type, mortgages,
notes or other property of any kind, real or personal, to buy or sell options on
common stock on a nationally recognized options exchange with or without holding
the underlying common stock, to buy and sell commodities, commodity options and
contracts for the future delivery of commodities, and to make any other
investments the Named Fiduciary deems appropriate.
(b) To retain in cash so much of the Trust Fund as the Named Fiduciary may
direct in writing to satisfy liquidity needs of the Plan and to deposit any cash
held in the Trust Fund in a bank account at reasonable interest, including,
specific authority to invest in any type of deposit of the Trustee (or of a bank
related to the Trustee within the meaning of Code (S)414(b)) at a reasonable
rate of interest.
(c) To sell, contract to sell, grant options to purchase, convey, exchange,
transfer, abandon, improve, repair, insure, lease for any term even though
commencing in the future or extending beyond the term of the Trust, and
otherwise deal with all property, real or personal, in such manner, for such
considerations and on such terms and conditions as the Named Fiduciary directs
in writing.
(d) To credit and distribute the Trust as directed by the Advisory Committee.
The Trustee is not obliged to inquire as to whether any payee or distributee is
entitled to any payment or whether the distribution is proper or within the
terms of the Plan, or as to the manner of making any payment or distribution.
The Trustee is accountable only to the Advisory Committee for any payment or
distribution made by it in good faith on the order or direction of the Advisory
Committee.
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(e) To borrow money, to assume indebtedness, extend mortgages and encumber by
mortgage or pledge.
(f) To have with respect to the Trust all of the rights of an individual
owner, including the power to give proxies, to participate in any voting trusts,
mergers, consolidations or liquidations, and to exercise or sell stock
subscriptions or conversion rights, provided the exercise of any such powers is
in accordance with and at the written direction of the Named Fiduciary.
(g) To lease for oil, gas and other mineral purposes and to create mineral
severances by grant or reservation; to pool or unitize interests in oil, gas and
other minerals; and to enter into operating agreements and to execute division
and transfer orders, provided the exercise of any such powers is in accordance
with and at the written direction of the Named Fiduciary.
(h) To hold any securities or other property in the name of the
nondiscretionary Trustee or its nominee, with depositories or agent depositories
or in another form as the Named Fiduciary may deem best, with or without
disclosing the custodial relationship.
(i) To retain any funds or property subject to any dispute without liability
for the payment of interest, and to decline to make payment or delivery of
the funds or property until a court of competent jurisdiction makes final
adjudication.
(j) To file all tax returns required of the Trustee.
(k) To furnish to the Named Fiduciary, the Employer, the Plan Administrator
and the Advisory Committee an annual statement of account showing the condition
of the Trust Fund and all investments, receipts, disbursements and other
transactions effected by the nondiscretionary Trustee during the Plan Year
covered by the statement and also stating the assets of the Trust held at the
end of the Plan Year, which accounts are conclusive on all persons, including
the Named Fiduciary, the Employer, the Plan Administrator and the Advisory
Committee, except as to any act or transaction concerning which the Named
Fiduciary, the Employer, the Plan Administrator or the Advisory Committee files
with the nondiscretionary Trustee written exceptions or objections within 90
days after the receipt of the accounts or for which ERISA authorizes a longer
period within which to object.
(l) To begin, maintain or defend any litigation necessary in connection with
the administration of the Plan, except that the Trustee is not obliged or
required to do so unless indemnified to its satisfaction.
Appointment of Custodian. The Employer may appoint a Custodian under the Plan,
the acceptance by the Custodian indicated on the execution page of the
Employer's Adoption Agreement. If the Employer appoints a Custodian, the
Employer's Plan must have a discretionary Trustee, as described in Section
10.03[A]. A Custodian has the same powers, rights and duties as a
nondiscretionary Trustee, as described in this Section 10.03[B]. The Custodian
accepts the terms of the Plan and Trust by executing the Employer's Adoption
Agreement. Any reference in the Plan to a Trustee also is a reference to a
Custodian where the context of the Plan dictates. A limitation of the Trustee's
liability by Plan provision also acts as a limitation of the Custodian's
liability. Any action taken by the Custodian at the discretionary Trustee's
direction satisfies any provision in the Plan referring to the Trustee's taking
that action.
Modification of Powers/Limited Responsibility. The Employer and the Custodian or
nondiscretionary Trustee, by letter agreement, may limit the powers of the
Custodian or nondiscretionary Trustee to any combination of powers listed within
this Section 10.03[B]. If there is a Custodian or a nondiscretionary Trustee
under the Employer's Plan, then the Employer, in adopting this Plan acknowledges
the Custodian or nondiscretionary Trustee has no discretion with respect to the
investment or re-investment of the Trust Fund and that the Custodian or
nondiscretionary Trustee is acting solely as custodian or as directed trustee
with respect to the assets comprising the Trust Fund.
[C] Limitation of Powers of Certain Custodians. If a Custodian is a bank
which, under its governing state law, does not possess trust powers, then
paragraphs (a), (c), (e), (f), (g) of Section 10.03[B], Section 10.16 and
Article XI do not apply to that bank and that bank only has the power and
authority to exercise the remaining powers, rights and duties under Section
10.03[B].
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[D] Named Fiduciary/Limitation of Liability of Nondiscretionary Trustee or
Custodian. Under a nondiscretionary Trustee designation, the Named Fiduciary
under the Employer's Plan has the sole responsibility for the management and
control of the Employer's Trust Fund, except with respect to a Plan asset under
the control or direction of a properly appointed Investment Manager or with
respect to a Plan asset properly subject to Participant or Advisory Committee
direction of investment. If the Employer appoints a Custodian, the Named
Fiduciary is the discretionary Trustee. Under a nondiscretionary Trustee
designation, unless the Employer designates in writing another person or persons
to serve as Named Fiduciary, the Named Fiduciary under the Plan is the president
of a corporate Employer, the managing partner of a partnership Employer or the
sole proprietor, as appropriate. The Named Fiduciary will exercise its
management and control of the Trust Fund through its written direction to the
nondiscretionary Trustee or to the Custodian, whichever applies to the
Employer's Plan.
The nondiscretionary Trustee or Custodian has no duty to review or to make
recommendations regarding investments made at the written direction of the Named
Fiduciary. The nondiscretionary Trustee or Custodian must retain any investment
obtained at the written direction of the Named Fiduciary until further directed
in writing by the Named Fiduciary to dispose of such investment. The
nondiscretionary Trustee or Custodian is not liable in any manner or for any
reason for making, retaining or disposing of any investment pursuant to any
written direction described in this paragraph. Furthermore, the Employer agrees
to indemnify and to hold the nondiscretionary Trustee or Custodian harmless from
any damages, costs or expenses, including reasonable counsel fees, which the
nondiscretionary Trustee or Custodian may incur as a result of any claim
asserted against the nondiscretionary Trustee, the Custodian or the Trust
arising out of the nondiscretionary Trustee's or Custodian's compliance with any
written direction described in this paragraph.
[E] Participant Loans. This Section 10.03[E] specifically authorizes the Trustee
to make loans on a nondiscriminatory basis to a Participant or to a Beneficiary
in accordance with the loan policy established by the Advisory Committee,
provided: (1) the loan policy satisfies the requirements of Section 9.04; (2)
loans are available to all Participants and Beneficiaries on a reasonably
equivalent basis and are not available in a greater amount for Highly
Compensated Employees than for other Employees; (3) any loan is adequately
secured and bears a reasonable rate of interest; (4) the loan provides for
repayment within a specified time; (5) the default provisions of the note
prohibit offset of the Participant's Nonforfeitable Accrued Benefit prior to the
time the Trustee otherwise would distribute the Participant's Nonforfeitable
Accrued Benefit; (6) the amount of the loan does not exceed (at the time the
Plan extends the loan) the present value of the Participant's Nonforfeitable
Accrued Benefit; and (7) the loan otherwise conforms to the exemption provided
by Code (S)4975(d)(1). If the joint and survivor requirements of Article VI
apply to the Participant, the Participant may not pledge any portion of his
Accrued Benefit as security for a loan made after August 18, 1985, unless,
within the 90 day period ending on the date the pledge becomes effective, the
Participant's spouse, if any, consents (in a manner described in Section 6.05
other than the requirement relating to the consent of a subsequent spouse) to
the security or, by separate consent, to an increase in the amount of security.
If the Employer is an unincorporated trade or business, a Participant who is an
Owner-Employee may not receive a loan from the Plan, unless he has obtained a
prohibited transaction exemption from the Department of Labor. If the Employer
is an "S Corporation," a Participant who is a shareholder-employee (an employee
or an officer) who, at any time during the Employer's taxable year, owns more
than 5%, either directly or by attribution under Code (S)318(a)(1), of the
Employer's outstanding stock may not receive a loan from the Plan, unless he has
obtained a prohibited transaction exemption from the Department of Labor. If the
Employer is not an unincorporated trade or business nor an "S Corporation," this
Section 10.03[E] does not impose any restrictions on the class of Participants
eligible for a loan from the Plan.
[F] Investment in qualifying Employer securities and qualifying Employer real
property. The investment options in this Section 10.03[F] include the ability to
invest in qualifying Employer securities or qualifying Employer real property,
as defined in and as limited by ERISA. If the Employer's Plan is a
Nonstandardized profit sharing plan, it may elect in its Adoption Agreement to
permit the aggregate investments in qualifying Employer securities and in
qualifying Employer real property to exceed 10% of the value of Plan assets.
10.04 RECORDS AND STATEMENTS. The records of the Trustee pertaining to the
Plan must be open to the inspection of the Plan Administrator, the Advisory
Committee and the Employer at all reasonable times and may be audited from time
to time by any person or persons as the Employer, Plan Administrator or Advisory
Committee may specify in writing. The Trustee must furnish the Plan
Administrator or Advisory Committee with whatever information relating to the
Trust Fund the Plan Administrator or Advisory Committee considers necessary.
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10.05 FEES AND EXPENSES FROM FUND. A Trustee or Custodian will receive
reasonable annual compensation as may be agreed upon from time to time between
the Employer and the Trustee or Custodian. No person who is receiving full pay
from the Employer may receive compensation for services as Trustee or as
Custodian. The Trustee will pay from the Trust Fund all fees and expenses
reasonably incurred by the Plan, to the extent such fees and expenses are for
the ordinary and necessary administration and operation of the Plan, unless the
Employer pays such fees and expenses. Any fee or expense paid, directly or
indirectly, by the Employer is not an Employer contribution to the Plan,
provided the fee or expense relates to the ordinary and necessary administration
of the Fund.
10.06 PARTIES TO LITIGATION. Except as otherwise provided by ERISA, no
Participant or Beneficiary is a necessary party or is required to receive notice
of process in any court proceeding involving the Plan, the Trust Fund or any
fiduciary of the Plan. Any final judgment entered in any proceeding will be
conclusive upon the Employer, the Plan Administrator, the Advisory Committee,
the Trustee, Custodian, Participants and Beneficiaries.
10.07 PROFESSIONAL AGENTS. The Trustee may employ and pay from the Trust Fund
reasonable compensation to agents, attorneys, accountants and other persons to
advise the Trustee as in its opinion may be necessary. The Trustee may delegate
to any agent, attorney, accountant or other person selected by it any non-
Trustee power or duty vested in it by the Plan, and the Trustee may act or
refrain from acting on the advice or opinion of any agent, attorney, accountant
or other person so selected.
10.08 DISTRIBUTION OF CASH OR PROPERTY. The Trustee may make distribution under
the Plan in cash or property, or partly in each, at its fair market value as
determined by the Trustee. For purposes of a distribution to a Participant or to
a Participant's designated Beneficiary or surviving spouse, "property" includes
a Nontransferable Annuity Contract, provided the contract satisfies the
requirements of this Plan.
10.09 DISTRIBUTION DIRECTIONS. If no one claims a payment or distribution made
from the Trust, the Trustee must promptly notify the Advisory Committee and
then dispose of the payment in accordance with the subsequent direction of the
Advisory Committee.
10.10 THIRD PARTY/MULTIPLE TRUSTEES. No person dealing with the Trustee is
obligated to see to the proper application of any money paid or property
delivered to the Trustee, or to inquire whether the Trustee has acted pursuant
to any of the terms of the Plan. Each person dealing with the Trustee may act
upon any notice, request or representation in writing by the Trustee, or by the
Trustee's duly authorized agent, and is not liable to any person in so acting.
The certificate of the Trustee that it is acting in accordance with the Plan
will be conclusive in favor of any person relying on the certificate. If more
than two persons act as Trustee, a decision of the majority of such persons
controls with respect to any decision regarding the administration or investment
of the Trust Fund or of any portion of the Trust Fund with respect to which such
persons act as Trustee. However, the signature of only one Trustee is necessary
to effect any transaction on behalf of the Trust.
10.11 RESIGNATION. The Trustee or Custodian may resign its position at any time
by giving 30 days' written notice in advance to the Employer and to the Advisory
Committee. If the Employer fails to appoint a successor Trustee within 60 days
of its receipt of the Trustee's written notice of resignation, the Trustee will
treat the Employer as having appointed itself as Trustee and as having filed its
acceptance of appointment with the former Trustee. The Employer, in its sole
discretion, may replace a Custodian. If the Employer does not replace a
Custodian, the discretionary Trustee will assume possession of Plan assets held
by the former Custodian.
10.12 REMOVAL. The Employer, by giving 30 days' written notice in advance to
the Trustee, may remove any Trustee or Custodian. In the event of the
resignation or removal of a Trustee, the Employer must appoint a successor
Trustee if it intends to continue the Plan. If two or more persons hold the
position of Trustee, in the event of the removal of one such person, during any
period the selection of a replacement is pending, or during any period such
person is unable to serve for any reason, the remaining person or persons will
act as the Trustee.
10.13 INTERIM DUTIES AND SUCCESSOR TRUSTEE. Each successor Trustee succeeds to
the title to the Trust vested in his predecessor by accepting in writing his
appointment as successor Trustee and by filing the acceptance with the former
Trustee and the Advisory Committee without the signing or filing of any further
statement. The resigning or removed
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Trustee, upon receipt of acceptance in writing of the Trust by the successor
Trustee, must execute all documents and do all acts necessary to vest the title
of record in any successor Trustee. Each successor Trustee has and enjoys all of
the powers, both discretionary and ministerial, conferred under this Agreement
upon his predecessor. A successor Trustee is not personally liable for any act
or failure to act of any predecessor Trustee, except as required under ERISA.
With the approval of the Employer and the Advisory Committee, a successor
Trustee, with respect to the Plan, may accept the account rendered and the
property delivered to it by a predecessor Trustee without incurring any
liability or responsibility for so doing.
10.14 VALUATION OF TRUST. The Trustee must value the Trust Fund as of each
Accounting Date to determine the fair market value of each Participant's Accrued
Benefit in the Trust. The Trustee also must value the Trust Fund on such other
valuation dates as directed in writing by the Advisory Committee or as required
by the Employer's Adoption Agreement.
10.15 LIMITATION ON LIABILITY -IF INVESTMENT MANAGER, ANCILLARY TRUSTEE OR
INDEPENDENT FIDUCIARY APPOINTED. The Trustee is not liable for the acts or
omissions of any Investment Manager the Advisory Committee may appoint, nor is
the Trustee under any obligation to invest or otherwise manage any asset of the
Plan which is subject to the management of a properly appointed Investment
Manager. The Advisory Committee, the Trustee and any properly appointed
Investment Manager may execute a letter agreement as a part of this Plan
delineating the duties, responsibilities and liabilities of the Investment
Manager with respect to any part of the Trust Fund under the control of the
Investment Manager.
The limitation on liability described in this Section 10.15 also applies to the
acts or omissions of any ancillary trustee or independent fiduciary properly
appointed under Section 10.17 of the Plan. However, if a discretionary Trustee,
pursuant to the delegation described in Section 10.17 of the Plan, appoints an
ancillary trustee, the discretionary Trustee is responsible for the periodic
review of the ancillary trustee's actions and must exercise its delegated
authority in accordance with the terms of the Plan and in a manner consistent
with ERISA. The Employer, the discretionary Trustee and an ancillary trustee may
execute a letter agreement as a part of this Plan delineating any
indemnification agreement between the parties.
10.16 INVESTMENT IN GROUP TRUST FUND. The Employer, by adopting this Plan,
specifically authorizes the Trustee to invest all or any portion of the assets
comprising the Trust Fund in any group trust fund which at the time of the
investment provides for the pooling of the assets of plans qualified under Code
(S)401(a). This authorization applies solely to a group trust fund exempt from
taxation under Code (S)501(a) and the trust agreement of which satisfies the
requirements of Revenue Ruling 81-100. The provisions of the group trust fund
agreement, as amended from time to time, are by this reference incorporated
within this Plan and Trust. The provisions of the group trust fund will govern
any investment of Plan assets in that fund. The Employer must specify in an
attachment to its adoption agreement the group trust fund(s) to which this
authorization applies. If the Trustee is acting as a nondiscretionary Trustee,
the investment in the group trust fund is available only in accordance with a
proper direction, by the Named Fiduciary, in accordance with Section 10.03[B].
Pursuant to paragraph (c) of Section 10.03[A] of the Plan, a Trustee has the
authority to invest in certain common trust funds and collective investment
funds without the need for the authorizing addendum described in this Section
10.16.
Furthermore, at the Employer's direction, the Trustee, for collective investment
purposes, may combine into one trust fund the Trust created under this Plan with
the Trust created under any other qualified retirement plan the Employer
maintains. However, the Trustee must maintain separate records of account for
the assets of each Trust in order to reflect properly each Participant's Accrued
Benefit under the plan(s) in which he is a Participant.
10.17 APPOINTMENT OF ANCILLARY TRUSTEE OR INDEPENDENT FIDUCIARY. The Employer,
in writing, may appoint any person in any State to act as ancillary trustee with
respect to a designated portion of the Trust Fund. An ancillary trustee must
acknowledge in writing its acceptance of the terms and conditions of its
appointment as ancillary trustee and its fiduciary status under ERISA. The
ancillary trustee has the rights, powers, duties and discretion as the Employer
may delegate, subject to any limitations or directions specified in the
instrument evidencing appointment of the ancillary trustee and to the terms of
the Plan or of ERISA. The investment powers delegated to the ancillary trustee
may include any investment powers available under Section 10.03 of the Plan
including the right to invest any portion of the assets of the Trust Fund in a
common trust fund, as described in Code (S)584, or in any collective investment
fund, the provisions of which govern the investment of such assets and which the
Plan incorporates by this reference, but only if the ancillary trustee is a bank
or similar financial institution supervised by the United States or by a State
and the ancillary
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trustee (or its affiliate, as defined in Code (S)1504) maintains the common
trust fund or collective investment fund exclusively for the collective
investment of money contributed by the ancillary trustee (or its affiliate) in a
trustee capacity and which conforms to the rules of the Comptroller of the
Currency. The Employer also may appoint as an ancillary trustee, the trustee of
any group trust fund designated for investment pursuant to the provisions of
Section 10.16 of the Plan.
The ancillary trustee may resign its position at any time by providing at least
30 days' advance written notice to the Employer, unless the Employer waives this
notice requirement. The Employer, in writing, may remove an ancillary trustee at
any time. In the event of resignation or removal, the Employer may appoint
another ancillary trustee, return the assets to the control and management of
the Trustee or receive such assets in the capacity of ancillary trustee. The
Employer may delegate its responsibilities under this Section 10.17 to a
discretionary Trustee under the Plan, but not to a nondiscretionary Trustee or
to a Custodian, subject to the acceptance by the discretionary Trustee of that
delegation.
If the U.S. Department of Labor ("the Department") requires engagement of an
independent fiduciary to have control or management of all or a portion of the
Trust Fund, the Employer will appoint such independent fiduciary, as directed by
the Department. The independent fiduciary will have the duties, responsibilities
and powers prescribed by the Department and will exercise those duties,
responsibilities and powers in accordance with the terms, restrictions and
conditions established by the Department and, to the extent not inconsistent
with ERISA, the terms of the Plan. The independent fiduciary must accept its
appointment in writing and must acknowledge its status as a fiduciary of the
Plan.
* * * * * * * * * * * * * * *
ARTICLE XI
PROVISIONS RELATING TO INSURANCE AND INSURANCE COMPANY
11.01 INSURANCE BENEFIT. The Employer may elect to provide incidental life
insurance benefits for insurable Participants who consent to life insurance
benefits by signing the appropriate insurance company application form. The
Trustee will not purchase any incidental life insurance benefit for any
Participant prior to an allocation to the Participant's Account. At an insured
Participant's written direction, the Trustee will use all or any portion of the
Participant's nondeductible voluntary contributions, if any, to pay insurance
premiums covering the Participant's life. This Section 11.01 also authorizes the
purchase of life insurance, for the benefit of the Participant, on the life of a
family member of the Participant or on any person in whom the Participant has an
insurable interest. However, if the policy is on the joint lives of the
Participant and another person, the Trustee may not maintain that policy if that
other person predeceases the Participant.
The Employer will direct the Trustee as to the insurance company and insurance
agent through which the Trustee is to purchase the insurance contracts, the
amount of the coverage and the applicable dividend plan. Each application for a
policy, and the policies themselves, must designate the Trustee as sole owner,
with the right reserved to the Trustee to exercise any right or option contained
in the policies, subject to the terms and provisions of this Agreement. The
Trustee must be the named beneficiary for the Account of the insured
Participant. Proceeds of insurance contracts paid to the Participant's Account
under this Article XI are subject to the distribution requirements of Article V
and of Article VI. The Trustee will not retain any such proceeds for the benefit
of the Trust.
The Trustee will charge the premiums on any incidental benefit insurance
contract covering the life of a Participant against the Account of that
Participant. The Trustee will hold all incidental benefit insurance contracts
issued under the Plan as assets of the Trust created under the Plan.
(A) Incidental insurance benefits. The aggregate of life insurance premiums
paid for the benefit of a Participant, at all times, may not exceed the
following percentages of the aggregate of the Employer's contributions allocated
to any Participant's Account: (i) 49% in the case of the purchase of ordinary
life insurance contracts; or (ii) 25% in the case of the purchase of term life
insurance or universal life insurance contracts. If the Trustee purchases a
combination of ordinary life insurance contract(s) and term life insurance or
universal life insurance contract(s), then the sum of one-half of the premiums
paid for the ordinary life insurance contract(s) and the premiums paid for the
term life insurance or universal life insurance contract(s) may not exceed 25%
of the Employer contributions allocated to any Participant's Account.
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(B) Exception for certain profit sharing plans. If the Employer's Plan is a
profit sharing plan, the incidental insurance benefits requirement does not
apply to the Plan if the Plan purchases life insurance benefits only from
Employer contributions accumulated in the Participant's Account for at least two
years (measured from the allocation date).
11.02 LIMITATION ON LIFE INSURANCE PROTECTION. The Trustee will not
continue any life insurance protection for any Participant beyond his annuity
starting date (as defined in Article VI). If the Trustee holds any incidental
benefit insurance contract(s) for the benefit of a Participant when he
terminates his employment (other than by reason of death), the Trustee must
proceed as follows:
(a) If the entire cash value of the contract(s) is vested in the terminating
Participant, or if the contract(s) will have no cash value at the end of the
policy year in which termination of employment occurs, the Trustee will transfer
the contract(s) to the Participant endorsed so as to vest in the transferee all
right, title and interest to the contract(s), free and clear of the Trust;
subject however, to restrictions as to surrender or payment of benefits as the
issuing insurance company may permit and as the Advisory Committee directs;
(b) If only part of the cash value of the contract(s) is vested in the
terminating Participant, the Trustee, to the extent the Participant's interest
in the cash value of the contract(s) is not vested, may adjust the Participant's
interest in the value of his Account attributable to Trust assets other than
incidental benefit insurance contracts and proceed as in (a), or the Trustee
must effect a loan from the issuing insurance company on the sole security of
the contract(s) for an amount equal to the difference between the cash value of
the contract(s) at the end of the policy year in which termination of employment
occurs and the amount of the cash value that is vested in the terminating
Participant, and the Trustee must transfer the contract(s) endorsed so as to
vest in the transferee all right, title and interest to the contract(s), free
and clear of the Trust; subject however, to the restrictions as to surrender or
payment of benefits as the issuing insurance company may permit and the Advisory
Committee directs;
(c) If no part of the cash value of the contract(s) is vested in the
terminating Participant, the Trustee must surrender the contract(s) for cash
proceeds as may be available.
In accordance with the written direction of the Advisory Committee, the Trustee
will make any transfer of contract(s) under this Section 11.02 on the
Participant's annuity starting date (or as soon as administratively practicable
after that date). The Trustee may not transfer any contract under this Section
11.02 which contains a method of payment not specifically authorized by Article
VI or which fails to comply with the joint and survivor annuity requirements, if
applicable, of Article VI. In this regard, the Trustee either must convert such
a contract to cash and distribute the cash instead of the contract, or before
making the transfer, require the issuing company to delete the unauthorized
method of payment option from the contract.
11.03 DEFINITIONS. For purposes of this Article XI:
(a) "Policy" means an ordinary life insurance contract or a term life
insurance contract issued by an insurer on the life of a Participant.
(b) "Issuing insurance company" is any life insurance company which has
issued a policy upon application by the Trustee under the terms of this Agree-
ment.
(c) "Contract" or "Contracts" means a policy of insurance. In the event of
any conflict between the provisions of this Plan and the terms of any contract
or policy of insurance issued in accordance with this Article XI, the
provisions of the Plan control.
(d) "Insurable Participant" means a Participant to whom an insurance company,
upon an application being submitted in accordance with the Plan, will issue
insurance coverage, either as a standard risk or as a risk in an extra mortality
classification.
11.04 DIVIDEND PLAN. The dividend plan is premium reduction unless the Advisory
Committee directs the Trustee to the contrary. The Trustee must use all
dividends for a contract to purchase insurance benefits or additional insurance
benefits
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for the Participant on whose life the insurance company has issued the contract.
Furthermore, the Trustee must arrange, where possible, for all policies issued
on the lives of Participants under the Plan to have the same premium due date
and all ordinary life insurance contracts to contain guaranteed cash values with
as uniform basic options as are possible to obtain. The term "dividends"
includes policy dividends, refunds of premiums and other credits.
11.05 INSURANCE COMPANY NOT A PARTY TO AGREEMENT. No insurance company, solely
in its capacity as an issuing insurance company, is a party to this Agreement
nor is the company responsible for its validity.
11.06 INSURANCE COMPANY NOT RESPONSIBLE FOR TRUSTEE'S ACTIONS. No insurance
company, solely in its capacity as an issuing insurance company, need examine
the terms of this Agreement nor is responsible for any action taken by the
Trustee.
11.07 INSURANCE COMPANY RELIANCE ON TRUSTEE'S SIGNATURE. For the purpose of
making application to an insurance company and in the exercise of any right or
option contained in any policy, the insurance company may rely upon the
signature of the Trustee and is saved harmless and completely discharged in
acting at the direction and authorization of the Trustee.
11.08 ACQUITTANCE. An insurance company is discharged from all liability for
any amount paid to the Trustee or paid in accordance with the direction of the
Trustee, and is not obliged to see to the distribution or further application of
any moneys it so pays.
11.09 DUTIES OF INSURANCE COMPANY. Each insurance company must keep such
records, make such identification of contracts, funds and accounts within funds,
and supply such information as may be necessary for the proper administration of
the Plan under which it is carrying insurance benefits.
Note: The provisions of this Article XI are not applicable, and the Plan may not
invest in insurance contracts, if a Custodian signatory to the Adoption
Agreement is a bank which has not acquired trust powers from its governing state
banking authority.
* * * * * * * * * * * * * * *
ARTICLE XII
MISCELLANEOUS
12.01 EVIDENCE. Anyone required to give evidence under the terms of the Plan
may do so by certificate, affidavit, document or other information which the
person to act in reliance may consider pertinent, reliable and genuine, and to
have been signed, made or presented by the proper party or parties. The Advisory
Committee and the Trustee are fully protected in acting and relying upon any
evidence described under the immediately preceding sentence.
12.02 NO RESPONSIBILITY FOR EMPLOYER ACTION. Neither the Trustee nor the
Advisory Committee has any obligation or responsibility with respect to any
action required by the Plan to be taken by the Employer, any Participant or
eligible Employee, or for the failure of any of the above persons to act or make
any payment or contribution, or to otherwise provide any benefit contemplated
under this Plan. Furthermore, the Plan does not require the Trustee or the
Advisory Committee to collect any contribution required under the Plan, or to
determine the correctness of the amount of any Employer contribution. Neither
the Trustee nor the Advisory Committee need inquire into or be responsible for
any action or failure to act on the part of the others, or on the part of any
other person who has any responsibility regarding the management, administration
or operation of the Plan, whether by the express terms of the Plan or by a
separate agreement authorized by the Plan or by the applicable provisions of
ERISA. Any action required of a corporate Employer must be by its Board of
Directors or its designate.
12.03 FIDUCIARIES NOT INSURERS. The Trustee, the Advisory Committee, the Plan
Administrator and the Employer in no way guarantee the Trust Fund from loss or
depreciation. The Employer does not guarantee the payment of any money which may
be or becomes due to any person from the Trust Fund. The liability of the
Advisory Committee and
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the Trustee to make any payment from the Trust Fund at any time and all times is
limited to the then available assets of the Trust.
12.04 WAIVER OF NOTICE. Any person entitled to notice under the Plan may waive
the notice, unless the Code or Treasury regulations prescribe the notice or
ERISA specifically or impliedly prohibits such a waiver.
12.05 SUCCESSORS. The Plan is binding upon all persons entitled to benefits
under the Plan, their respective heirs and legal representatives, upon the
Employer, its successors and assigns, and upon the Trustee, the Advisory
Committee, the Plan Administrator and their successors.
12.06 WORD USAGE. Words used in the masculine also apply to the feminine where
applicable, and wherever the context of the Employer's Plan dictates, the plural
includes the singular and the singular includes the plural.
12.07 STATE LAW. The law of the state of the Employer's principal place of
business (unless otherwise designated in an addendum to the Employer's Adoption
Agreement) will determine all questions arising with respect to the provisions
of this Agreement except to the extent superseded by Federal law.
12.08 EMPLOYER'S RIGHT TO PARTICIPATE. If the Employer's Plan fails to qualify
or to maintain qualification or if the Employer makes any amendment or
modification to a provision of this Plan (other than a proper completion of an
elective provision under the Adoption Agreement or the attachment of an addendum
authorized by the Plan or by the Adoption Agreement), the Employer may no longer
participate under this Prototype Plan. Furthermore, if the Employer no longer is
a client of the Regional Prototype Sponsor, pursuant to Section 13.03 of the
Plan, will result in the discontinuance of the Employer's participation in this
Prototype Plan unless it resumes its client relationship with the Regional
Prototype Sponsor. If the Employer is not entitled to participate under this
Prototype Plan, the Employer's Plan is an individually-designed plan and the
reliance procedures specified in the applicable Adoption Agreement no longer
will apply.
12.09 EMPLOYMENT NOT GUARANTEED. Nothing contained in this Plan, or with
respect to the establishment of the Trust, or any modification or amendment to
the Plan or Trust, or in the creation of any Account, or the payment of any
benefit, gives any Employee, Employee-Participant or any Beneficiary any right
to continue employment, any legal or equitable right against the Employer, or
Employee of the Employer, or against the Trustee, or its agents or employees, or
against the Plan Administrator, except as expressly provided by the Plan, the
Trust, ERISA or by a separate agreement.
* * * * * * * * * * * * * * *
ARTICLE XIII
EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION
13.01 EXCLUSIVE BENEFIT. Except as provided under Article III, the Employer has
no beneficial interest in any asset of the Trust and no part of any asset in the
Trust may ever revert to or be repaid to an Employer, either directly or
indirectly; nor, prior to the satisfaction of all liabilities with respect to
the Participants and their Beneficiaries under the Plan, may any part of the
corpus or income of the Trust Fund, or any asset of the Trust, be (at any time)
used for, or diverted to, purposes other than the exclusive benefit of the
Participants or their Beneficiaries. However, if the Commissioner of Internal
Revenue, upon the Employer's request for initial approval of this Plan,
determines the Trust created under the Plan is not a qualified trust exempt from
Federal income tax, then (and only then) the Trustee, upon written notice from
the Employer, will return the Employer's contributions (and increment
attributable to the contributions) to the Employer. The Trustee must make the
return of the Employer contribution under this Section 13.01 within one year of
a final disposition of the Employer's request for initial approval of the Plan.
The Employer's Plan and Trust will terminate upon the Trustee's return of the
Employer's contributions.
13.02 AMENDMENT BY EMPLOYER. The Employer has the right at any time and
from time to time:
(a) To amend the elective provisions of the Adoption Agreement in any
manner it deems necessary or advisable in order to qualify (or maintain
qualification of) this Plan and the Trust created under it under the provisions
of Code (S)401(a);
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(b) To amend the Plan to allow the Plan to operate under a waiver of the
minimum funding requirement; and
(c) To amend this Agreement in any other manner.
No amendment may authorize or permit any of the Trust Fund (other than the part
which is required to pay taxes and administration expenses) to be used for or
diverted to purposes other than for the exclusive benefit of the Participants or
their Beneficiaries or estates. No amendment may cause or permit any portion of
the Trust Fund to revert to or become a property of the Employer. The Employer
also may not make any amendment which affects the rights, duties or
responsibilities of the Trustee, the Plan Administrator or the Advisory
Committee without the written consent of the affected Trustee, the Plan
Administrator or the affected member of the Advisory Committee. The Employer
must make all amendments in writing. Each amendment must state the date to which
it is either retroactively or prospectively effective. See Section 12.08 for the
effect of certain amendments adopted by the Employer.
(A) Code (S)411(d)(6) protected benefits. An amendment (including the
adoption of this Plan as a restatement of an existing plan) may not decrease a
Participant's Accrued Benefit, except to the extent permitted under Code
(S)412(c)(8), and may not reduce or eliminate Code (S)411(d)(6) protected
benefits determined immediately prior to the adoption date (or, if later, the
effective date) of the amendment. An amendment reduces or eliminates Code
(S)411(d)(6) protected benefits if the amendment has the effect of either (1)
eliminating or reducing an early retirement benefit or a retirement-type subsidy
(as defined in Treasury regulations), or (2) except as provided by Treasury
regulations, eliminating an optional form of benefit. The Advisory Committee
must disregard an amendment to the extent application of the amendment would
fail to satisfy this paragraph. If the Advisory Committee must disregard an
amendment because the amendment would violate clause (1) or clause (2), the
Advisory Committee must maintain a schedule of the early retirement option or
other optional forms of benefit the Plan must continue for the affected
Participants.
13.03 AMENDMENT BY REGIONAL PROTOTYPE PLAN SPONSOR. The Regional Prototype Plan
Sponsor, without the Employer's consent, may amend the Plan and Trust, from time
to time, in order to conform the Plan and Trust to any requirement for
qualification of the Plan and Trust under the Internal Revenue Code. The
Regional Prototype Plan Sponsor may not amend the Plan in any manner which would
modify any election made by the Employer under the Plan without the Employer's
written consent. Furthermore, the Regional Prototype Plan Sponsor may not amend
the Plan in any manner which would violate the proscription of Section 13.02. A
Trustee does not have the power to amend the Plan or Trust.
13.04 DISCONTINUANCE. The Employer has the right, at any time, to suspend or
discontinue its contributions under the Plan, and to terminate, at any time,
this Plan and the Trust created under this Agreement. The Plan will terminate
upon the first to occur of the following:
(a) The date terminated by action of the Employer;
(b) The dissolution or merger of the Employer, unless the successor makes
provision to continue the Plan, in which event the successor must substitute
itself as the Employer under this Plan. Any termination of the Plan resulting
from this paragraph (b) is not effective until compliance with any applicable
notice requirements under ERISA.
13.05 FULL VESTING ON TERMINATION. Upon either full or partial termination of
the Plan, or, if applicable, upon complete discontinuance of profit sharing plan
contributions to the Plan, an affected Participant's right to his Accrued
Benefit is 100% Nonforfeitable, irrespective of the Nonforfeitable percentage
which otherwise would apply under Article V.
13.06 MERGER/DIRECT TRANSFER. The Trustee may not consent to, or be a party to,
any merger or consolidation with another plan, or to a transfer of assets or
liabilities to another plan, unless immediately after the merger, consolidation
or transfer, the surviving Plan provides each Participant a benefit equal to or
greater than the benefit each Participant would have received had the Plan
terminated immediately before the merger or consolidation or transfer. The
Trustee possesses the specific authority to enter into merger agreements or
direct transfer of assets agreements with the trustees of other retirement plans
described in Code (S)401(a), including an elective transfer, and to accept the
direct transfer of plan assets, or to transfer plan assets, as a party to any
such agreement.
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The Trustee may accept a direct transfer of plan assets on behalf of an Employee
prior to the date the Employee satisfies the Plan's eligibility conditions. If
the Trustee accepts such a direct transfer of plan assets, the Advisory
Committee and Trustee must treat the Employee as a Participant for all purposes
of the Plan except the Employee is not a Participant for purposes of sharing in
Employer contributions or Participant forfeitures under the Plan until he
actually becomes a Participant in the Plan.
(A) Elective transfers. The Trustee, after August 9, 1988, may not consent
to, or be a party to a merger, consolidation or transfer of assets with a
defined benefit plan, except with respect to an elective transfer, or unless the
transferred benefits are in the form of paid-up individual annuity contracts
guaranteeing the payment of the transferred benefits in accordance with the
terms of the transferor plan and in a manner consistent with the Code and with
ERISA. The Trustee will hold, administer and distribute the transferred assets
as a part of the Trust Fund and the Trustee must maintain a separate Employer
contribution Account for the benefit of the Employee on whose behalf the Trustee
accepted the transfer in order to reflect the value of the transferred assets.
Unless a transfer of assets to this Plan is an elective transfer, the Plan will
preserve all Code (S)411(d)(6) protected benefits with respect to those
transferred assets, in the manner described in Section 13.02. A transfer is an
elective transfer if: (1) the transfer satisfies the first paragraph of this
Section 13.06; (2) the transfer is voluntary, under a fully informed election by
the Participant; (3) the Participant has an alternative that retains his Code
(S)411(d)(6) protected benefits (including an option to leave his benefit in the
transferor plan, if that plan is not terminating); (4) the transfer satisfies
the applicable spousal consent requirements of the Code; (5) the transferor plan
satisfies the joint and survivor notice requirements of the Code, if the
Participant's transferred benefit is subject to those requirements; (6) the
Participant has a right to immediate distribution from the transferor plan, in
lieu of the elective transfer; (7) the transferred benefit is at least the
greater of the single sum distribution provided by the transferor plan for which
the Participant is eligible or the present value of the Participant's accrued
benefit under the transferor plan payable at that plan's normal retirement age;
(8) the Participant has a 100% Nonforfeitable interest in the transferred
benefit; and (9) the transfer otherwise satisfies applicable Treasury
regulations. An elective transfer may occur between qualified plans of any type.
Any direct transfer of assets from a defined benefit plan after August 9, 1988,
which does not satisfy the requirements of this paragraph will render the
Employer's Plan individually-designed. See Section 12.08.
(B) Distribution restrictions under Code (S)401(k). If the Plan receives a
direct transfer (by merger or otherwise) of elective contributions (or amounts
treated as elective contributions) under a Plan with a Code (S)401(k)
arrangement, the distribution restrictions of Code (S)(S)401(k)(2) and (10)
continue to apply to those transferred elective contributions.
13.07 TERMINATION.
(A) Procedure. Upon termination of the Plan, the distribution provisions of
Article VI remain operative, with the following exceptions:
(1) if the present value of the Participant's Nonforfeitable Accrued Benefit
does not exceed $3,500, the Advisory Committee will direct the Trustee to
distribute the Participant's Nonforfeitable Accrued Benefit to him in lump sum
as soon as administratively practicable after the Plan terminates; and
(2) if the present value of the Participant's Nonforfeitable Accrued Benefit
exceeds $3,500, the Participant or the Beneficiary, in addition to the
distribution events permitted under Article VI, may elect to have the Trustee
commence distribution of his Nonforfeitable Accrued Benefit as soon as
administratively practicable after the Plan terminates.
To liquidate the Trust, the Advisory Committee will purchase a deferred annuity
contract for each Participant which protects the Participant's distribution
rights under the Plan, if the Participant's Nonforfeitable Accrued Benefit
exceeds $3,500 and the Participant does not elect an immediate distribution
pursuant to Paragraph (2).
If the Employer's Plan is a profit sharing plan, in lieu of the preceding
provisions of this Section 13.07 and the distribution provisions of Article VI,
the Advisory Committee will direct the Trustee to distribute each Participant's
Nonforfeitable Accrued Benefit, in lump sum, as soon as administratively
practicable after the termination of the Plan, irrespective of the present value
of the Participant's Nonforfeitable Accrued Benefit and whether the Participant
consents to that distribution. This paragraph does not apply if: (1) the Plan
provides an annuity option; or (2) as of the period between the Plan termination
date and the final distribution of assets, the Employer maintains any other
defined contribution plan (other than
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an ESOP). The Employer, in an addendum to its Adoption Agreement numbered 13.07,
may elect not to have this paragraph apply.
The Trust will continue until the Trustee in accordance with the direction of
the Advisory Committee has distributed all of the benefits under the Plan. On
each valuation date, the Advisory Committee will credit any part of a
Participant's Accrued Benefit retained in the Trust with its proportionate share
of the Trust's income, expenses, gains and losses, both realized and unrealized.
Upon termination of the Plan, the amount, if any, in a suspense account under
Article III will revert to the Employer, subject to the conditions of the
Treasury regulations permitting such a reversion. A resolution or amendment to
freeze all future benefit accrual but otherwise to continue maintenance of this
Plan, is not a termination for purposes of this Section 13.07.
(B) Distribution restrictions under Code (S)401(k). If the Employer's Plan
includes a Code (S)401(k) arrangement or if transferred assets described in
Section 13.06 are subject to the distribution restrictions of Code
(S)(S)401(k)(2) and (10), the special distribution provisions of this Section
13.07 are subject to the restrictions of this paragraph. The portion of the
Participant's Nonforfeitable Accrued Benefit attributable to elective
contributions (or to amounts treated under the Code (S)401(k) arrangement as
elective contributions) is not distributable on account of Plan termination, as
described in this Section 13.07, unless: (a) the Participant otherwise is
entitled under the Plan to a distribution of that portion of his Nonforfeitable
Accrued Benefit; or (b) the Plan termination occurs without the establishment of
a successor plan. A successor plan under clause (b) is a defined contribution
plan (other than an ESOP) maintained by the Employer (or by a related employer)
at the time of the termination of the Plan or within the period ending twelve
months after the final distribution of assets. A distribution made after March
31, 1988, pursuant to clause (b), must be part of a lump sum distribution to the
Participant of his Nonforfeitable Accrued Benefit.
* * * * * * * * * * * * * * *
ARTICLE XIV
CODE (S)401(k) AND CODE (S)401(m) ARRANGEMENTS
14.01 APPLICATION. This Article XIV applies to an Employer's Plan only if the
Employer is maintaining its Plan under a Code (S)401(k) Adoption Agreement.
14.02 CODE (S)401(k) ARRANGEMENT. The Employer will elect in Section 3.01 of
its Adoption Agreement the terms of the Code (S)401(k) arrangement, if any,
under the Plan. If the Employer's Plan is a Standardized Plan, the Code
(S)401(k) arrangement must be a salary reduction arrangement. If the Employer's
Plan is a Nonstandardized Plan, the Code (S)401(k) arrangement may be a salary
reduction arrangement or a cash or deferred arrangement.
(A) Salary Reduction Arrangement. If the Employer elects a salary reduction
arrangement, any Employee eligible to participate in the Plan may file a salary
reduction agreement with the Advisory Committee. The salary reduction agreement
may not be effective earlier than the following date which occurs last: (i) the
Employee's Plan Entry Date (or, in the case of a reemployed Employee, his
reparticipation date under Article II); (ii) the execution date of the
Employee's salary reduction agreement; (iii) the date the Employer adopts the
Code (S)401(k) arrangement by executing the Adoption Agreement; or (iv) the
effective date of the Code (S)401(k) arrangement, as specified in the Employer's
Adoption Agreement. Regarding clause (i), an Employee subject to the Break in
Service rule of Section 2.03(B) of the Plan may not enter into a salary
reduction agreement until the Employee has completed a sufficient number of
Hours of Service to receive credit for a Year of Service (as defined in Section
2.02) following his reemployment commencement date. A salary reduction agreement
must specify the amount of Compensation (as defined in Section 1.12) or
percentage of Compensation the Employee wishes to defer. The salary reduction
agreement will apply only to Compensation which becomes currently available to
the Employee after the effective date of the salary reduction agreement. The
Employer will apply a reduction election to all Compensation (and to increases
in such Compensation) unless the Employee specifies in his salary reduction
agreement to limit the election to certain Compensation. The Employer will
specify in Adoption Agreement Section 3.01 the rules and restrictions applicable
to the Employees salary reduction agreements.
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(B) Cash or deferred arrangement. If the Employer elects a cash or deferred
arrangement, a Participant may elect to make a cash election against his
proportionate share of the Employer's Cash or Deferred Contribution, in
accordance with the Employer's elections in Adoption Agreement Section 3.01. A
Participant's proportionate share of the Employer's Cash or Deferred
Contribution is the percentage of the total Cash or Deferred Contribution which
bears the same ratio that the Participant's Compensation for the Plan Year bears
to the total Compensation of all Participants for the Plan Year. For purposes of
determining each Participant's proportionate share of the Cash or Deferred
Contribution, a Participant's Compensation is his Compensation as determined
under Section 1.12 of the Plan (as modified by Section 3.06 for allocation
purposes), excluding any effect the proportionate share may have on the
Participant's Compensation for the Plan Year. The Advisory Committee will
determine the proportionate share prior to the Employer's actual contribution to
the Trust, to provide the Participants the opportunity to file cash elections.
The Employer will pay directly to the Participant the portion of his
proportionate share the Participant has elected to receive in cash.
(C) Election not to participate. A Participant's or Employee's election not
to participate, pursuant to Section 2.06, includes his right to enter into a
salary reduction agreement or to share in the allocation of a Cash or Deferred
Contribution, unless the Participant or Employee limits the effect of the
election to the non-401(k) portions of the Plan.
14.03 DEFINITIONS. For purposes of this Article XIV:
(a) "Highly Compensated Employee" means an Eligible Employee who satisfies
the definition in Section 1.09 of the Plan. Family members aggregated as a
single Employee under Section 1.09 constitute a single Highly Compensated
Employee, whether a particular family member is a Highly Compensated Employee or
a Nonhighly Compensated Employee without the application of family aggregation.
(b) "Nonhighly Compensated Employee" means an Eligible Employee who is not a
Highly Compensated Employee and who is not a family member treated as a Highly
Compensated Employee.
(c) "Eligible Employee" means, for purposes of the ADP test described in
Section 14.08, an Employee who is eligible to enter into a salary reduction
agreement for the Plan Year, irrespective of whether he actually enters into
such an agreement, and a Participant who is eligible for an allocation of the
Employer's Cash or Deferred Contribution for the Plan Year. For purposes of the
ACP test described in Section 14.09, an "Eligible Employee" means a Participant
who is eligible to receive an allocation of matching contributions (or would be
eligible if he made the type of contributions necessary to receive an allocation
of matching contributions) and a Participant who is eligible to make
nondeductible contributions, irrespective of whether he actually makes
nondeductible contributions. An Employee continues to be an Eligible Employee
during a period the Plan suspends the Employee's right to make elective
deferrals or nondeductible contributions following a hardship distribution.
(d) "Highly Compensated Group" means the group of Eligible Employees who are
Highly Compensated Employees for the Plan Year.
(e) "Nonhighly Compensated Group" means the group of Eligible Employees who
are Nonhighly Compensated Employees for the Plan Year.
(f) "Compensation" means, except as specifically provided in this Article
XIV, Compensation as defined for nondiscrimination purposes in Section 1.12(B)
of the Plan. To compute an Employee's ADP or ACP, the Advisory Committee may
limit Compensation taken into account to Compensation received only for the
portion of the Plan Year in which the Employee was an Eligible Employee and only
for the portion of the Plan Year in which the Plan or the Code (S)401(k)
arrangement was in effect.
(g) "Deferral contributions" are Salary Reduction Contributions and Cash or
Deferred Contributions the Employer contributes to the Trust on behalf of an
Eligible Employee, irrespective of whether, in the case of Cash or Deferred
Contributions, the contribution is at the election of the Employee. For Salary
Reduction Contributions, the terms "deferral contributions" and "elective
deferrals" have the same meaning.
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(h) "Elective deferrals" are all Salary Reduction Contributions and that
portion of any Cash or Deferred Contribution which the Employer contributes to
the Trust at the election of an Eligible Employee. Any portion of a Cash or
Deferred Contribution contributed to the Trust because of the Employee's failure
to make a cash election is an elective deferral. However, any portion of a Cash
or Deferred Contribution over which the Employee does not have a cash election
is not an elective deferral. Elective deferrals do not include amounts which
have become currently available to the Employee prior to the election nor
amounts designated as nondeductible contributions at the time of deferral or
contribution.
(i) "Matching contributions" are contributions made by the Employer on
account of elective deferrals under a Code (S)401(k) arrangement or on account
of employee contributions. Matching contributions also include Participant
forfeitures allocated on account of such elective deferrals or employee
contributions.
(j) "Nonelective contributions" are contributions made by the Employer which
are not subject to a deferral election by an Employee and which are not matching
contributions.
(k) "Qualified matching contributions" are matching contributions which are
100% Nonforfeitable at all times and which are subject to the distribution
restrictions described in paragraph (m). Matching contributions are not 100%
Nonforfeitable at all times if the Employee has a 100% Nonforfeitable interest
because of his Years of Service taken into account under a vesting schedule. Any
matching contributions allocated to a Participant's Qualified Matching
Contributions Account under the Plan automatically satisfy the definition of
qualified matching contributions.
(l) "Qualified nonelective contributions" are nonelective contributions which
are 100% Nonforfeitable at all times and which are subject to the distribution
restrictions described in paragraph (m). Nonelective contributions are not 100%
Nonforfeitable at all times if the Employee has a 100% Nonforfeitable interest
because of his Years of Service taken into account under a vesting schedule. Any
nonelective contributions allocated to a Participant's Qualified Nonelective
Contributions Account under the Plan automatically satisfy the definition of
qualified nonelective contributions.
(m) "Distribution restrictions" means the Employee may not receive a
distribution of the specified contributions (nor earnings on those
contributions) except in the event of (1) the Participant's death, disability,
termination of employment or attainment of age 59 1/2, (2) financial hardship
satisfying the requirements of Code (S)401(k) and the applicable Treasury
regulations, (3) a plan termination, without establishment of a successor
defined contribution plan (other than an ESOP), (4) a sale of substantially all
of the assets (within the meaning of Code (S)409(d)(2)) used in a trade or
business, but only to an employee who continues employment with the corporation
acquiring those assets, or (5) a sale by a corporation of its interest in a
subsidiary (within the meaning of Code (S)409(d)(3)), but only to an employee
who continues employment with the subsidiary. For Plan Years beginning after
December 31, 1988, a distribution on account of financial hardship, as described
in clause (2), may not include earnings on elective deferrals credited as of a
date later than December 31, 1988, and may not include qualified matching
contributions and qualified nonelective contributions, nor any earnings on such
contributions, credited after December 31, 1988. A plan does not violate the
distribution restrictions if, instead of the December 31, 1988, date in the
preceding sentence the plan specifies a date not later than the end of the last
Plan Year ending before July 1, 1989. A distribution described in clauses (3),
(4) or (5), if made after March 31, 1988, must be a lump sum distribution, as
required under Code (S)401(k)(10).
(n) "Employee contributions" are contributions made by a Participant on an
after-tax basis, whether voluntary or mandatory, and designated, at the time of
contribution, as an employee (or nondeductible) contribution. Elective deferrals
and deferral contributions are not employee contributions. Participant
nondeductible contributions, made pursuant to Section 4.01 of the Plan, are
employee contributions.
14.04 MATCHING CONTRIBUTIONS/EMPLOYEE CONTRIBUTIONS. The Employer may elect in
Adoption Agreement Section 3.01 to provide matching contributions. The Employer
also may elect in Adoption Agreement Section 4.01 to permit or to require a
Participant to make nondeductible contributions.
(A) Mandatory contributions. Any Participant nondeductible contributions
eligible for matching contributions are mandatory contributions. The Advisory
Committee will maintain a separate accounting, pursuant to Section 4.06 of the
Plan, to reflect the Participant's Accrued Benefit derived from his mandatory
contributions. The Employer, under Adoption Agreement Section 4.05, may
prescribe special distribution restrictions which will apply to the Mandatory
Contribution
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Account prior to the Participant's Separation from Service. Following his
Separation from Service, the general distribution provisions of Article VI apply
to the distribution of the Participant's Mandatory Contributions Account.
14.05 TIME OF PAYMENT OF CONTRIBUTIONS. The Employer must make Salary Reduction
Contributions to the Trust within an administratively reasonable period of time
after withholding the corresponding Compensation from the Participant.
Furthermore, the Employer must make Salary Reduction Contributions, Cash or
Deferred Contributions, Employer matching contributions (including qualified
Employer matching contributions) and qualified Employer nonelective
contributions no later than the time prescribed by the Code or by applicable
Treasury regulations. Salary Reduction Contributions and Cash or Deferred
Contributions are Employer contributions for all purposes under this Plan,
except to the extent the Code or Treasury regulations prohibit the use of these
contributions to satisfy the qualification requirements of the Code.
14.06 SPECIAL ALLOCATION PROVISIONS - DEFERRAL CONTRIBUTIONS, MATCHING
CONTRIBUTIONS AND QUALIFIED NONELECTIVE CONTRIBUTIONS. To make allocations under
the Plan, the Advisory Committee must establish a Deferral Contributions
Account, a Qualified Matching Contributions Account, a Regular Matching
Contributions Account, a Qualified Nonelective Contributions Account and an
Employer Contributions Account for each Participant.
(A) Deferral contributions. The Advisory Committee will allocate to each
Participant's Deferral Contributions Account the amount of Deferral
Contributions the Employer makes to the Trust on behalf of the Participant. The
Advisory Committee will make this allocation as of the last day of each Plan
Year unless, in Adoption Agreement Section 3.04, the Employer elects more
frequent allocation dates for salary reduction contributions.
(B) Matching contributions. The Employer must specify in its Adoption
Agreement whether the Advisory Committee will allocate matching contributions to
the Qualified Matching Contributions Account or to the Regular Matching
Contributions Account of each Participant. The Advisory Committee will make this
allocation as of the last day of each Plan Year unless, in Adoption Agreement
Section 3.04, the Employer elects more frequent allocation dates for matching
contributions.
(1) To the extent the Employer makes matching contributions under a fixed
matching contribution formula, the Advisory Committee will allocate the matching
contribution to the Account of the Participant on whose behalf the Employer
makes that contribution. A fixed matching contribution formula is a formula
under which the Employer contributes a certain percentage or dollar amount on
behalf of a Participant based on that Participant's deferral contributions or
nondeductible contributions eligible for a match, as specified in Section 3.01
of the Employer's Adoption Agreement. The Employer may contribute on a
Participant's behalf under a specific matching contribution formula only if the
Participant satisfies the accrual requirements for matching contributions
specified in Section 3.06 of the Employer's Adoption Agreement and only to the
extent the matching contribution does not exceed the Participant's annual
additions limitation in Part 2 of Article III.
(2) To the extent the Employer makes matching contributions under a
discretionary formula, the Advisory Committee will allocate the discretionary
matching contributions to the Account of each Participant who satisfies the
accrual requirements for matching contributions specified in Section 3.06 of the
Employer's Adoption Agreement. The allocation of discretionary matching
contributions to a Participant's Account is in the same proportion that each
Participant's eligible contributions bear to the total eligible contributions of
all Participants. If the discretionary formula is a tiered formula, the Advisory
Committee will make this allocation separately with respect to each tier of
eligible contributions, allocating in such manner the amount of the matching
contributions made with respect to that tier. "Eligible contributions" are the
Participant's deferral contributions or nondeductible contributions eligible for
an allocation of matching contributions, as specified in Section 3.01 of the
Employer's Adoption Agreement.
If the matching contribution formula applies both to deferral contributions and
to Participant nondeductible contributions, the matching contributions apply
first to deferral contributions. Furthermore, the matching contribution formula
does not apply to deferral contributions that are excess deferrals under Section
14.07. For this purpose: (a) excess deferrals relate first to deferral
contributions for the Plan Year not otherwise eligible for a matching
contribution; and (2) if the Plan Year is not a calendar year, the excess
deferrals for a Plan Year are the last elective deferrals made for a calendar
year. Under a Standardized Plan, an Employee forfeits any matching contribution
attributable to an excess contribution or to an excess aggregate contribution,
unless distributed pursuant to Sections 14.08 or 14.09. Under a Nonstandardized
Plan, this forfeiture
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rule applies only if specified in Adoption Agreement Section 3.06. The
provisions of Section 3.05 govern the treatment of any forfeiture described in
this paragraph, and the Advisory Committee will compute a Participant's ACP
under 14.09 by disregarding the forfeiture.
(C) Qualified nonelective contributions. If the Employer, at the time of
contribution, designates a contribution to be a qualified nonelective
contribution for the Plan Year, the Advisory Committee will allocate that
qualified nonelective contribution to the Qualified Nonelective Contributions
Account of each Participant eligible for an allocation of that designated
contribution, as specified in Section 3.04 of the Employer's Adoption Agreement.
The Advisory Committee will make the allocation to each eligible Participant's
Account in the same ratio that the Participant's Compensation for the Plan Year
bears to the total Compensation of all eligible Participants for the Plan Year.
The Advisory Committee will determine a Participant's Compensation in accordance
with the general definition of Compensation under Section 1.12 of the Plan, as
modified by the Employer in Sections 1.12 and 3.06 of its Adoption Agreement.
(D) Nonelective contributions. To the extent the Employer makes nonelective
contributions for the Plan Year which, at the time of contribution, it does not
designate as qualified nonelective contributions, the Advisory Committee will
allocate those contributions in accordance with the elections under Section 3.04
of the Employer's Adoption Agreement. For purposes of the special
nondiscrimination tests described in Sections 14.08 and 14.09, the Advisory
Committee may treat nonelective contributions allocated under this paragraph as
qualified nonelective contributions, if the contributions otherwise satisfy the
definition of qualified nonelective contributions.
14.07 ANNUAL ELECTIVE DEFERRAL LIMITATION.
(A) Annual Elective Deferral Limitation. An Employee's elective deferrals
for a calendar year beginning after December 31, 1986, may not exceed the 402(g)
limitation. The 402(g) limitation is the greater of $7,000 or the adjusted
amount determined by the Secretary of the Treasury. If, pursuant to a salary
reduction agreement or pursuant to a cash or deferral election, the Employer
determines the Employee's elective deferrals to the Plan for a calendar year
would exceed the 402(g) limitation, the Employer will suspend the Employee's
salary reduction agreement, if any, until the following January 1 and pay in
cash the portion of a cash or deferral election which would result in the
Employee's elective deferrals for the calendar year exceeding the 402(g)
limitation. If the Advisory Committee determines an Employee's elective
deferrals already contributed to the Plan for a calendar year exceed the 402(g)
limitation, the Advisory Committee will distribute the amount in excess of the
402(g) limitation (the "excess deferral"), as adjusted for allocable income, no
later than April 15 of the following calendar year. If the Advisory Committee
distributes the excess deferral by the appropriate April 15, it may make the
distribution irrespective of any other provision under this Plan or under the
Code. The Advisory Committee will reduce the amount of excess deferrals for a
calendar year distributable to the Employee by the amount of excess
contributions (as determined in Section 14.08), if any, previously distributed
to the Employee for the Plan Year beginning in that calendar year.
If an Employee participates in another plan under which he makes elective
deferrals pursuant to a Code (S)401(k) arrangement, elective deferrals under a
Simplified Employee Pension, or salary reduction contributions to a tax-
sheltered annuity, irrespective of whether the Employer maintains the other
plan, he may provide the Advisory Committee a written claim for excess deferrals
made for a calendar year. The Employee must submit the claim no later than the
March 1 following the close of the particular calendar year and the claim must
specify the amount of the Employee's elective deferrals under this Plan which
are excess deferrals. If the Advisory Committee receives a timely claim, it will
distribute the excess deferral (as adjusted for allocable income) the Employee
has assigned to this Plan, in accordance with the distribution procedure
described in the immediately preceding paragraph.
(B) Allocable income. For purposes of making a distribution of excess
deferrals pursuant to this Section 14.07, allocable income means net income or
net loss allocable to the excess deferrals for the calendar year in which the
Employee made the excess deferral, determined in a manner which is uniform,
nondiscriminatory and reasonably reflective of the manner used by the Plan to
allocate income to Participants' Accounts.
14.08 ACTUAL DEFERRAL PERCENTAGE ("ADP") TEST. For each Plan Year, the Advisory
Committee must determine whether the Plan's Code (S)401(k) arrangement satisfies
either of the following ADP tests:
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(i) The average ADP for the Highly Compensated Group does not exceed 1.25 times
the average ADP of the Nonhighly Compensated Group; or
(ii) The average ADP for the Highly Compensated Group does not exceed the
average ADP for the Nonhighly Compensated Group by more than two percentage
points (or the lesser percentage permitted by the multiple use limitation in
Section 14.10) and the average ADP for the Highly Compensated Group is not more
than twice the average ADP for the Nonhighly Compensated Group.
(A) Calculation of ADP. The average ADP for a group is the average of the
separate ADPs calculated for each Eligible Employee who is a member of that
group. An Eligible Employee's ADP for a Plan Year is the ratio of the Eligible
Employee's deferral contributions for the Plan Year to the Employee's
Compensation for the Plan Year. For aggregated family members treated as a
single Highly Compensated Employee, the ADP of the family unit is the ADP
determined by combining the deferral contributions and Compensation of all
aggregated family members. A Nonhighly Compensated Employee's ADP does not
include elective deferrals made to this Plan or to any other Plan maintained by
the Employer, to the extent such elective deferrals exceed the 402(g) limitation
described in Section 14.07(A).
The Advisory Committee, in a manner consistent with Treasury regulations, may
determine the ADPs of the Eligible Employees by taking into account qualified
nonelective contributions or qualified matching contributions, or both, made to
this Plan or to any other qualified Plan maintained by the Employer. The
Advisory Committee may not include qualified nonelective contributions in the
ADP test unless the allocation of nonelective contributions is nondiscriminatory
when the Advisory Committee takes into account all nonelective contributions
(including the qualified nonelective contributions) and also when the Advisory
Committee takes into account only the nonelective contributions not used in
either the ADP test described in this Section 14.08 or the ACP test described in
Section 14.09. For Plan Years beginning after December 31, 1989, the Advisory
Committee may not include in the ADP test any qualified nonelective
contributions or qualified matching contributions under another qualified plan
unless that plan has the same plan year as this Plan. The Advisory Committee
must maintain records to demonstrate compliance with the ADP test, including the
extent to which the Plan used qualified nonelective contributions or qualified
matching contributions to satisfy the test.
For Plan Years beginning prior to January 1, 1992, the Advisory Committee may
elect to apply a separate ADP test to each component group under the Plan. Each
component group separately must satisfy the commonality requirement of the Code
(S)401(k) regulations and the minimum coverage requirements of Code (S)410(b). A
component group consists of all the allocations and other benefits, rights and
features provided that group of Employees. An Employee may not be part of more
than one component group. The correction rules described in this Section 14.08
apply separately to each component group.
(B) Special aggregation rule for Highly Compensated Employees. To determine
the ADP of any Highly Compensated Employee, the deferral contributions taken
into account must include any elective deferrals made by the Highly Compensated
Employee under any other Code (S)401(k) arrangement maintained by the Employer,
unless the elective deferrals are to an ESOP. If the plans containing the Code
(S)401(k) arrangements have different plan years, the Advisory Committee will
determine the combined deferral contributions on the basis of the plan years
ending in the same calendar year.
(C) Aggregation of certain Code (S)401(k) arrangements. If the Employer
treats two plans as a unit for coverage or nondiscrimination purposes, the
Employer must combine the Code (S)401(k) arrangements under such plans to
determine whether either plan satisfies the ADP test. This aggregation rule
applies to the ADP determination for all Eligible Employees, irrespective of
whether an Eligible Employee is a Highly Compensated Employee or a Nonhighly
Compensated Employee. For Plan Years beginning after December 31, 1989, an
aggregation of Code (S)401(k) arrangements under this paragraph does not apply
to plans which have different plan years and, for Plan Years beginning after
December 31, 1988, the Advisory Committee may not aggregate an ESOP (or the ESOP
portion of a plan) with a non-ESOP plan (or non-ESOP portion of a plan).
(D) Characterization of excess contributions. If, pursuant to this Section
14.08, the Advisory Committee has elected to include qualified matching
contributions in the average ADP, the Advisory Committee will treat excess
contributions as attributable proportionately to deferral contributions and to
qualified matching contributions allocated on the basis of those deferral
contributions. If the total amount of a Highly Compensated Employee's excess
contributions for the Plan Year
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exceeds his deferral contributions or qualified matching contributions for the
Plan Year, the Advisory Committee will treat the remaining portion of his excess
contributions as attributable to qualified nonelective contributions. The
Advisory Committee will reduce the amount of excess contributions for a Plan
Year distributable to a Highly Compensated Employee by the amount of excess
deferrals (as determined in Section 14.07), if any, previously distributed to
that Employee for the Employee's taxable year ending in that Plan Year.
(E) Distribution of excess contributions. If the Advisory Committee
determines the Plan fails to satisfy the ADP test for a Plan Year, it must
distribute the excess contributions, as adjusted for allocable income, during
the next Plan Year. However, the Employer will incur an excise tax equal to 10%
of the amount of excess contributions for a Plan Year not distributed to the
appropriate Highly Compensated Employees during the first 2 1/2 months of that
next Plan Year. The excess contributions are the amount of deferral
contributions made by the Highly Compensated Employees which causes the Plan to
fail to satisfy the ADP test. The Advisory Committee will distribute to each
Highly Compensated Employee his respective share of the excess contributions.
The Advisory Committee will determine the respective shares of excess
contributions by starting with the Highly Compensated Employee(s) who has the
greatest ADP, reducing his ADP (but not below the next highest ADP), then, if
necessary, reducing the ADP of the Highly Compensated Employee(s) at the next
highest ADP level (including the ADP of the Highly Compensated Employee(s) whose
ADP the Advisory Committee already has reduced), and continuing in this manner
until the average ADP for the Highly Compensated Group satisfies the ADP test.
If the Highly Compensated Employee is part of an aggregated family group, the
Advisory Committee, in accordance with the applicable Treasury regulations, will
determine each aggregated family member's allocable share of the excess
contributions assigned to the family unit.
(F) Allocable income. To determine the amount of the corrective distribution
required under this Section 14.08, the Advisory Committee must calculate the
allocable income for the Plan Year in which the excess contributions arose.
"Allocable income" means net income or net loss. To calculate allocable income
for the Plan Year, the Advisory Committee will use a uniform and
nondiscriminatory method which reasonably reflects the manner used by the Plan
to allocate income to Participants' Accounts.
14.09 NONDISCRIMINATION RULES FOR EMPLOYER MATCHING CONTRIBUTIONS/PARTICIPANT
NONDEDUCTIBLE CONTRIBUTIONS. For Plan Years beginning after December 31, 1986,
the Advisory Committee must determine whether the annual Employer matching
contributions (other than qualified matching contributions used in the ADP under
Section 14.08), if any, and the Employee contributions, if any, satisfy either
of the following average contribution percentage ("ACP") tests:
(i) The ACP for the Highly Compensated Group does not exceed 1.25 times the
ACP of the Nonhighly Compensated Group; or
(ii) The ACP for the Highly Compensated Group does not exceed the ACP for the
Nonhighly Compensated Group by more than two percentage points (or the lesser
percentage permitted by the multiple use limitation in Section 14.10) and the
ACP for the Highly Compensated Group is not more than twice the ACP for the
Nonhighly Compensated Group.
(A) Calculation of ACP. The average contribution percentage for a group is
the average of the separate contribution percentages calculated for each
Eligible Employee who is a member of that group. An Eligible Employee's
contribution percentage for a Plan Year is the ratio of the Eligible Employee's
aggregate contributions for the Plan Year to the Employee's Compensation for the
Plan Year. "Aggregate contributions" are Employer matching contributions (other
than qualified matching contributions used in the ADP test under Section 14.08)
and employee contributions (as defined in Section 14.03). For aggregated family
members treated as a single Highly Compensated Employee, the contribution
percentage of the family unit is the contribution percentage determined by
combining the aggregate contributions and Compensation of all aggregated family
members.
The Advisory Committee, in a manner consistent with Treasury regulations, may
determine the contribution percentages of the Eligible Employees by taking into
account qualified nonelective contributions (other than qualified nonelective
contributions used in the ADP test under Section 14.08) or elective deferrals,
or both, made to this Plan or to any other qualified Plan maintained by the
Employer. The Advisory Committee may not include qualified nonelective
contributions in the ACP test unless the allocation of nonelective contributions
is nondiscriminatory when the Advisory Committee takes into
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account all nonelective contributions (including the qualified nonelective
contributions) and also when the Advisory Committee takes into account only the
nonelective contributions not used in either the ADP test described in Section
14.08 or the ACP test described in this Section 14.09. The Advisory Committee
may not include elective deferrals in the ACP test, unless the Plan which
includes the elective deferrals satisfies the ADP test both with and without the
elective deferrals included in this ACP test. For Plan Years beginning after
December 31, 1989, the Advisory Committee may not include in the ACP test any
qualified nonelective contributions or elective deferrals under another
qualified plan unless that plan has the same plan year as this Plan. The
Advisory Committee must maintain records to demonstrate compliance with the ACP
test, including the extent to which the Plan used qualified nonelective
contributions or elective deferrals to satisfy the test. For Plan Years
beginning prior to January 1, 1992, the component group testing rule permitted
under Section 14.08(A) also applies to the ACP test under this Section 14.09.
(B) Special aggregation rule for Highly Compensated Employees. To determine
the contribution percentage of any Highly Compensated Employee, the aggregate
contributions taken into account must include any matching contributions (other
than qualified matching contributions used in the ADP test) and any Employee
contributions made on his behalf to any other plan maintained by the Employer,
unless the other plan is an ESOP. If the plans have different plan years, the
Advisory Committee will determine the combined aggregate contributions on the
basis of the plan years ending in the same calendar year.
(C) Aggregation of certain plans. If the Employer treats two plans as a unit
for coverage or nondiscrimination purposes, the Employer must combine the plans
to determine whether either plan satisfies the ACP test. This aggregation rule
applies to the contribution percentage determination for all Eligible Employees,
irrespective of whether an Eligible Employee is a Highly Compensated Employee or
a Nonhighly Compensated Employee. For Plan Years beginning after December 31,
1989, an aggregation of plans under this paragraph does not apply to plans which
have different plan years and, for Plan Years beginning after December 31, 1988,
the Advisory Committee may not aggregate an ESOP (or the ESOP portion of a plan)
with a non-ESOP plan (or non-ESOP portion of a plan).
(D) Distribution of excess aggregate contributions. The Advisory Committee
will determine excess aggregate contributions after determining excess deferrals
under Section 14.07 and excess contributions under Section 14.08. If the
Advisory Committee determines the Plan fails to satisfy the ACP test for a Plan
Year, it must distribute the excess aggregate contributions, as adjusted for
allocable income, during the next Plan Year. However, the Employer will incur an
excise tax equal to 10% of the amount of excess aggregate contributions for a
Plan Year not distributed to the appropriate Highly Compensated Employees during
the first 2 1/2 months of that next Plan Year. The excess aggregate
contributions are the amount of aggregate contributions allocated on behalf of
the Highly Compensated Employees which causes the Plan to fail to satisfy the
ACP test. The Advisory Committee will distribute to each Highly Compensated
Employee his respective share of the excess aggregate contributions. The
Advisory Committee will determine the respective shares of excess aggregate
contributions by starting with the Highly Compensated Employee(s) who has the
greatest contribution percentage, reducing his contribution percentage (but not
below the next highest contribution percentage), then, if necessary, reducing
the contribution percentage of the Highly Compensated Employee(s) at the next
highest contribution percentage level (including the contribution percentage of
the Highly Compensated Employee(s) whose contribution percentage the Advisory
Committee already has reduced), and continuing in this manner until the ACP for
the Highly Compensated Group satisfies the ACP test. If the Highly Compensated
Employee is part of an aggregated family group, the Advisory Committee, in
accordance with the applicable Treasury regulations, will determine each
aggregated family member's allocable share of the excess aggregate contributions
assigned to the family unit.
(E) Allocable income. To determine the amount of the corrective distribution
required under this Section 14.09, the Advisory Committee must calculate the
allocable income for the Plan Year in which the excess aggregate contributions
arose. "Allocable income" means net income or net loss. The Advisory Committee
will determine allocable income in the same manner as described in Section
14.08(F) for excess contributions.
(F) Characterization of excess aggregate contributions. The Advisory
Committee will treat a Highly Compensated Employee's allocable share of excess
aggregate contributions in the following priority: (1) first as attributable to
his Employee contributions which are voluntary contributions, if any; (2) then
as matching contributions allocable with respect to excess contributions
determined under the ADP test described in Section 14.08; (3) then on a pro rata
basis to matching contributions and to the deferral contributions relating to
those matching contributions which the Advisory Committee has
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included in the ACP test; (4) then on a pro rata basis to Employee contributions
which are mandatory contributions, if any, and to the matching contributions
allocated on the basis of those mandatory contributions; and (5) last to
qualified nonelective contributions used in the ACP test. To the extent the
Highly Compensated Employee's excess aggregate contributions are attributable to
matching contributions, and he is not 100% vested in his Accrued Benefit
attributable to matching contributions, the Advisory Committee will distribute
only the vested portion and forfeit the nonvested portion. The vested portion of
the Highly Compensated Employee's excess aggregate contributions attributable to
Employer matching contributions is the total amount of such excess aggregate
contributions (as adjusted for allocable income) multiplied by his vested
percentage (determined as of the last day of the Plan Year for which the
Employer made the matching contribution). The Employer will specify in Adoption
Agreement Section 3.05 the manner in which the Plan will allocate forfeited
excess aggregate contributions.
14.10 MULTIPLE USE LIMITATION. For Plan Years beginning after December 31,
1988, if at least one Highly Compensated Employee is includible in the ADP test
under Section 14.08 and in the ACP test under Section 14.09, the sum of the
Highly Compensated Group's ADP and ACP may not exceed the multiple use
limitation.
The multiple use limitation is the sum of (i) and (ii):
(i) 125% of the greater of: (a) the ADP of the Nonhighly Compensated Group
under the Code (S)401(k) arrangement; or (b) the ACP of the Nonhighly
Compensated Group for the Plan Year beginning with or within the Plan Year of
the Code (S)401(k) arrangement.
(ii) 2% plus the lesser of (i)(a) or (i)(b), but no more than twice the lesser
of (i)(a) or (i)(b).
The Advisory Committee, in lieu of determining the multiple use limitation as
the sum of (i) and (ii), may elect to determine the multiple use limitation as
the sum of (iii) and (iv):
(iii) 125% of the lesser of: (a) the ADP of the Nonhighly Compensated Group
under the Code (S)401(k) arrangement; or (b) the ACP of the Nonhighly
Compensated Group for the Plan Year beginning with or within the Plan Year of
the Code (S)401(k) arrangement.
(iv) 2% plus the greater of (iii)(a) or (iii)(b), but no more than twice the
greater of (iii)(a) or (iii)(b).
The Advisory Committee will determine whether the Plan satisfies the multiple
use limitation after applying the ADP test under Section 14.08 and the ACP test
under Section 14.09 and after making any corrective distributions required by
those Sections. If, after applying this Section 14.10, the Advisory Committee
determines the Plan has failed to satisfy the multiple use limitation, the
Advisory Committee will correct the failure by treating the excess amount as
excess contributions under Section 14.08 or as excess aggregate contributions
under Secyion 14.09, as it determines in its sole discretion. This Section 14.10
does not apply unless, prior to application of the multiple use limitation, the
ADP and the ACP of the Highly Compensated Group each exceeds 125% of the
respective percentages for the Nonhighly Compensated Group.
14.11 DISTRIBUTION RESTRICTIONS. The Employer must elect in Section 6.03 the
Adoption Agreement the distribution events permitted under the Plan. The
distribution events applicable to the Participant's Deferral Contributions
Account, Qualified Nonelective Contributions Account and Qualified Matching
Contributions Account must satisfy the distribution restrictions described in
paragraph (m) of Section 14.03.
(A) Hardship distributions from Deferral Contributions Account. The Employer
must elect in Adoption Agreement Section 6.03 whether a Participant may receive
hardship distributions from his Deferral Contributions Account prior to the
Participant's Separation from Service. Hardship distributions from the Deferral
Contributions Account must satisfy the requirements of this Section 14.11. A
hardship distribution option may not apply to the Participant's Qualified
Nonelective Contributions Account or Qualified Matching Contributions Account,
except as provided in paragraph (3).
(1) Definition of hardship. A hardship distribution under this Section
14.11 must be on account of one or more of the following immediate and heavy
financial needs: (1) medical care described in Code (S)213(d) incurred by the
Participant, by the Participant's spouse, or by any of the Participant's
dependents, or necessary to obtain such medical care;
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(2) the purchase (excluding mortgage payments) of a principal residence for the
Participant; (3) the payment of post-secondary education tuition and related
educational fees, for the next 12-month period, for the Participant, for the
Participant's spouse, or for any of the Participant's dependents (as defined in
Code (S)152); (4) to prevent the eviction of the Participant from his principal
residence or the foreclosure on the mortgage of the Participant's principal
residence; or (5) any need prescribed by the Revenue Service in a revenue
ruling, notice or other document of general applicability which satisfies the
safe harbor definition of hardship.
(2) Restrictions. The following restrictions apply to a Participant who
receives a hardship distribution: (a) the Participant may not make elective
deferrals or employee contributions to the Plan for the 12-month period
following the date of his hardship distribution; (b) the distribution is not in
excess of the amount of the immediate and heavy financial need (including any
amounts necessary to pay any federal, state or local income taxes or penalties
reasonably anticipated to result from the distribution); (c) the Participant
must have obtained all distributions, other than hardship distributions, and all
nontaxable loans (determined at the time of the loan) currently available under
this Plan and all other qualified plans maintained by the Employer; and (d) the
Participant agrees to limit elective deferrals under this Plan and under any
other qualified Plan maintained by the Employer, for the Participant's taxable
year immediately following the taxable year of the hardship distribution, to the
402(g) limitation (as described in Section 14.07), reduced by the amount of the
Participant's elective deferrals made in the taxable year of the hardship
distribution. The suspension of elective deferrals and employee contributions
described in clause (a) also must apply to all other qualified plans and to all
nonqualified plans of deferred compensation maintained by the Employer, other
than any mandatory employee contribution portion of a defined benefit plan,
including stock option, stock purchase and other similar plans, but not
including health or welfare benefit plans (other than the cash or deferred
arrangement portion of a cafeteria plan).
(3) Earnings. For Plan Years beginning after December 31, 1988, a hardship
distribution under this Section 14.11 may not include earnings on an Employee's
elective deferrals credited after December 31, 1988. Qualified matching
contributions and qualified nonelective contributions, and any earnings on such
contributions, credited as of December 31, 1988, are subject to the hardship
withdrawal only if the Employer specifies in an addendum to this Section 14.11.
The addendum may modify the December 31, 1988, date for purposes of determining
credited amounts provided the date is not later than the end of the Plan Year
ending before July 1, 1989.
(B) Distributions after Separation from Service. Following the Participant's
Separation from Service, the distribution events applicable to the Participant
apply equally to all of the Participant's Accounts, except as elected in Section
6.03 of the Employer's Adoption Agreement.
(C) Corrections of Annual Additions Limitation. If, as a result of a
reasonable error in determining the amount of elective deferrals an Employee may
make without violating the limitations of Part 2 of Article III, an Excess
Amount results, the Advisory Committee will return the Excess Amount (as
adjusted for allocable income) attributable to the elective deferrals. The
Advisory Committee will make this distribution before taking any corrective
steps pursuant to Section 3.10 or to Section 3.16. The Advisory Committee will
disregard any elective deferrals returned under this Section 14.11(C) for
purposes of Section 14.07, 14.08 and 14.09.
14.12 SPECIAL ALLOCATION RULES. If the Code (S)401(k) arrangement provides for
salary reduction contributions, if the Plan accepts Employee contributions,
pursuant to Adoption Agreement Section 4.01, or if the Plan allocates matching
contributions as of any date other than the last day of the Plan Year, the
Employer must elect in Adoption Agreement 9.11 whether any special allocation
provisions will apply under Section 9.11 of the Plan. For purposes of the
elections:
(a) A "segregated Account" direction means the Advisory Committee will
establish a segregated Account for the applicable contributions made on the
Participant's behalf during the Plan Year. The Trustee must invest the
segregated Account in Federally insured interest bearing savings account(s) or
time deposits, or a combination of both, or in any other fixed income
investments, unless otherwise specified in the Employer's Adoption Agreement. As
of the last day of each Plan Year (or, if earlier, an allocation date coinciding
with a valuation date described in Section 9.11), the Advisory Committee will
reallocate the segregated Account to the Participant's appropriate Account, in
accordance with Section 3.04 or Section 4.06, whichever applies to the
contributions.
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(b) A "weighted average allocation" method will treat a weighted portion of
the applicable contributions as if includible in the Participant's Account as of
the beginning of the valuation period. The weighted portion is a fraction, the
numerator of which is the number of months in the valuation period, excluding
each month in the valuation period which begins prior to the contribution date
of the applicable contributions, and the denominator of which is the number of
months in the valuation period. The Employer may elect in its Adoption Agreement
to substitute a weighting period other than months for purposes of this weighted
average allocation.
* * * * * * * * * * * * * * *
ARTICLE A
APPENDIX TO BASIC PLAN DOCUMENT
This Article is necessary to comply with the Unemployment Compensation
Amendments Act of 1992 and is an integral part of the basic plan document.
Section 12.08 applies to any modification or amendment of this Article.
A-1. APPLICATIONS. This Article applies to distributions made on or after
January 1, 1993. Not withstanding any provision of the Plan to the contrary that
would otherwise limit a distributee's election under this Article, a distributee
may elect, at the time and in the manner prescribed by the Plan 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.
A-2. DEFINITIONS.
(a) "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 of the joint lives (or joint life expectancies) of the
distributee and the distributee's designated beneficiary, or for a specified
period of ten years or more; any distribution to the extent such distribution is
required under Code (S)401(a)(9); and the portion of any distribution that is
not includible in gross income (determined without regard to the exclusion of
net unrealized appreciation with respect to employer securities).
(b) "Eligible retirement plan." An eligible retirement plan is an individual
retirement account described in Code (S)408(a), an individual retirement annuity
described in Code (S)408(b), an annuity plan described in Code (S)403(a), or a
qualified trust described in Code (S)401(a), 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.
(c) "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 an alternate
payee under a qualified domestic relations order, as defined in Code (S)414(p),
are distributees with regard to the interest of the spouse or former spouse.
(d) "Direct Rollover." A direct rollover is a payment by the Plan to the
eligible retirement plan specified by the distributee.
* * * * * * * * * * * * * * *
ARTICLE B
APPENDIX TO BASIC PLAN DOCUMENT
This Article is necessary to comply with the Omnibus Budget Reconciliation Act
of 1993 (OBRA'93) and is an integral part of the basic plan document. Section
12.08 applies to any modification or amendment of this Article.
In addition to other applicable limitations set forth in the plan, and
notwithstanding any other provision of the plan to the contrary, for plan years
beginning on or after January 1, 1994, the annual compensation of each employee
taken into account
59
<PAGE>
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 Commissioner for
increases in the cost of living in accordance with Section 401(a)(17)(B) of the
Internal Revenue Code. The cost-of-living adjustment in effect for a calendar
year applies to any period, not exceeding 12 months, over which compensation is
determined (determination period) beginning in such calendar year. If a
determination period consist of fewer than 12 months, the OBRA '93 annual
compensation limit will be multiplied by a fraction, the numerator of which is
the number of months in the determination period, and the denominator of which
is 12.
For plan years beginning on or after January 1, 1994, any reference in this 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 an employee'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
this purpose, for determination periods beginning before the first day of the
first plan year beginning on or after January 1, 1994, the OBRA '93 annual
compensation limit is 150,000.
* * * * * * * * * * * * * * *
ARTICLE C
APPENDIX TO BASIC PLAN DOCUMENT
Rev. Rul. 94-76 Model Amendment
This amendment is effective on the first day of the first Plan Year beginning on
or after December 12, 1994, or, if later, March 12, 1995.
Notwithstanding any provision of this Plan to the contrary, to the extent that
any optional form of benefit under this Plan permits a distribution prior to the
Employee's retirement, death, disability, or severance from employment, and
prior to plan termination, the optional form of benefits is not available with
respect to benefits attributable to assets (including the post-transfer earnings
thereon) and liabilities that are transferred, within the meaning of Code
(S)414(1), to this Plan from a money purchase pension plan qualified under Code
(S)401(a) (other than any portion of those assets and liabilities attributable
to voluntary Employee contributions).
ARTICLE D
APPENDIX TO BASIC PLAN DOCUMENT
USERRA Model Amendment
This amendment is effective as of December 12, 1994.
Notwithstanding any provision of this Plan to the contrary, contributions,
benefits and service credit with respect to qualified military service will be
provided in accordance with Code (S)414(u)(4). Loan repayments will be suspended
under this Plan as permitted under Code (S)414(u)(4).
* * * * * * * * * * * * * * *
60
<PAGE>
EXHIBIT 23 - CONSENT OF EXPERTS
The Board of Directors
First Financial Bancorp:
We consent to incorporation by reference in the registration statements dated
April 23, 1991 on Form S-8 of First Financial Bancorp and dated June 12, 1997 on
Form S-8 of First Financial Bancorp of our report dated February 12, 1998,
relating to the consolidated balance sheets of First Financial Bancorp and
subsidiary as of December 31, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1997, which report appears in the
December 31, 1997 annual report on Form 10-K of First Financial Bancorp.
/s/ KPMG Peat Marwick LLP
Sacramento, California
March 5, 1998
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1997
FIRST FINANCIAL BANCORP FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 7,813 4,748
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 4,900 1,100
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 60,201 35,124
<INVESTMENTS-CARRYING> 1,716 1,789
<INVESTMENTS-MARKET> 1,785 1,888
<LOANS> 63,541 53,879
<ALLOWANCE> 1,313 1,207
<TOTAL-ASSETS> 147,850 104,913
<DEPOSITS> 133,891 92,207
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 1,098 817
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 7,455 7,324
<OTHER-SE> 5,406 4,565
<TOTAL-LIABILITIES-AND-EQUITY> 147,850 104,913
<INTEREST-LOAN> 6,612 5,613
<INTEREST-INVEST> 3,519 2,233
<INTEREST-OTHER> 461 199
<INTEREST-TOTAL> 10,592 8,045
<INTEREST-DEPOSIT> 3,785 2,992
<INTEREST-EXPENSE> 3,785 3,254
<INTEREST-INCOME-NET> 6,807 4,791
<LOAN-LOSSES> (60) 310
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 6,796 4,654
<INCOME-PRETAX> 1,494 894
<INCOME-PRE-EXTRAORDINARY> 1,494 894
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,015 640
<EPS-PRIMARY> .77 .49
<EPS-DILUTED> .73 .48
<YIELD-ACTUAL> 5.65 5.15
<LOANS-NON> 340 898
<LOANS-PAST> 65 52
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1,207 959
<CHARGE-OFFS> 290 334
<RECOVERIES> 456 272
<ALLOWANCE-CLOSE> 1,313 1,207
<ALLOWANCE-DOMESTIC> 1,313 1,207
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 806 671
</TABLE>
