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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
/X/ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
COMMISSION FILE NUMBER 0-25844
TAITRON COMPONENTS INCORPORATED
(Name of Registrant as specified in its charter)
CALIFORNIA 95-4249240
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
25202 ANZA DRIVE, SANTA CLARITA, CALIFORNIA 91355
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 257-6060
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
CLASS A COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of each class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers in response 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.
Approximate aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 18, 1998 was $10,506,000.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:
Number of shares outstanding on March 18, 1998:
Class A Common Stock, $.001 par value 5,591,262
Class B Common Stock, $.001 par value 762,612
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Proxy Statement relating to Registrant's
Annual Meeting of Shareholders scheduled to be held on May 15, 1998 are
incorporated by reference in Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS.
For a discussion of certain material factors which may affect the
Company, see "BUSINESS - Cautionary Statements and Risk Factors" commencing
on page 11 of this report.
GENERAL
Taitron Components Incorporated ("Taitron" or the "Company") is a
"discrete components superstore," which distributes a wide variety of
transistors, diodes and other discrete semiconductors, optoelectronic devices
and passive components to other electronic distributors, contract electronic
manufacturers (CEMs) and to original equipment manufacturers (OEMs) who
incorporate these devices in their products. In order to meet the rapid
delivery requirements of its customers, the Company maintains a significant
inventory of discrete components. At December 31, 1997, the Company's
inventory consisted of over 1.3 billion components. The Company distributes
over 12,000 different products manufactured by more than 60 different
suppliers. The Company's per unit sales price of components for the net sales
made during the year ended December 31, 1997, ranged from under one cent to
$6.50, and averaged approximately 3.6 cents each.
Discrete semiconductors are basic electronic building blocks. One
or more different types of discrete semiconductors generally are found in the
electronic or power supply circuitry of such diverse products as automobiles,
televisions, radios, telephones, computers, medical equipment, airplanes,
industrial robotics and household appliances. The term "discrete" is used to
differentiate those single function semiconductor products which are packaged
alone, such as transistors or diodes, from those which are "integrated" into
microchips and other integrated circuit devices. ELECTRONIC BUSINESS TODAY
reported in January 1996 that the American market for discrete semiconductors
(which includes discrete semiconductor products which are not currently
included in the Company's product lines) was in excess of $3.1 billion in
1994 and estimated that the market was in excess of $3.9 billion in 1995. The
Company believes that the majority of these sales are made by large
semiconductor manufacturers directly to large OEMs.
The United States electronics distribution industry is composed of
national distributors (and international distributors), as well as regional
and local distributors. Electronics distributors market numerous products,
including active components (such as transistors, microprocessors and
integrated circuits), passive components (such as capacitors and resistors),
and electromechanical, interconnect and computer products. The Company
focuses its efforts almost exclusively on the distribution of discrete
semiconductors, optoelectronic devices and recently passive components, a
small subset of the component market. Based on 1996 sales data, ELECTRONIC
BUYERS NEWS ranked the Company 49th among the top 50 distributors and 17th
for distribution of discrete semiconductors. The largest single distributor
reported sales for 1996 of over $4.3 billion. Of this magazine's top 50
electronics distributors, the Company believes that it is the only
distributor which concentrates its efforts principally on the discrete
semiconductor market.
The Company has attempted to develop a more efficient link between
the component manufacturers and the small to medium size OEMs and
distributors. The Company's "superstore" strategy typically includes
foregoing certain benefits distributors normally require from component
manufacturers, such as stock-rotation, and requesting only limited price
protection privileges, in order to obtain better pricing, and providing its
customers with one stop, "no hassle" shopping for their discrete component
needs.
The Company intends to continue to grow by increasing its sales to
existing customers through further expansion of the number of different types
of discrete component and other non-integrated circuit components in its
inventory, and by attracting additional CEMs, OEMs and electronics
distributor customers. The Company has historically sold its products through
a national network of independent sales representatives. To better service
its customers, the Company began, during 1997, to expand its direct sales
force geographically to cover portions of the United States.
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DISCRETE SEMICONDUCTORS
Semiconductors can be broadly divided into two categories -
DISCRETE SEMICONDUCTORS, including transistors, diodes, rectifiers and
bridges, which are packaged individually to perform a single or limited
function, and INTEGRATED CIRCUITS, such as microprocessors and other "chips,"
which can contain from a few to as many as several million transistors and
other elements in a single package, and usually are designed to perform
complex tasks. During 1996, the Company almost exclusively distributed
discrete semiconductors.
While integrated circuits, such as microprocessor chips, have
garnered more public exposure during the past several years, discrete
semiconductors, the ancestral root of integrated circuits, have been a core
element of electric equipment for more than 30 years. Discrete semiconductors
are found in most consumer, industrial and military electrical and electronic
applications.
Discrete semiconductors represent only a small subset of the
different types of semiconductors currently available. DONALDSON, LUFKIN &
JENRETTE, WORLD SEMICONDUCTOR TRADE STATISTICS estimated that the Worldwide
market purchased over $136 billion of semiconductors in 1997, of which over
$18 billion were discrete devices. The balance were various forms of
integrated circuits. Discrete semiconductors are generally more mature
products with a more predictable demand, more stable pricing and more
constant sourcing than other products in the semiconductor industry, and are
thus less susceptible to technological obsolescence than integrated circuits.
The Company believes that the market for discrete semiconductors is growing,
although at a slower pace than the market for semiconductors in general. This
could in part be due to the fact that OEMs are designing products which
utilize integrated circuits in place of discrete semiconductors.
OPTOELECTRONIC DEVICES AND PASSIVE COMPONENTS
During 1994, the Company introduced optoelectronic devices in a
new catalog of all optoelectronic devices. The catalog contains a wide
selection of optoelectronic devices such as LED's, infrared sensors and opto
couplers. During the second quarter of 1997, the Company introduced a new
catalog of all passive components. The catalog was the beginning of an
aggressive marketing campaign to sell passive components, such as resistors,
capacitors and inductors, a type of electronic component manufactured with
non-semiconductor materials. The Company believes that optoelectronic
devices, passive components and discrete semiconductors can be marketed
through existing channels, which in turn will reinforce the Company's current
relationship with its customers. Sales of optoelectronic devices were
$1,721,000, $1,675,000 and $1,472,000 for the years ended December 31, 1997,
1996 and 1995, respectively. Sales of passive components during 1997 were
$799,000 and the Company built-up inventory of $1.5 million of passive
components to facilitate planned increases in sales in the future. This is a
forward looking statement and the Company cannot guarantee that sales of
passive components will increase in the future.
ELECTRONIC DISTRIBUTION CHANNELS
Electronic component manufacturers ("suppliers") sell components
directly to CEMs and OEMs, as well as to their distributors. The practice
among the major suppliers is generally to focus their direct selling efforts
on larger volume customers, while utilizing distributors to reach medium and
smaller sized CEMS and OEMs, as well as smaller distributors. Many suppliers
consider electronic distributors to be an integral part of their businesses.
As a stocking, marketing and financial intermediary, the distributor relieves
its suppliers of a portion of their costs and personnel associated with
stocking and selling products, including otherwise sizable investments in
finished goods inventories and accounts receivable. By having geographically
dispersed selling and delivery capabilities, distributors are often able to
serve smaller and medium sized companies more effectively and economically
than can the supplier.
Electronic distributors are also important to CEMs and OEMs. CEMs
and OEMs frequently place orders which are of insufficient size to be placed
directly with the suppliers or require delivery schedules not available from
them. Distributors offer product availability, selection and more rapid and
flexible delivery schedules keyed to meet the requirements of their CEMs and OEM
customers. They also often rely upon electronic distributors to provide
timely, knowledgeable access to electronic components.
There is also pressure on both the suppliers, CEMs and OEMs to
maintain small inventories. Inventory is costly to maintain and thus
suppliers desire to ship finished goods as soon as such goods are
manufactured. CEMs and OEMs typically demand "just in time" delivery --
receipt of their requirements immediately prior to the time when the
components are
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to be used. Distributors fill this niche.
Most large distributors tend to be broad line distributors,
carrying various different categories of electronic products, and usually
focus their resources on the fastest selling products in each category they
distribute. Of 1997's top 50 electronics distributors reported by ELECTRONIC
BUYERS NEWS, the Company believes that, only Taitron and three other
companies focused a significant portion of their distribution efforts on
discrete semiconductors. However, the Company believes that the three other
companies concentrated their selling efforts on other semiconductor
components, such as integrated circuits, microprocessors and memory
components. The Company believes that it was the only distributor which
concentrated its efforts almost exclusively on the discrete semiconductor
market.
STRATEGY
Since it was founded in 1989, the Company's goal has been to
become one of the leading distributors of discrete semiconductors in North
America. The Company initially gained market share by concentrating on
selling discrete semiconductors at competitive prices. The Company has
marketed itself as a "discrete components superstore," whose in-depth focus
on discrete semiconductors and extensive inventory of products is of benefit
to both suppliers and OEMs. In creating the "superstore" strategy, the
Company has attempted to develop a more efficient link between suppliers and
the small to medium sized OEMs and distributors which generally do not have
direct access to large suppliers and must purchase exclusively through
distributors. The primary aspects of the Company's strategy include:
INVENTORY. The Company believes that its most important
competitive advantage is the depth of its inventory. Unlike other
distributors who carry only the best-selling discretes, the
Company's entire inventory consists of a wide range of discrete
semiconductors, optoelectronic devices and passive components. Due
to manufacturers lead times ranging from eight weeks to twenty
four weeks, the Company generally attempts to maintain
approximately a ten month supply of inventory of most products in
its catalogs. Currently, the Company's inventory is higher than
this goal as a result of its decision to increase inventory levels
and intensify its long standing purchasing strategy by making
opportunistic purchases of suppliers' uncommitted capacity, at
favorable pricing. With immediate availability of a wide selection
of products and brands, the Company attempts to function more like
a wholesale superstore than a franchised distributor. See Part II
Item 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS - Liquidity and
Capital Resources."
STRATEGIC PURCHASING. When the opportunity presents
itself, the Company also makes opportunistic purchases of a
supplier's uncommitted inventory in order to take advantage of
favorable pricing. The Company also makes significant purchases in
advance in an attempt to maintain consistent inventory levels and
meet anticipated orders. When possible, the Company attempts to
control its inventory risks by matching large customer orders with
simultaneous purchases from suppliers. See "BUSINESS - Cautionary
Statements and Risk Factors - NEED TO MAINTAIN LARGE INVENTORY;
PRICE FLUCTUATIONS."
MASTER DISTRIBUTOR. The Company distributes Electronic
components to other nationwide distributors when their inventory
cannot fulfill immediate customer orders. The Company, with its high
volume, low cost inventory acts as a master distributor for certain
of its component manufacturer suppliers. The Company estimates that
approximately 10% of its sales are a direct result of being a master
distributor.
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RELATIONSHIPS WITH SUPPLIERS. During 1997, the Company
entered into agreements with certain suppliers that provide the
Company with return privileges. The amount of inventory subject to
these agreements that provide return privileges was approximately
$8.9 million of total inventory at December 31, 1997. For the
balance of the Company's inventory, unlike most other
distributors, the Company does not demand return or stock-rotation
privileges which are generally available from its suppliers.
Return and stock-rotation privileges are beneficial to
distributors because they enable distributors to return or rotate
inventory they are unable to sell, thus significantly reducing the
risks and costs associated with over-purchasing or obsolescence.
The Company requests and will accept price protection from its
suppliers, but does not demand formal price protection agreements
from its suppliers. Price protection mitigates the risks of
falling prices of components held in inventory. Approximately
$13.3 million of the Company's inventory at December 31, 1997 was
subject to price protection arrangements with suppliers. The
Company believes that it has been able to gain a competitive
advantage over other distributors by typically foregoing or not
demanding these privileges (and thus assuming the majority of risk
for over-purchasing, product obsolescence and the risk for price
fluctuations) in order to obtain better pricing. During 1997, the
Company opened an office in Taipei, Taiwan. This office will focus
on product procurement and strengthening relationships with
suppliers in the far east. See "BUSINESS -Cautionary Statements
and Risk Factors - NEED TO MAINTAIN LARGE INVENTORY; PRICE
FLUCTUATIONS" and "BUSINESS Suppliers."
RELIABLE ONE STOP SHOPPING. The Company offers a large
selection of different name-brand discrete semiconductors,
optoelectronic devices and passive components at competitive
prices which reduces significantly the number of suppliers a buyer
must purchase from. The Company provides customers with catalogs
that are specially designed to aid customers in quickly locating
the types and brands of products that they need. Because of its
large inventory, the Company can often fill a significant portion,
or all, of a customer's order from stock. Historically, the
Company has been able to fill most of its customers' orders within
24 hours and in compliance with their requested delivery
schedules. The Company also follows a lenient policy of "no
hassle" returns. Under this policy, if a customer can demonstrate
an acceptable cause for a return, it may generally return products
to the Company for a reasonable period of time after purchase,
without penalty or restocking charge. See "BUSINESS - Cautionary
Statements and Risk Factors PRODUCT RETURNS," Part II Item 7 -
"MANAGEMENT'S DISCUSSION AND ANALYSIS -Results of Operations,"
"BUSINESS - Customers" and "BUSINESS - Sales and Marketing."
SUPPORT SMALLER DISTRIBUTORS,OCMS AND OEMS. The Company
focuses its marketing efforts on smaller OEMs, distributors and
contract manufacturers who generally do not have direct access to
suppliers because of their limited purchasing volumes and,
therefore, usually have to purchase their requirements from large
distributors, often with substantial markups. During the last few
years, there has been substantial consolidations within the
electronics distribution industry creating very large distributors.
This trend to consolidate creates opportunities for the Company since
suppliers do not usually direct sales efforts toward smaller or
medium sized CEMs and OEMs and often the larger distributors no
longer adequately service smaller customers. The Company believes
that its strategic purchasing policies enable the Company to provide
medium and smaller OEMs and distributors competitive prices while
still maintaining adequate profit margins. The Company, generally,
does not impose minimum order limitations on its customers, which
enables smaller customers to avoid the costs of carrying large
inventories. The Company also offers its customers a limited range of
value added services such as cutting and forming, quality monitoring
and product source tracing. The Company intends to continue to grow
through further expansion of the number of different types and brands
of products in its inventory and by continuing to expand its direct
sales force geographically to attract additional electronics
distributors, CEMs and OEMs. See "BUSINESS - Sales and Marketing."
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PRODUCTS
The Company markets a wide variety of discrete semiconductors,
including rectifiers (or power diodes), diodes and transistors, optoelectronic
devices and passive components. The Company maintains a broad line of brands and
products including a "Taitron" label produced by certain suppliers on selected
products in order not to conflict with their own marketing channels. The Company
attempts to maintain at least ten months of inventory for each component in its
catalogs. At December 31, 1997, the Company's inventory contained over 1.3
billion separate components and over 10,000 distinct products. The Company's
products can range in sales price from under one cent for a chip resistor to
$6.50 for certain optoelectronic devices. In 1997, the average component sales
price of the products sold by the Company was approximately 3.6 cents.
In 1997, the Company purchased products from over 60 suppliers,
including Everlight Electronics Co, Ltd., Fairchild Semiconductor Corporation,
Frontier Electronics Co., Ltd., General Semiconductor, Inc., Hi-Sincerity
Microelectronics, Pan - Jit Semiconductor Inc., QT Optoelectronics, Samsung
Semiconductors Inc., TEMIC Semiconductors and United Parts Mart. See "BUSINESS -
Cautionary Statements and Risk Factors - SUPPLIERS," "BUSINESS -Customers" and
"BUSINESS - Suppliers."
Discretes are categorized based on various factors, including
function, construction, fabrication and capacity. The products sold by the
Company include:
RECTIFIERS. Rectifiers are generally utilized in power
supply and other high power applications to convert alternating
current to direct current. The Company sells a wide variety of
rectifiers, including silicon rectifiers, fast efficient
rectifiers, schottky rectifiers, glass passivated rectifiers, fast
efficient glass passivated rectifiers, silicon bridge rectifiers,
schottky bridge rectifiers, glass passivated bridge rectifiers and
controlled avalanche bridge rectifiers.
DIODES. Diodes are two-lead semiconductors that only allow
electric current to flow in one direction. They are used in a
variety of electronic applications, including signal processing
and direction of current. Diodes sold by the Company include
switching diodes, varistor diodes, germanium diodes and zener
diodes.
TRANSISTORS. Transistors are used in, among other
applications, the processing or amplification of electric current
and electronic signals, including data, television, sound and
power. The Company currently stocks many types of transistors,
including small signal transistors, power transistors and power
MOSFETS.
OPTOELECTRONIC DEVICES. Optoelectronic devices are solid
state products which provide light displays (such as LEDs),
optical links and fiber-optic signal coupling. Applications vary
from digital displays on consumer video equipment to fiberoptic
transmission of computer signals to pattern sensing for
regulation, such as is found in automobile cruise controls.
Optoelectronic devices are not generally classified as discrete
semiconductors or integrated circuits, although they incorporate
semiconductor materials.
PASSIVE COMPONENTS. Passive components are a type of
electronic component manufactured with non-semiconductor
materials. Passive components such as resistors, capacitors and
inductors are used in electronic circuitry but they do not provide
amplification. Passive components are basic electronic components
found in virtually all electronic products.
The products distributed by the Company are mature products that are
used in a wide range of commercial and industrial products and industries. The
Company believes that a majority of the products it distributes are used in
applications where integrated circuits are not viable alternatives. As a result,
the Company has never experienced any material amount of product obsolescence,
and does not expect to experience any material amount of product obsolescence in
the foreseeable future. This is a forward looking statement and, as such, is
subject to uncertainties. There can be no assurance that over time the functions
for which discretes are used will not eventually be displaced by integrated
circuits.
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The Company conducts limited quality monitoring of its products. The
Company purchases products from reliable manufacturers who provide warranties
for their products that are common in the industry.
The Company's distribution originates from a 24,500 square foot owned
facility and a 30,000 square foot leased facility, both located in Santa
Clarita, California. The Company utilizes a computerized inventory
control/tracking system which enables the Company to quickly access its
inventory levels and trace product shipments. See Item 2 "PROPERTIES."
CUSTOMERS
The Company markets its products to distributors, CEMs and OEMs. The
Company believes that its strategic purchasing policies allow the Company to
provide medium and smaller distributors, OCMs and OEMs competitive prices while
still maintaining an adequate profit margin. As a rule, the Company does not
impose minimum order limitations on its customers, which enables smaller
customers to avoid the cost of carrying large inventories. See "BUSINESS -
Strategy."
During 1997, the Company distributed its products to over 2,000
customers. For the years ended December 31, 1997, 1996 and 1995, no one customer
accounted for more than 3.3%, 3.6% and 4.3%, respectively, of the Company's net
sales. The Company does not believe that the loss of any one customer would have
a material adverse effect on its business.
Historically, distributors have accounted for a much larger
percentage of the Company's net sales than CEMs and OEMs. However, over time,
as the Company has expanded its customer base, the Company's customer
breakdown has become somewhat more balanced, with distributors accounting for
approximately 60% and CEMs and OEMs accounting for approximately 40% of the
Company's net sales in 1997.
The Company historically has not required its distributor
customers to provide any point of sale reporting and therefore the Company
does not know the breakdown of industries into which its products are sold.
However, based on its sales to CEMs and OEMs, the Company believes that no
one industry accounted for a majority of the applications of the products
which it sold in 1997, 1996 or 1995.
Taitron offers sales support to its customers through its sales
department and a network of 16 independent sales representatives. Inventory
support provided to customers includes carrying inventory for their specific
needs and providing free samples of the products the Company distributes.
The Company also offers its customers a limited range of value added
services, such as wire or lead cutting and bending for specific applications,
enhanced quality monitoring and product source tracing, but, to date, these
value added services have not been material to the Company's business or results
of operations.
The Company believes that exceptional customer service and customer
relations are key elements of its success, and trains its sales force to provide
prompt, efficient and courteous service to all customers. See "BUSINESS - Sales
and Marketing." The Company has the ability to ship most orders the same day
they are placed and, historically, most of its customers' orders have been
shipped within the requested delivery schedule.
As the Company's customers grow in size, the Company may lose its larger
customers to its suppliers and as the electronics distribution industry
consolidates some of the Company's customers may be acquired by competitors. See
"BUSINESS Cautionary Statements and Risk Factors - COMPETITION."
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SALES AND MARKETING
The Company's sales department is currently located at its
facility in Santa Clarita, California. The sales department is organized into
three separate groups designed to handle the needs of the customer. Each
group is managed by a Vice President of Sales. Each Vice President is given a
substantial amount of discretion in developing sales strategies within his or
her group. Group 1 salespeople complete the orders of customers whose orders
are usually more routine and assist more experienced Group 2 salespeople.
Group 2 salespeople focus on solidifying relationships with and providing
support to existing key CEMs and OEMs and key distributors who have more
complex needs. Group 3 salespeople are based in the sales region in which
they have responsibility for potential OEM accounts and to establish and
solidify the relationship with OEM's and to evaluate the performance of the
Company's network of independent sales representatives. Group 3 salespeople
will develop potential CEM and OEM accounts with independent sales
representatives who will be compensated for the new business growth.
Salespeople are generally compensated by a combination of salary and
incentives based upon the profits obtained from their sales. Salespeople may
also be given responsibilities as brand and/or product managers and are given
additional compensation for these duties. Each Vice President of sales is
compensated by a combination of salary and incentives based upon the overall
performance of his or her group, including the group's profitability.
The Company has recognized that there is a rapidly growing market for discrete
components in South America. To take advantage of this opportunity, Taitron
opened a branch office in Sao Paulo, Brazil in May 1995. South American sales
were $438,000 in 1997, $391,000 in 1996 and $144,000 in 1995.
The independent sales representatives have played an important role
in developing the Company's client base, especially with respect to OEMs. Many
OEMs want their suppliers to have a local presence and the Company's network of
independent sales representatives are responsive to these needs. The independent
sales representatives are primarily responsible for face-to-face meetings with
the Company's customers, and for developing new customers. The Company's
independent sales representatives are each given responsibility for a specific
geographical territory. Historically, sales representatives were paid a
commission of 5% on all sales made in their territory, regardless of whether
they were involved in the sales process. Beginning in the first quarter of 1998,
sales representatives will not be compensated for sales made to other
distributors. The Company believes that this commission policy will re-direct
independent sales representatives attention to CEMs and OEMs and therefore
increase the Company's market share with end users. The Company and its
independent sales representatives also jointly advertise and participate in
trade shows.
At March 1, 1998, the Company's sales and marketing department
consisted of 21 employees, including 4 that are located outside of Santa
Clarita, California, and the Company utilized 16 independent sales
representatives to develop new OEM customers and to provide a more direct link
to existing OEM customers.
The Company provides customers with catalogs that are specially
designed to aid customers in quickly finding the types and brands of discrete
semiconductors and optoelectronic devices that they need.
To attract new customers, the Company has advertised in national
industry publications such as ELECTRONIC BUYER'S NEWS, ELECTRONIC BUSINESS,
ELECTRONIC SOURCE BOOK, PURCHASING and, in Canada, ELECTRONIC PRODUCTS AND
TECHNOLOGY. The Company also participates in regional and national trade shows
and jointly advertises with suppliers, customers and independent sales
representatives.
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SUPPLIERS
The Company believes that it is important to develop and maintain
good relationships with its suppliers. Historically, the Company did not have
long-term supply, distribution or franchise agreements with its suppliers, but
instead cultivated strong working relationships with each of its suppliers.
However, during 1997 the Company did enter into franchise agreements with
certain of its suppliers. Such franchise agreements have terms from one to two
years. See "BUSINESS - Cautionary Statements and Risk Factors - RELATIONSHIP
WITH SUPPLIERS."
In order to facilitate good relationships with its suppliers, the
Company typically will carry a complete line of each supplier's discrete
products. The Company also supports its suppliers by increasing their
visibility through advertising and participation in regional and national
trade shows. The Company generally orders components far in advance, helping
suppliers plan production, and it generally does not require stock-rotation
or return privileges, all of which are costly to the supplier. The Company
requests and will accept price protection from its suppliers, but does not
demand formal price protection agreements from its suppliers. See "BUSINESS -
Cautionary Statements and Risk Factors - NEED TO MAINTAIN LARGE INVENTORY;
PRICE FLUCTUATIONS" and "BUSINESS - Strategy."
The Company purchases components from over 60 different suppliers,
including Everlight Electronics Co., Ltd., Fairchild Semiconductor Corporation,
Frontier Electronics Co., Ltd., General Semiconductor, Inc. Hi-Sincerity
Microelectronics, Pan - Jit Semiconductor Inc., QT Optoelectronics, Samsung
Semiconductors Inc., TEMIC Semiconductors and United Parts Mart. The Company is
continually attempting to build relationships with suppliers and from time to
time adds new suppliers in an attempt to provide its customers with a better
product mix. Also, the Company's relationships with suppliers have been
terminated from time to time. The possibility exists that the loss of one or
more supplier distribution relationships might have a material adverse effect on
the Company and its results of operations. See "BUSINESS - Cautionary Statements
and Risk Factors - RELATIONSHIP WITH SUPPLIERS."
For the year ended December 31, 1997, the Company's four largest
suppliers, General Semiconductor, Inc., Samsung Semiconductors, Inc., TEMIC
Semiconductors and United Parts Mart accounted for approximately 63.1% of the
Company's net purchases. However, the Company does not regard any one
supplier as essential to its operations, since equivalent replacements for
most of the products the Company markets are either available from one or
more of the Company's other suppliers or are available from various other
sources at competitive prices. The Company believes that, even if it loses
its direct relationship with a supplier, there exist alternative sources for
a supplier's product. No assurance can be given that the loss or a
significant disruption in the relationship with one or more of the Company's
suppliers would not have a material adverse effect on the Company's business
and results of operations. See "BUSINESS - Cautionary Statements and Risk
Factors - RELATIONSHIP WITH SUPPLIERS."
COMPETITION
The Company operates in a highly competitive environment. The Company
faces competition from numerous local, regional and national distributors (both
in purchasing and selling inventory) and electronic component manufacturers,
including some of its own suppliers. Many of the Company's competitors are more
established and have greater name recognition and financial and marketing
resources than the Company. The Company believes that competition in the
electronic industry is based on breadth of product lines, product availability,
choice of suppliers, customer service, competitive pricing and product
knowledge, as well as value-added services. The Company believes it competes
effectively with respect to breadth and availability of inventory, response
time, pricing and product knowledge. To the Company's knowledge, no other
national distributor focuses its business on discrete semiconductors to the same
extent as does the Company. Generally, large component manufacturers and large
distributors do not focus their internal selling efforts on small to medium
sized OEMs and distributors, which constitute the vast majority of the Company's
customers; however, as the Company's customers increase in size, component
manufacturers may find it cost effective to focus direct selling efforts on
those customers, which could result in the loss of customers or decreased
selling prices. See "BUSINESS Cautionary Statements and Risk Factors -
COMPETITION" and "BUSINESS - Semiconductor Distribution Channels."
MANAGEMENT INFORMATION SYSTEMS
The Company has made a significant investment in computer hardware,
software and personnel. The MIS department is responsible for software and
hardware upgrades, maintenance of current software and related databases, and
designing custom systems. The Company believes that its MIS department is
crucial to the Company's success
8
<PAGE>
and believes in continually upgrading its hardware and software. To that end,
management has acquired and is in the final stage of implementing an Oracle
Applications System. The Company believes that this system has the capabilities
to serve the Company for future anticipated needs including capabilities of
net working with remote locations.
FOREIGN TRADE REGULATION
Most of the products distributed by the Company are manufactured in
the Far East, including Taiwan, Japan, China, Korea, Thailand and the
Philippines. The purchase of goods manufactured in foreign countries is subject
to a number of risks, including economic disruptions, transportation delays and
interruptions, foreign exchange rate fluctuations, imposition of tariffs and
import and export controls, and changes in governmental policies, any of which
could have a material adverse effect on the Company's business and results of
operations.
Many of the Company's suppliers have their manufacturing facilities
in countries whose economies are experiencing financial problems. Mounting trade
deficits have sent interest rates soaring and local currencies plunging. The US
dollar's rise compared with Asian currencies may reduce exports to Asia in the
future. 1997 sales to Asian customers was not material to the Company.
Management believes that the decline in Asian currencies may actually benefit
the Company in the short-term by providing opportunities for the Company to
purchase products at lower prices.
From time to time, protectionist pressures have influenced U.S. trade
policy concerning the imposition of significant duties or other trade
restrictions upon foreign products. The Company cannot predict whether
additional U.S. Customs quotas, duties, taxes or other charges or restrictions
will be imposed upon the importation of foreign components in the future or what
effect any of these actions would have on its business, financial condition or
results of operations.
The ability to remain competitive with respect to the pricing of
imported components could be adversely affected by increases in tariffs or
duties, changes in trade treaties, strikes in air or sea transportation, and
possible future United States legislation with respect to pricing and import
quotas on products from foreign countries. For example, it is possible that
political or economic developments in China, or with respect to the United
States' relationship with China, could have an adverse effect on the Company's
business. The Company's ability to remain competitive could also be affected by
other governmental actions related to, among other things, anti-dumping
legislation and international currency fluctuations. While the Company does not
believe that any of these factors adversely impact its business at present,
there can be no assurance that these factors will not materially adversely
affect the Company in the future. Any significant disruption in the delivery of
merchandise from the Company's suppliers, substantially all of whom are foreign,
could have a material adverse impact on the Company's business and results of
operations. See "BUSINESS - Cautionary Statements and Risk Factors - FOREIGN
TRADE REGULATION."
EMPLOYEES
At March 1, 1998, the Company had a total of 55 employees, 50
full-time employees and 5 full-time workers from temporary employment agencies.
None of the Company's employees are covered by a collective bargaining
agreement, and the Company considers its relations with its employees to be
excellent.
9
<PAGE>
CAUTIONARY STATEMENTS AND RISK FACTORS
Several of the matters discussed in this document contain forward
looking statements that involve risks and uncertainties. Factors associated with
the forward looking statements which could cause actual results to differ
materially from those projected or forecast in the statements appear below. In
addition to other information contained in this document, readers should
carefully consider the following cautionary statements and risk factors:
DEPENDENCE UPON KEY PERSONNEL. The Company is highly dependent upon
the services of Stewart Wang, its Chief Executive Officer and President. The
success of the Company to date has been largely dependent upon the efforts and
abilities of Mr. Wang, and the loss of Mr. Wang's services for any reason could
have a material adverse effect upon the Company. In addition, the Company's work
force includes executives and employees with significant knowledge and
experience in the electronics distribution industry. The Company's future
success will be strongly influenced by its ability to continue to recruit, train
and retain a skilled work force. While the Company believes that it would be
able to locate suitable replacements for its executives or other personnel if
their services were lost to the Company, there can be no assurance that the
Company would be able to do so on terms acceptable to the Company. In
particular, the location and hiring of a suitable replacement for Mr. Wang could
be very difficult. The Company has purchased and currently intends to maintain a
key-man life insurance policy on Mr. Wang's life with benefits of $2,000,000
payable to the Company in the event of Mr. Wang's death. The benefits received
under this policy might not be sufficient to compensate the Company for the loss
of Mr. Wang's services should a suitable replacement not be employed.
RELATIONSHIP WITH SUPPLIERS. Typically, the Company does not have
written long-term supply, distribution or franchise agreements with any of its
suppliers. Although the Company believes that it has established close working
relationships with its principal suppliers, the Company's success will depend,
in large part, on maintaining these relationships and developing new supplier
relationships for its existing and future product lines. Because of the lack of
long-term contracts, there can be no assurance that the Company will be able to
maintain these relationships. For example, in 1992, ITT Semiconductors, which
was then one of the Company's principal suppliers, consolidated its United
States distribution network into a limited number of distribution channels and
the Company was not among the distributors chosen. The Company believes that,
even if it loses its direct relationship with a supplier, there exist
alternative sources for products. No assurance can be given that the loss or a
significant disruption in the relationship with one or more of the Company's
suppliers would not have a material adverse effect on the Company's business and
results of operations.
NEED TO MAINTAIN LARGE INVENTORY; PRICE FLUCTUATIONS. To adequately
service its customers, the Company believes that it is necessary to maintain a
large inventory of its product offerings, and the Company generally attempts to
maintain approximately ten months inventory of most products in its catalogs.
The Company's inventory level is higher than this due to its decision to
increase inventory levels and intensify its long standing purchasing strategy by
making opportunistic purchases of suppliers' uncommitted capacity, at favorable
pricing. The Company is focusing its efforts to maintain or gradually reduce its
inventory. As a result of the Company's strategic inventory purchasing policies,
under which the Company, in order to obtain preferential pricing, waives the
rights to suppliers' inventory protection agreements such as inventory return
rights and accepts limited rights to suppliers price protection arrangements,
the Company bears the risk of decreases in the prices charged by its suppliers
and decreases in the prices of products held in its inventory or covered by
purchase commitments. If prices of components held in inventory by the Company
decline or if new technology is developed that displaces products distributed by
the Company and held in inventory, the Company's business could be materially
adversely affected. See "BUSINESS - Strategy."
PRODUCT MIX; PRODUCT MARGINS. The Company's gross profit margins have
decreased since 1995, principally due to a weaker product demand and competitive
pricing pressures within the electronics industry. The Company's gross profit
margins are subject to a number of factors, including product demand, the
ability of the Company to purchase inventory at favorable prices and the
Company's favorable sales mix, all of which could adversely impact margins.
Generally optoelectronic devices and passive components have a lower gross
margin than other products that the Company sells. See Part II Item 7 -
"MANAGEMENT'S DISCUSSION AND ANALYSIS - Results of Operations."
AVAILABILITY OF COMPONENTS. The semiconductor component business has
from time to time experienced
10
<PAGE>
periods of extreme shortages in product supply, generally as the result of
demand exceeding available supply. When these shortages occur, suppliers tend
to either raise unit prices in order to reduce demand or place their
customers on "allocation," reducing the number of units sold to each
customer. While the Company believes that, due to the depth of its inventory,
it has not been adversely affected by recent shortages in certain discrete
components, no assurance can be given that future shortages will not
adversely impact the Company. See "BUSINESS - Suppliers."
FOREIGN TRADE REGULATION. A significant number of the products
distributed by the Company are manufactured in Taiwan, China, Korea and the
Philippines. The purchase of goods manufactured in foreign countries is subject
to a number of risks, including economic disruptions, transportation delays and
interruptions, foreign exchange rate fluctuations, imposition of tariffs and
import and export controls and changes in governmental policies, any of which
could have a material adverse effect on the Company's business and results of
operations.
The ability to remain competitive with respect to the pricing of
imported components could be adversely affected by increases in tariffs or
duties, changes in trade treaties, strikes in air or sea transportation, and
possible future United States legislation with respect to pricing and import
quotas on products from foreign countries. For example, it is possible that
political or economic developments in China, or with respect to the United
States' relationship with China, could have an adverse effect on the Company's
business. The Company's ability to remain competitive could also be affected by
other governmental actions related to, among other things, anti-dumping
legislation and international currency fluctuations. While the Company does not
believe that any of these factors adversely impact its business at present,
there can be no assurance that these factors will not materially adversely
affect the Company in the future. Any significant disruption in the delivery of
merchandise from the Company's suppliers, substantially all of whom are foreign,
could also have a material adverse impact on the Company's business and results
of operations. See "BUSINESS - Suppliers" and "BUSINESS - Foreign Trade
Regulation."
MANAGEMENT OF GROWTH. The Company's ability to effectively manage
future growth, if any, will require it to continue to implement and improve
its operational, financial and management information systems and to train,
motivate and manage a larger number of employees. There can be no assurance
that the Company will be able to preserve the revenue growth experienced in
prior years, continue its profitable operations or manage future growth
successfully. As an example, sales decreased from 1995 to 1996 principally as
a result of the soft market demand for discrete semiconductors. See Part II
Item 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS - Results of Operations."
COMPETITION. The Company faces intense competition, both in its
selling efforts and purchasing efforts, from the significant number of companies
that manufacture or distribute discrete products. Many of these companies have
substantially greater assets and possess substantially greater financial and
personnel resources than those of the Company. Many competing distributors also
carry product lines which the Company does not carry. Generally, large component
manufacturers and large distributors do not focus their direct selling efforts
on small to medium sized OEMs and distributors, which constitute the vast
majority of the Company's customers. However, as the Company's customers
increase in size, component manufacturers may find it cost effective to focus
direct selling efforts on those customers, which could result in the loss of
customers or decrease on profit margins. There can be no assurance that the
Company will be able to continue to compete effectively with existing or
potential competitors. See "BUSINESS - Competition."
11
<PAGE>
CONTROL BY CLASS B COMMON STOCK SHAREHOLDER; POSSIBLE DEPRESSIVE
EFFECT ON THE PRICE OF THE CLASS A COMMON Stock. Stewart Wang, the Company's
Chief Executive Officer and President, beneficially owns all of the Class B
Common Stock of the Company, which carries ten votes per share, and he thus
controls approximately 58% of the voting power of the Company's Common Stock. As
a result, Mr. Wang is able to control the Company and its operations, including
the election of at least a majority of the Company's Board of Directors and the
policies of the Company. Also, any time while the Company has at least 800
shareholders who beneficially own shares of the Company's Common Stock, the
Company's Articles of Incorporation provide for the automatic elimination of
cumulative voting, which would allow Mr. Wang to elect all of the Directors. The
disproportionate vote afforded the Class B Common Stock could also serve to
discourage potential acquirers from seeking to acquire control of the Company
through the purchase of the Class A Common Stock, which might have a depressive
effect on the price of the Class A Common Stock.
PRODUCT RETURNS. The Company maintains a "no hassle" return policy.
On a case-by-case basis, the Company accepts returns of products from its
customers, without restocking charges, where they can demonstrate an acceptable
cause for the return. Requests by a distributor to return products purchased for
its own inventory are generally not included under this policy. With respect to
OCMs and OEMs, acceptable causes are generally limited to loss of orders for
products in which the components were to be incorporated and errors in
specifications of the OCMs and OEMs orders to the Company (e.g. when the OCM or
OEM erroneously orders the wrong product). The Company will also, on a
case-by-case basis, accept returns of products upon payment of a restocking fee,
which generally is set at 15% of the sales price. The Company will not accept
returns of any products which were special ordered by a customer, or which are
otherwise not generally included in the Company's inventory. During the fiscal
years ended December 31, 1997, 1996 and 1995, sales returns aggregated
$1,110,000, $1,536,000 and $1,307,000, or 3.3%, 5.1% and 3.7% of net sales,
respectively. Historically, most allowable returns occur during the first two
months following shipment. While the Company maintains reserves for product
returns which it considers to be adequate, the possibility exists that the
Company could experience returns in any period at a rate significantly in excess
of historical levels, which could materially and adversely impact the Company's
results of operations for that period. See Part II Item 7 - "MANAGEMENT'S
DISCUSSION AND ANALYSIS - Results of Operations" and "BUSINESS - Customers."
CYCLICAL NATURE OF ELECTRONICS INDUSTRY. The electronics distribution
industry has been affected historically by general economic downturns, which
have had an adverse economic effect upon manufacturers and end-users of discrete
components, as well as electronic distributors such as the Company. In addition,
the life-cycle of existing electronic products and the timing of new product
development and introduction can affect demand for electronic components. Any
downturns in the electronics distribution industry, or the electronics industry
in general, could adversely affect the Company's business and results of
operations. See "BUSINESS - Semiconductor Distribution Channels."
NO EARTHQUAKE INSURANCE. The Company's principal executive offices
are located in a Company-owned facility in Santa Clarita, California - an area
which experienced significant damage in the 1994 Northridge, California
earthquake. During 1994, the Company expended approximately $145,000 in repair
costs and renovations to its facility resulting from that earthquake, none of
which were covered by insurance. The Company believes that it is economically a
better decision to self insure against any future earthquake losses than to pay
the expensive earthquake insurance premiums.
12
<PAGE>
ITEM 2. PROPERTIES.
The Company's executive offices and warehouse facilities, covering
approximately 24,500 square feet, are located in Santa Clarita, California. The
Company owns this property subject to a mortgage held by a bank with an
outstanding principal balance of $494,000 as of December 31, 1997 and due on
December 1, 2013 (the "Mortgage"). Pursuant to the Mortgage, the Company is
obligated to make monthly payments of $4,390, which includes interest at 6.359%
per annum. Payments by the Company under the Mortgage are currently
unconditionally guaranteed by both the Chairman of the Board of the Company and
the President of the Company. Neither of the officers has any intention of
guaranteeing obligations of the Company in the future. During 1997, the Company
invested $519,000 in its Taiwan office, principally for acquisition of office
and warehouse space that is owned by the Company and not subject to any debt.
In May, 1996, the Company increased its warehouse space by entering
into a two year lease, with an option for one additional year, for warehouse
space of approximately 30,000 square feet located in Santa Clarita, California.
All of the space is currently occupied by the Company. In January 1998, the
Company exercised its option extending the lease to June 1999. The monthly
rental expense is $12,500.
The Company currently anticipates that it will need to relocate
its executive offices and warehouse operations to a larger facility sometime
in the next several years. The Company will begin planning for such a move
when it experiences enough growth to warrant the additional expense and
disruption to the business. The Company currently does not anticipate that
the costs to lease the new facilities will be material to its overall
financial condition or results of operations. However, the actual relocation
and lease costs will be dependent upon real estate market conditions existing
at the time of the move. Following this move, the Company anticipates that it
will attempt to either sell or lease its current facilities. While the
Company believes that the disposition or leasing of its current facilities
should not adversely impact its results of operations, there is a possibility
that the Company could realize a loss with respect thereto.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
In September 1997, the Company filed a lawsuit in Los Angeles
Superior Court against Taiwan Semiconductor Co. Ltd. ("TSCL"), TSC America, Inc.
("TSC") an officer of these companies and a former employee of the Company. The
lawsuit arises out of alleged unethical and illegal business practices including
unauthorized use of certain of the Company's trade secrets. The Company is
seeking monetary damages in the amount of $5 million. In September 1997, TSCL
and TSC filed a cross-complaint against the Company and one of its officers,
alleging unauthorized use of certain of TSCL's trade secrets. The
cross-complaint seeks $10 million in damages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since April 19, 1995, the Company's Class A Common Stock has been
traded on the Nasdaq National Market under the symbol "TAIT". The following
table sets forth the range of high and low sale prices per share for the Class A
Common Stock as quoted on the Nasdaq National Market, for the periods indicated
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year Ended December 31, 1995
Second Quarter (from April 19, 1995) 9 1/2 6
Third Quarter 12 8
Fourth Quarter 9 1/4 6 1/4
Year Ended December 31, 1996
First Quarter 8 6
Second Quarter 7 1/4 4 7/8
Third Quarter 5 3/4 2 7/8
Fourth Quarter 4 1/4 2 1/16
Year Ended December 31, 1997
First Quarter 3 7/8 2 25/64
Second Quarter 3 7/8 2 35/64
Third Quarter 4 1/8 2 7/8
Fourth Quarter 4 1/4 2 1/2
Year Ended December 31, 1998 3 1/8 2 1/8
First Quarter (through March 18, 1998)
</TABLE>
At March 18, 1998, there were approximately 102 holders of record of
the Company's Common Stock. The Company estimates that there are approximately
1,815 beneficial owners of its Class A Common stock.
The Company has not paid cash dividends on its Common Stock. The
present policy of the Company is to retain earnings to finance the development
of its operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS - Results of
Operations; Liquidity and Capital Resources."
In December 1996, the Company announced a program to repurchase
shares of its Class A common stock. As of March 18, 1998, the Company had
repurchased 580,913 shares of its Class A common stock in open market purchases.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table presents certain selected consolidated financial
and operating data for the Company as of and for each of the years in the five
year period ended December 31, 1997. The selected consolidated financial and
operating data in the table should be read in conjunction with the Company's
Financial Statements and the notes thereto included elsewhere herein and in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations.
STATEMENTS OF INCOME AND PER SHARE DATA:
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales $33,945 $30,128 $35,936 $24,588 $15,554
Cost of goods sold 24,293 20,744 23,303 17,220 11,690
------- ------- ------- ------- -------
Gross profit 9,652 9,384 12,633 7,368 3,864
Selling, general and administrative
expenses 5,641 4,870 5,424 3,879 2,465
------- ------- ------- ------- -------
Operating earnings 4,011 4,514 7,209 3,489 1,399
Income tax expense 1,220 1,424 2,807 1,229 437
------- ------- ------- ------- -------
Net earnings $ 1,850 $ 2,158 $ 4,304 $ 1,775 $ 672
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Earnings per share $ .28 $ .31 $ .68 $ .41 $ .16
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Weighted average common shares
outstanding (1) 6,644 6,930 6,297 4,287 4,166
------- ------- ------- ------- -------
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital (1) $24,784 $25,311 $20,438 $ 5,883 $ 3,457
Total assets (1) 44,985 42,315 36,380 18,494 10,983
Total debt (1) 16,444 13,510 527 6,561 4,237
Stockholder's equity (1) 24,371 24,113 21,955 6,342 3,762
</TABLE>
(1) On April 19, 1995, the Company sold 2,530,000 shares of Class A common stock
at $5.25 per share in connection with its initial public offering. The
$11.3 million net proceeds from this offering were used to pay off the bank
line of credit, to retire long-term debt and to expand inventory.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company distributes a wide variety of transistors, diodes and other
semiconductors and optoelectronic devices to other electronic distributors,
contract electronic manufacturers (CEMs) and original equipment manufacturers
(OEMs) who incorporate them in their products.
The following table sets forth, for the periods indicated, certain operating
amounts and ratios:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Net sales $33,945 $30,128 $35,936
Cost of goods sold 24,293 20,744 23,303
% of net sales 71.6% 68.9% 64.8%
Gross profit 9,652 9,384 12,633
% of net sales 28.4% 31.1% 35.2%
Selling, general and administrative expenses 5,641 4,870 5,424
% of net sales 16.6% 16.2% 15.1%
Operating earnings 4,011 4,514 7,209
% of net sales 11.8% 15.0% 20.1%
Income tax expense 1,220 1,424 2,807
Effective tax rate as a % of earnings
before income taxes 39.7% 39.8% 39.5%
Net earnings 1,850 2,158 4,304
% of net sales 5.5% 7.2% 12.0%
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Net sales for the year ended December 31, 1997 increased $3,817,000
or 12.7% to $33,945,000 from $30,128,000 from the year ended December 31, 1996.
The increase in net sales during 1997 was attributable principally to an
increase in the volume of products sold of $6.1 million, partially offset by net
price reductions of approximately $3.2 million. The Company also experienced an
increase in export sales volume of approximately $1.0 million and a $426,000
reduction in sales returns and allowances from customers. The increase in net
sales was principally a result of sales made to new customers during 1997.
Cost of goods sold increased by $3,549,000 to $24,293,000 for the
year ended December 31, 1997, an increase of 17.1% from the year ended
December 31, 1996. Early in 1996, the demand for discrete semiconductors was
greater than the supply. The intense competition for available supply of
discrete semiconductors caused the Company to purchase products for prices
that were higher than normal market conditions. As the high priced inventory
was sold in late 1996 and all of 1997, it caused cost of goods sold to
increase as a percentage of sales. Gross profit on net sales increased by
$268,000 to $9,652,000 for the year ended December 31, 1997 from $9,384,000
from the year ended December 31, 1996, and decreased, as a percentage of net
sales, to 28.4% from 31.1%.
Gross profit as a percentage of net sales decreased to 28.4% for the
year ended December 31, 1997 from
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<PAGE>
31.1% for the year ended December 31, 1996 principally as a result of lower
selling prices due to the competitive market place and as a result of higher
export sales which usually have a lower profit margin than domestic sales.
Selling, general and administrative expenses increased by $771,000 or
15.8% in 1997 as compared to 1996. The increase was attributable to increased
payroll costs principally as a result of the geographic expansion of its direct
sales force and the addition of sales support staff. The increase in net sales
resulted in an increase in commissions paid to both sales employees and
independent sales representatives. In addition, management decided to take a
one-time impairment charge in connection with the abandonment of the Company's
prior computer software system in the amount of $163,000. Selling, general and
administrative expenses, as a percentage of net sales, increased to 16.6% for
the year ended December 31, 1997 compared to 16.2% for the year ended December
31, 1996
Operating earnings decreased by $503,000 or 11.1% between the years
ended December 31, 1997 and 1996, and decreased as a percentage of net sales to
11.8% from 15.0%. Operating earnings decreased principally as a result of
increased cost of sales and increases in selling, general and administrative
expenses as described above.
Interest expense, net for the year ended December 31, 1997 increased
$14,000 compared to the year ended December 31, 1996. Net interest expense as a
percentage of net sales, decreased to 2.8% for the year ended December 31, 1997
compared to 3.1% for the year ended December 31, 1996. During 1997, interest
expense resulted from borrowings incurred to finance increased inventory levels,
trade receivables, computer software, office space and equipment in the Taiwan
office and to finance the repurchase of 487,113 shares of the Company's Class A
Common Stock.
Income taxes were $1,220,000 for the year ended December 31, 1997,
resulting in an effective tax rate of 39.7%, compared to $1,424,000 for the year
ended December 31, 1996, an effective tax rate of 39.8%.
The Company had net earnings of $1,850,000 for the year ended
December 31, 1997 as compared with net earnings of $2,158,000 for the year ended
December 31, 1996, a decrease of $308,000 or 14.3% for the reasons discussed
above. Net earnings as a percentage of net sales decreased to 5.5% from 7.2%.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Net sales for the year ended December 31, 1996 were $30,128,000
compared with net sales for the year ended December 31, 1995 of $35,936,000,
a decrease of $5,808,000 or 16.2%. This decrease in net sales during 1996 was
attributable principally to a decline in the Company's domestic sales volume
of approximately $3,719,000. Net price reductions accounted for approximately
$757,000 of the net sales decrease and had a negative impact on gross profit.
For most of 1995, the demand for discrete semiconductors was greater than the
supply. The intense competition for the available supply of discrete
semiconductors allowed the Company to sell its products for prices that were
higher than normal market conditions. A decrease in export sales of
$1,197,000 also contributed to the decline in net sales. The Company has
continued to add new customers during 1996, but at a slower rate than during
1995. The decline in net sales was principally a result of an industry wide
decline in demand for discrete semiconductors.
Cost of goods sold decreased by $2,559,000 to $20,744,000 for the
year ended December 31, 1996, a decrease of 11.0% from the year ended December
31, 1995. Consistent with the decrease in net sales, the Company was able to
reduce the cost of goods sold, although at a lesser rate than the decrease in
sales due to the cost incurred in earlier periods to acquire the products sold
during 1996. Gross profit on net sales decreased by $3,249,000 to $9,384,000 for
the year ended December 31, 1996 from $12,633,000 for the same period in 1995,
and decreased as a percentage of net sales to 31.1% from 35.2%.
Selling, general and administrative expenses decreased by $554,000
or 10.2% for 1996 compared to 1995. These expenses, as a percentage of net
sales, increased to 16.2% for the year ended December 31, 1996 compared to
15.1% for the year ended December 31, 1995. The Company was able to reduce
selling, general and administrative expenses during 1996, principally by
eliminating non-essential expenditures and not replacing employees who left
the Company.
Operating earnings decreased by $2,695,000 or 37.4% between the
years ended December 31, 1996, and
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<PAGE>
1995, and decreased as a percentage of net sales to 15.0% from 20.1%.
Operating earnings decreased principally as a result of decreases in both
domestic and export sales and market price reductions. The decrease in
revenue was offset somewhat by a reduction in cost of goods sold and selling,
general and administrative expenses.
Interest expense for the year ended December 31, 1996 increased
$652,000 compared to the year ended December 31, 1995. This increase is
primarily due to increased borrowings made to finance the increase in
inventory during the year ended December 31, 1996 compared to the year ended
December 31, 1995.
Income taxes were $1,424,000 for the year ended December 31, 1996,
representing an effective tax rate of 39.8%, compared to $2,807,000 for the
year ended December 31, 1995, an effective tax rate of 39.5%.
The Company had net earnings of $2,158,000 for the year ended
December 31, 1996 as compared with net earnings of $4,304,000 for the year
ended December 31, 1995, a decrease of $2,146,000 or 49.9% for the reasons
discussed above. Net earnings as a percentage of net sales decreased to 7.2%
from 12.0%.
SUPPLY AND DEMAND ISSUES
The year 1995 was exceptionally good for the Company and other
discrete suppliers. For most of 1995, the demand for discrete semiconductors,
in general, was greater than the supply. The intense competition for the
available supply of discrete semiconductors pushed the prices higher than in
normal market conditions. The Company, from time to time, could not fulfill
some sales orders because of the limited supply of certain of these products.
The supply shortage of discrete semiconductors in 1995 caused many
customers to order more than their needs to prevent future shortages and
suppliers expanded their capacity to meet the strong market demands. However,
with a weak market demand in the later part of 1996, many distributors and
end-users had built-up excessive inventories and as a result, the majority of
Taitron's customers were struggling with inventory adjustments and
corrections. To help customers readjust their inventories, Taitron
strategically decided to accept more returns and order cancellations than it
normally would.
In 1996, suppliers increased capacity and the weak demand left
suppliers with large amounts of uncommitted products. During 1996 and
continuing into 1997, the Company decided to take advantage of this situation
by intensifying its long standing purchasing strategy by making opportunistic
purchases of suppliers' uncommitted capacity, at favorable pricing. The
Company believes this strategy of opportunistic purchasing will posture the
Company to be price competitive, while still maintaining acceptable profit
margins.
As a result, the Company's inventory has increased significantly
during 1996 and continuing into 1997, leading to the leasing of additional
warehouse space in 1996 and full utilization of the space in 1997. The
Company's inventory level peaked in May 1996 at $39.2 million and has
subsequently reduced to $35.8 million at December 31, 1997. The Company is
focusing its efforts to maintain or gradually reduce its inventory while
maintaining adequate stock to accommodate the Company's future growth, if
any, when demand increases. In order to finance these strategic purchases,
the revolving debt increased to $14.5 million in June 1996 and has
subsequently been reduced to $13.0 million at December 31, 1997.
Taitron's competitive edge is its ability to fill customer orders
immediately from stock held in inventory. Thus, management has structured
inventory levels in such a way as to poise the Company to take advantage of a
recovery in the discrete semiconductor market. At the same time, if the
market recovery is slow in taking place, inventory levels should not impose
an unwarranted financial burden on the Company's earnings.
18
<PAGE>
Management believes, that the strategies it has followed with its
customers and suppliers have cemented its relationships which will benefit
the Company in the future. The Company's core strategy has been to maintain a
substantial inventory of discrete semiconductors purchased at prices
generally lower than those commonly available to its competitors. The Company
has been able to offer its products to customers at competitive prices and
offers other incentives to customers, such as its no hassle returns policy,
which distinguishes the Company from most of its competitors.
Several of the matters discussed under Supply and Demand Issues
contain forward looking statements that involve risks and uncertainties with
respect to growth and relationships with suppliers. Many factors could cause
actual results to differ materially from these statements. See "BUSINESS -
Cautionary Statements and Risk Factors - RELATIONSHIP WITH SUPPLIERS."
LIQUIDITY AND CAPITAL RESOURCES
Since 1993, the Company has satisfied its liquidity requirements
principally through cash generated from short-term commercial loans and the
sale of equity securities, including the initial public offering of its
common stock in April 1995. The Company's cash flows provided by (used in)
operating, financing and investing activities for the years ended December 31,
1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(In thousands)
-----------------------------------
1997 1996 1995
------ -------- -------
<S> <C> <C> <C>
Operating activities.......................................... $ (478) $(13,658) $(4,010)
Investing activities.......................................... (998) (171) (179)
Financing activities.......................................... 1,398 12,984 5,275
</TABLE>
In positioning itself as a "discrete components superstore," the
Company has been required to significantly increase its inventory levels. As
a consequence, inventory has grown from $27.8 million at December 31, 1995 to
$35.8 million at December 31, 1997.
The discrete semiconductor products distributed by the Company are
mature products, used in a wide range of commercial and industrial products
and industries. As a result, the Company has never experienced any material
amounts of product obsolescence. The Company also attempts to control its
inventory risks by matching large customer orders with simultaneous orders to
suppliers. Nonetheless, the high levels of inventory carried by the Company
increase the risks of price fluctuations and product obsolescence.
Investment activities consisted of the purchase of property and
equipment, principally computer equipment. Investment in computer equipment
was $85,000, $135,000 and $424,000 for the years ended December 31, 1995,
1996 and 1997. During 1997, the Company invested $519,000 in its Taiwan
office, principally for acquisition of office and warehouse space. The
Company expects to invest an additional amount of approximately $200,000 per
year over the next several years in hardware and software for maintaining and
improving its new Oracle Applications System, which is scheduled to be
operational in the second quarter of 1998. See "BUSINESS - Management
Information Systems."
On April 19, 1995, the Company completed its initial public
offering of 2,530,000 shares of its Class A Common Stock. The net proceeds of
approximately $11.3 million were used during 1995 to retire bank debt in the
amount of $5.4 million, to repay $670,000 in long-term mortgage debt, to
expand inventory and for general corporate purposes.
In May 1996, the Company issued a Convertible Subordinated Note
(the Note) for $3,000,000, with interest at 8% payable annually and the
principal is due May 2001. The Note is convertible into the Company's Class A
Common Stock at the conversion price of $5.25 per share. These securities
have not been registered under the Securities Act of 1933, as amended (the
Act), and the Company issued these securities in reliance upon exemption from
registration provided by Regulation S of the Act.
19
<PAGE>
In May 1997, the Company replaced its $15 million revolving line
of credit that had been in place since March 1996. The new revolving line of
credit provides the Company with up to $16 million for operating purposes and
up to an additional $4 million for business acquisition purposes. Both
facilities mature on June 2, 1999. The agreement governing these credit
facilities contains covenants that require the Company to be in compliance
with certain financial ratios.
The Company believes that funds generated from operations and the
revolving line of credit will be sufficient to finance its working capital
and capital expenditures requirements for the foreseeable future.
YEAR 2000 ISSUES
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000"
issue and is developing an implementation plan to resolve the issue. The Year
2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather the 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications to
existing software and converting to an Oracle Applications System (which is
Year 2000 compliant), the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted.
ASIAN ECONOMIC ISSUES
Many of the Company's suppliers have their manufacturing
facilities in countries who's economies are experiencing financial problems.
Mounting trade deficits have sent interest rates soaring and local currencies
plunging. The US dollar's rise compared with Asian currencies may reduce
exports to Asia in the future. During 1997, the Company sold $1.9 million or
5.6% of net sales to Asian customers and most of the products purchased by
the Company are manufactured in Asia. Management believes that the decline in
Asian currencies may actually benefit the Company in the short-term by
providing an opportunity for the Company to purchase products at lower prices.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements as of December 31, 1997, 1996 and 1995 and for the years
then ended and the Independent Auditors' Report are included on pages F-1 to
F-14 of this Annual Report on Form 10-K.
INDEX TO FINANCIAL STATEMENTS
TAITRON COMPONENTS INCORPORATED
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report........................................................................F-1
Balance Sheets at December 31, 1997 and 1996........................................................F-2
Statements of Earnings for the Years Ended December 31, 1997, 1996 and 1995.........................F-3
Statements of Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995.............F-4
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.......................F-5
Notes to Financial Statements for the Years Ended December 31, 1997, 1996 and 1995..................F-6
</TABLE>
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Taitron Components Incorporated:
We have audited the accompanying balance sheets of Taitron Components
Incorporated as of December 31, 1997 and 1996 and the related statements of
earnings, shareholders' equity and cash flows for each of the years in the
three year period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Taitron Components
Incorporated as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Los Angeles, California
February 11, 1998
F-1
<PAGE>
TAITRON COMPONENTS INCORPORATED
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 163,000 $ 300,000
Trade accounts receivable, net 5,398,000 4,109,000
Inventory, net 35,757,000 35,168,000
Prepaid expenses 169,000 221,000
Other current assets 436,000 222,000
----------- -----------
Total current assets 41,923,000 40,020,000
Property and equipment, net 2,309,000 1,660,000
Deferred income taxes 716,000 612,000
Other assets 37,000 23,000
----------- -----------
Total assets $44,985,000 $42,315,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $12,969,000 $10,017,000
Trade accounts payable 3,235,000 3,737,000
Accrued liabilities 935,000 955,000
----------- -----------
Total current liabilities 17,139,000 14,709,000
Long-term debt, less current portion 3,475,000 3,493,000
----------- -----------
Shareholders' equity:
Preferred stock, $.001 par value. Authorized
5,000,000 shares. None issued or outstanding - -
Class A common stock, $.001 par value.
Authorized 20,000,000 shares; 5,685,062 and
6,167,341 shares issued and outstanding at
December 31, 1997 and 1996, respectively 5,000 6,000
Class B common stock, $.001 par value.
Authorized, issued and outstanding 762,612
shares at December 31, 1997 and 1996 1,000 1,000
Additional paid-in capital 12,997,000 14,531,000
Foreign currency translation adjustment (57,000) -
Retained earnings 11,425,000 9,575,000
----------- -----------
Total shareholders' equity 24,371,000 24,113,000
----------- -----------
Total liabilities and shareholders' equity $44,985,000 $42,315,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
TAITRON COMPONENTS INCORPORATED
Statements of Earnings
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $33,945,000 $30,128,000 $35,936,000
Cost of goods sold 24,293,000 20,744,000 23,303,000
----------- ----------- -----------
Gross profit 9,652,000 9,384,000 12,633,000
Selling, general and administrative expenses 5,641,000 4,870,000 5,424,000
----------- ----------- -----------
Operating earnings 4,011,000 4,514,000 7,209,000
Interest expense, net 956,000 942,000 128,000
Other income (15,000) (10,000) (30,000)
----------- ----------- -----------
Earnings before income taxes 3,070,000 3,582,000 7,111,000
Income tax expense 1,220,000 1,424,000 2,807,000
----------- ----------- -----------
Net earnings $ 1,850,000 $ 2,158,000 $ 4,304,000
----------- ----------- -----------
----------- ----------- -----------
Earnings Per Share:
Basic $ .28 $ .31 $ .68
----------- ----------- -----------
----------- ----------- -----------
Diluted $ .27 $ .31 $ .68
----------- ----------- -----------
----------- ----------- -----------
Weighted Average Common Shares Outstanding:
Basic 6,643,975 6,929,953 6,297,453
----------- ----------- -----------
----------- ----------- -----------
Diluted 6,732,856 7,003,883 6,365,779
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
TAITRON COMPONENTS INCORPORATED
Statement of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
COMMON STOCK CLASS A COMMON STOCK CLASS B COMMON STOCK
-------------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 4,399,953 $ 3,229,000 - $ - - $ -
Issuances of common stock - - 2,530,000 3,000 - -
Reclassification of common stock (4,399,953) (3,229,000) 4,399,953 4,000 - -
Exchange of Class A for
Class B common stock - - (762,612) (1,000) 762,612 1,000
Net earnings - - - - - $1,000
---------- ----------- --------- -------- ------- ------
Balances at December 31, 1995 - - 6,167,341 $ 6,000 762,612 $1,000
Net earnings - - - - - -
---------- ----------- --------- -------- ------- ------
Balances at December 31, 1996 - - 6,167,341 $ 6,000 762,612 $1,000
Exercise of stock options - - 4,834 - - -
Repurchase of common stock - - (487,113) (1,000) - -
Tax effect of disqualifying disposition
of stock options - - - - - -
Net earnings - - - - - -
Foreign currency translation adjustment - - - - - -
---------- ----------- --------- -------- ------- ------
Balances at December 31, 1997 - $ - 5,685,062 $ 5,000 762,612 $1,000
---------- ----------- --------- -------- ------- ------
---------- ----------- --------- -------- ------- ------
FOREIGN
CURRENCY TOTAL
ADDITIONAL RETAINED TRANSLATION SHAREHOLDERS'
PAID-IN CAPITAL EARNINGS ADJUSTMENT EQUITY
--------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 $ - $ 3,113,000 $ - $ 6,342,000
Issuances of common stock 11,306,000 - - 11,309,000
Reclassification of common stock 3,225,000 - - -
Exchange of Class A for
Class B common stock - - - -
Net earnings - 4,304,000 - 4,304,000
--------------- ----------- ----------- -------------
Balances at December 31, 1995 $14,531,000 $ 7,417,000 - $21,955,000
Net earnings - 2,158,000 - 2,158,000
--------------- ----------- ----------- -------------
Balances at December 31, 1996 $14,531,000 $ 9,575,000 - $24,113,000
Exercise of stock options 11,000 - - 11,000
Repurchase of common stock (1,548,000) - - (1,549,000)
Tax effect of disqualifying disposition
of stock options 3,000 - - 3,000
Net earnings - 1,850,000 - 1,850,000
Foreign currency translation adjustment - - (57,000) (57,000)
--------------- ----------- ----------- -------------
Balances at December 31, 1997 $12,997,000 $11,425,000 $(57,000) $24,371,000
--------------- ----------- ----------- -------------
--------------- ----------- ----------- -------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
TAITRON COMPONENTS INCORPORATED
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,850,000 $ 2,158,000 $ 4,304,000
------------ ------------ ------------
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 348,000 139,000 162,000
Deferred income taxes (104,000) (212,000) (270,000)
Changes in assets and liabilities:
Trade accounts receivable (1,288,000) 1,252,000 (1,055,000)
Inventory (589,000) (7,416,000) (15,492,000)
Prepaid expenses and other current assets (42,000) (351,000) 16,000
Other assets (14,000) (22,000) 18,000
Trade accounts payable (502,000) (9,125,000) 8,992,000
Accrued liabilities (139,000) (81,000) (685,000)
Other 2,000 - -
------------ ------------ ------------
Total adjustments (2,328,000) (15,816,000) (8,314,000)
------------ ------------ ------------
Net cash used in operating activities (478,000) (13,658,000) (4,010,000)
------------ ------------ ------------
Cash flows from investing activities - acquisition of property
and equipment (998,000) (171,000) (179,000)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) on long-term debt 12,950,000 13,000,000 (5,364,000)
Proceeds from exercise of stock options 11,000 - -
Tax effect of disqualifying dispositions of stock options 3,000 - -
Payments on long-term debt (10,017,000) (16,000) (670,000)
Proceeds from stock issuances - - 11,309,000
Repurchase of Company stock (1,549,000) - -
------------ ------------ ------------
Net cash provided by financing activities 1,398,000 12,984,000 5,275,000
------------ ------------ ------------
Impact of changes in exchange rates on cash (59,000) - -
Net increase (decrease) in cash and cash
equivalents (137,000) (845,000) 1,086,000
Cash and cash equivalents, beginning of year 300,000 1,145,000 59,000
------------ ------------ ------------
Cash and cash equivalents, end of year $ 163,000 $ 300,000 $ 1,145,000
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,008,000 $ 758,000 $ 296,000
Cash paid for income taxes $ 1,410,000 $ 1,710,000 $ 3,886,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
TAITRON COMPONENTS INCORPORATED
Notes to Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Taitron Components Incorporated ("Taitron" or the "Company") is a
"discrete components superstore," which distributes a wide variety of
transistors, diodes and other discrete semiconductors, optoelectronic
devices and passive components to other electronic distributors,
contract electronics manufacturers (CEMs) and to original equipment
manufacturers (OEM's), who incorporate these devices in their products. In
order to meet the rapid delivery requirements of its customers, the Company
maintains a significant inventory of discrete components.
CONCENTRATION OF RISK
A significant number of the products distributed by the Company are
manufactured in Taiwan, China, Korea and the Philippines. The purchase
of goods manufactured in foreign countries is subject to a number of
risks, including economic disruptions, transportation delays and
interruptions, foreign exchange rate fluctuations, imposition of tariffs
and import and export controls and changes in governmental policies, any
of which could have a material adverse effect on the Company's business
and results of operations.
The ability to remain competitive with respect to the pricing of
imported components could be adversely affected by increases in tariffs
or duties, changes in trade treaties, strikes in air or sea
transportation, and possible future United States legislation with
respect to pricing and import quotas on products from foreign countries.
For example, it is possible that political or economic developments in
China, or with respect to the United States relationship with China,
could have an adverse effect on the Company's business. The Company's
ability to remain competitive could also be affected by other government
actions related to, among other things, anti-dumping legislation and
international currency fluctuations. While the Company does not believe
that any of these factors adversely impact its business at present,
there can be no assurance that these factors will not materially
adversely affect the Company in the future. Any significant disruption
in the delivery of merchandise from the Company's suppliers,
substantially all of whom are foreign, could also have a material
adverse impact on the Company's business and results of operations.
Management estimates that over 60% of the Company's products are
produced in Asia.
CASH AND CASH EQUIVALENTS
Cash equivalents of $1,000 and $32,000 at December 31, 1997 and 1996,
respectively, consist of highly liquid investments with an original
maturity of 90 days or less. The Company considers all highly liquid
investments with an original maturity of 90 days or less to be cash
equivalents. Management of the Company maintains a relatively low cash
balance as cash is used to buy inventory and to repay debt in order to
reduce interest cost.
REVENUE RECOGNITION
Revenue is recognized upon shipment of the merchandise. Reserves for
sales allowances and customer returns are established based upon
historical experience and management's estimates as shipments are made.
Sales returns for the years ended December 31, 1997, 1996 and 1995
aggregated $1,110,000, $1,536,000 and $1,307,000, respectively.
F-6
<PAGE>
ALLOWANCE FOR SALES RETURNS AND DOUBTFUL ACCOUNTS
The allowance for sales returns and doubtful accounts was $135,000 at
December 31, 1997 and 1996.
INVENTORY
Inventory, consisting principally of products held for resale, is stated
at the lower of cost or market, using the first-in, first-out method.
The value presented in the accompanying financial statements is net of
valuation allowances of $1,291,000 and $988,000 at December 31, 1997 and
1996, respectively.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property and equipment are computed
principally on the accelerated and the straight-line methods using lives
from 5 to 7 years for furniture, machinery and equipment and 31.5 years
for building and building improvements.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on January 1, 1996.
This Statement requires that long-lived assets and certain identifiable
intangibles be 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. Adoption of this
Statement did not have a material impact on the Company's financial
position, results of operations, or liquidity.
STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No.25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense would be recorded
on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which
permits entities 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 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock options 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
Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which such temporary differences are expected to be recovered or
settled. Under SFAS No. 109, 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.
F-7
<PAGE>
FINANCIAL INSTRUMENTS
The estimated fair values of cash and cash equivalents, accounts
receivable, accounts payable, and accrued liabilities approximate their
carrying value because of the short term maturity of these instruments.
The fair value of long-term debt approximates its carrying value as the
interest rates are comparable to rates currently offered to the Company
for similar debt instruments with similar maturities. All financial
instruments are held for purposes other than trading.
NET EARNINGS PER SHARE
On December 31, 1997, the Company adopted the provisions of SFAS No.
128, "Earnings Per Share" which replaces the presentation of primary
earnings per share with a presentation of basic earnings per share and
replaces the presentation of fully diluted earnings per share with
diluted earnings per share. Basic earnings per share is computed by
dividing net income available to common shareholders by the
weighted-average number of common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company. Diluted
earnings per share is computed similarly to fully diluted earnings per
share pursuant to APB Opinion No. 15. Earnings per share for the years
ended December 31, 1996 and 1995 have been restated to comply with SFAS
No. 128.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's division in Taiwan, which was
established in 1997, are translated into United States dollars. Balance
sheet accounts are translated at year-end or historical rates while
income and expenses are translated at weighted-average exchange rates
for the year. Translation gains or losses related to net assets are
shown as a separate component of shareholders' equity. Gains and losses
resulting from realized foreign currency transactions (transactions
denominated in a currency other than the entities' functional currency)
are included in operations. Such transactional gains and losses are
immaterial to the consolidated financial statements for 1997.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 financial statement presentation.
USE OF ESTIMATES
The Company's management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from these estimates.
(2) PROPERTY AND EQUIPMENT
Property and equipment, at cost, is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Land $ 474,000 $ 361,000
Building and improvements 1,479,000 1,139,000
Furniture and equipment 514,000 393,000
Computer and test equipment 570,000 309,000
---------- ----------
3,037,000 2,202,000
Less accumulated depreciation and amortization 728,000 542,000
---------- ----------
$2,309,000 $1,660,000
---------- ----------
---------- ----------
</TABLE>
F-8
<PAGE>
(3) LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Second trust deed loan payable in monthly installments of $4,390, bearing
interest at the rate of 6.359% per annum, due December 1, 2013 and
guaranteed by certain officers of the Company $ 494,000 $ 510,000
Revolving line of credit, providing maximum borrowings of $20 million and
$15 million at December 31, 1997 and 1996, respectively. The line expires
June 1999 12,950,000 10,000,000
8% convertible subordinated debenture interest due May 18, 2001 3,000,000 3,000,000
----------- -----------
16,444,000 13,510,000
Less current portion 12,969,000 10,017,000
----------- -----------
$ 3,475,000 $ 3,493,000
----------- -----------
----------- -----------
</TABLE>
Minimum future payments of long-term debt are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31:
1998 $ 19,000
1999 12,970,000
2000 21,000
2001 3,022,000
2002 24,000
Thereafter 388,000
-----------
$16,444,000
-----------
-----------
</TABLE>
UNSECURED REVOLVING LINE OF CREDIT
On May 6, 1997, the Company replaced its $15 million revolving line of
credit with a new revolving line of credit facility which provides the
Company with up to $16 million for operating purposes and up to an
additional $4 million for business acquisition purposes, which matures
on June 2, 1999. The agreement governing these credit facilities
contains covenants that require the Company to be in compliance with
certain financial ratios. Borrowings on the line of credit are secured
by substantially all of the Company's assets.
Both the old and new revolving lines of credit contain security
agreements which essentially cover all assets of the Company and bear
interest at the bank's prime rate (8.5% at December 31, 1997 and 1996)
or at the option of the Company, at LIBOR (weighted average 0f 5.65% and
5.57% at December 31, 1997 and 1996 respectively) plus 1.375% after May 6,
1997 and 1.5% prior to that date.
CONVERTIBLE SUBORDINATED DEBENTURE
In May 1996, the Company issued a Convertible Subordinated Debenture
(the Note) for $3,000,000 with interest at 8% payable annually and the
principal due May 2001. The Note is convertible into the Company's Class A
Common Stock at the conversion price of $5.25 per share, the market
price of the stock on the date of issuance. These securities have not
been registered under the Securities Act of 1933, as amended (the Act),
in the belief that the securities are exempt from such registration
under Regulation S of the Act.
F-9
<PAGE>
(4) SHAREHOLDERS' EQUITY
In March 1995, the Board of Directors authorized the filing of a
registration statement for an initial public offering of the Company's
common stock. In connection with the initial public offering, the
Company recorded a .891-for-1 reverse stock split of its common stock
outstanding at December 31, 1994. Accordingly, all references to the
number of shares outstanding have been adjusted to give effect to the
aforementioned reverse stock split.
Additionally, the Company:
- Authorized the issuance of up to 5,000,000 shares of newly authorized
preferred stock, par value $.001 per share. The terms of the shares
are subject to the discretion of the Board of Directors.
- Authorized the issuance of up to 20,000,000 shares of newly
authorized Class A common stock, par value $.001 per share. Each
holder of Class A common stock is entitled to one vote for each share
held.
- Authorized the issuance of 762,612 shares of newly created Class B
common stock, par value $.001 per share. Each holder of Class B
common stock is entitled to ten votes for each share held. The shares
of Class B common stock are convertible at any time at the election
of the shareholder into one share of Class A common stock, subject to
certain adjustments.
- Reclassified all of the shares of the Company's common stock
outstanding at December 31, 1994 for an equal number of shares of
Class A common stock.
- Authorized the exchange of all Class A common stock (762,612 shares)
held by the Chief Executive Officer/Director for an equal number of
shares of Class B common stock. This exchange was effected during
1995.
On April 19, 1995, the Company sold 2,530,000 shares of Class A common
stock at $5.25 per share in connection with its initial public offering.
The proceeds from this offering aggregated approximately $11.3 million,
net of approximately $2 million of issuance costs, which proceeds were
used to pay off the previous bank line of credit, to retire long-term
debt, to expand inventory and for general corporate purposes.
During 1997 the Company repurchased 487,113 shares of its Class A Common
Stock on the open market for $1,549,000 in the aggregate and permanently
retired such shares.
(5) INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ 1,008,000 $ 1,272,000 $ 2,457,000
State 316,000 392,000 620,000
------------ ------------ ------------
1,324,000 1,664,000 3,077,000
Deferred:
Federal (86,000) (197,000) (220,000)
State (18,000) (43,000) (50,000)
------------ ------------ ------------
(104,000) (240,000) (270,000)
------------ ------------ ------------
$ 1,220,000 $ 1,424,000 $ 2,807,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The actual income tax expense differs from the "expected" tax expense
computed by applying the Federal corporate tax rate of 34% to earnings
before income taxes as follows:
F-10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
"Expected" income tax expense $ 1,044,000 $ 1,218,000 $ 2,418,000
State tax expense, net of Federal benefit 190,000 220,000 376,000
Other (14,000) (14,000) 13,000
------------ ----------- ------------
$ 1,220,000 $ 1,424,000 $ 2,807,000
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
The tax effects of temporary differences which give rise to significant
portions of the deferred tax assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------
DEFERRED TAX ASSETS: 1997 1996
----------------- ------------------
<S> <C> <C>
Depreciation $ - $ 14,000
Inventory reserves 455,000 341,000
Section 263a adjustment 150,000 142,000
Allowances for bad debts and returns 84,000 54,000
Accrued expenses 49,000 39,000
Other - 22,000
----------------- ------------------
Total deferred tax assets 738,000 612,000
Deferred tax liability - depreciation (22,000) -
----------------- ------------------
Net deferred tax assets $ 716,000 $ 612,000
----------------- ------------------
----------------- ------------------
</TABLE>
Based upon the level of historical taxable earnings and projections of
future taxable earnings over the periods in which the temporary
differences are deductible, management has concluded that, as of
December 31, 1997, it is more likely than not that the Company will
realize the benefits of these deductible differences.
(6) 401(K) PROFIT SHARING PLAN
In January 1995, the Company implemented a defined contribution 401(k)
profit sharing plan pursuant to Section 401 of the Internal Revenue Code
(the Code) covering all employees of the Company. Participants once
eligible, as defined by the plan, may contribute up to 15% of their
compensation, but not in excess of the maximum allowed under the Code.
The plan provides for a matching contribution at the discretion of the
Company which vests as defined by the plan. For the years ended December
31, 1997, 1996 and 1995 employer matching contributions aggregated
approximately $29,000, $30,000 and $24,000, respectively. The plan
purchased 28,666 and 28,991 shares of the Company's common stock on the
open market for cash consideration of approximately $97,000 and $135,000
during the year ended December 31, 1997 and 1996, respectively.
F-11
<PAGE>
(7) STOCK OPTIONS AND WARRANTS
In March 1995, the Company established the 1995 Stock Incentive Plan
(the Plan) expiring in March, 2005. The Plan provides for the issuance
of an aggregate of 440,000 incentive stock options, nonstatutory options
or stock appreciation rights (SAR's) to directors, officers and other
employees of the Company. Under the Plan, incentive stock options may be
granted at prices equal to at least the fair market value of the
Company's Class A common stock at the date of grant. Nonstatutory
options and stock appreciation rights may be granted at prices equal to
at least 85% and 100%, respectively, of the fair market value of the
Company's Class A common stock at the date of grant. Outstanding options
and rights vest ratably over three years commencing one year from the
date of grant and are subject to termination provisions as defined in
the Plan. The Plan also provides for automatic grants of nonstatutory
options to purchase 5,000 shares of Class A common stock to all members
of the committee administering the Plan, upon their initial election to
such committee and each year thereafter. The exercise price of these
options will be equal to the fair market value of the Company's Class A
common stock at the date of grant.
In November 1996, the Company gave each employee who held options issued
during 1995 with exercise prices of $5.25 and $7.125 the right to
receive, in place of such options, an amended option for half the shares
covered by the original option but a with reduced exercise price of
$2.25 (the market price on November 21, 1996).
In connection with the Company's initial public offering, the Company
issued warrants exercisable over a period of four years commencing April
19, 1996 to purchase 220,000 shares of the Company's Class A common
stock at a price of $6.30, which is 120% of the initial public offering
price.
In April 1995, the Company granted 6,600 stock appreciation rights to
certain employees at an exercise price of $5.25. Compensation expense
related to these rights was $3,800, $1,200 and $13,000 in 1997, 1996 and
1995, respectively.
The fair value of options, SAR's and warrants used to compute pro forma
net income and earnings per share disclosures is the estimated present
value at grant date using the Black-Scholes option-pricing model with
the following weighted average assumptions for 1997, 1996 and 1995:
Dividend yield of 2%; expected volatility of 40%; a risk free interest
rate of approximately 6% and an expected holding period of five years.
The incremental fair value of the modified options substituted for
options issued during 1995, used to compute pro forma net income and
earning per share disclosures was determined using the Black-Scholes
option-pricing model with the following weighted average assumptions:
dividend yield of 2%; expected volatility of 40%; a risk free interest
rate of approximately 6%; and an expected holding period of 3.5 years,
adjusted to reflect the remaining period to maturity of the modified
options.
The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation", but applies Accounting
Principles Board Opinion No. 25 and related interpretations in
accounting for its Plan SAR's and warrants. If the Company had elected
to recognize compensation cost based on the fair value at the grant
dates for awards under the Plan SAR's and warrants (including the
modified awards), consistent with the method prescribed by SFAS No. 123,
net earnings and earnings per share would have been changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net earnings As reported $1,850,000 $2,158,000 $4,304,000
Pro forma $1,482,000 $1,838,000 $3,302,000
Diluted Earnings per share As reported $ .27 $ .31 $ .68
Pro forma $ .22 $ .26 $ .52
</TABLE>
F-12
<PAGE>
The disclosure of compensation cost under this pronouncement may not be
representative of the effects on net earnings for future years. Stock
option and SAR activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
------------ ----------------
<S> <C> <C>
Balance at December 31, 1994 N/A N/A
Granted 345,600 $ 6.44
Exercised - -
Forfeited (16,300) 6.44
------------- ----------
Balance at December 31, 1995 329,300 6.44
------------- ----------
Granted 162,050 2.34
Exercised - -
Forfeited (35,200) 6.44
Canceled (294,100) 6.44
------------- ----------
Balance at December 31, 1996 162,050 2.34
------------- ----------
Granted 253,400 2.51
Exercised (4,834) 2.25
Forfeited (33,066) 2.50
Canceled - -
------------- ----------
Balance at December 31, 1997 377,550 $2.44
------------- ----------
------------- ----------
</TABLE>
The weighted average fair value of options granted in 1997, 1996 and
1995 was $.94, $.76 and $3.15, respectively.
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $2.25 to $3.25 and
19 months, respectively.
At December 31, 1997, 1996 and 1995, the number of options exercisable
was 193,006, 49,017 and none, respectively, and weighted average
exercise prices of those options were $2.36, $2.25 and $7.13,
respectively.
(8) NET EARNINGS PER SHARE
On December 31, 1997, the Company adopted the provisions of SFAS
No. 128, which requires the presentation of diluted and basic earnings
per share (EPS). The following data show a reconciliation of the
numerators and the denominators used in computing earnings per share and
the weighted average number of shares of dilutive potential common
stock.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995
------------------ ------------------ -----------------
<S> <C> <C> <C>
Net earnings available to common shareholders
used in basic EPS $ 1,850,000 $ 2,158,000 $ 4,304,000
------------------ ------------------ -----------------
Weighted average number of common shares
used in basic EPS 6,643,975 6,929,953 6,297,453
------------------ ------------------ -----------------
Basic EPS .27 .31 .68
------------------ ------------------ -----------------
Effect of dilutive securities:
Warrants - - 22,203
Options 88,881 73,930 46,123
------------------ ------------------ -----------------
Weighted number of common shares and dilutive
potential common shares used in diluted EPS 6,732,856 7,003,883 6,365,779
------------------ ------------------ -----------------
------------------ ------------------ -----------------
Diluted EPS $ .27 $ .31 $ .68
------------------ ------------------ -----------------
------------------ ------------------ -----------------
</TABLE>
Warrants on 220,000 shares of common stock were not included
in computing diluted EPS for the years ended December 31, 1997, 1996
and 1995 because their effects were antidilutive. Also, convertible
subordinated debentures convertible into 571,429 shares of common
stock were not included in computing diluted EPS for the years
ended December 31, 1997 and 1996 because their effects were
anti-dilutive.
F-13
<PAGE>
(9) COMMITMENTS AND CONTINGENCIES
The Company leases equipment under noncancelable operating leases
expiring on various dates through 2000. In May 1996, the Company
entered into a two year lease for additional warehouse space of
approximately 30,000 square feet located in Santa Clarita, California
which is now completely occupied by the Company. Rental expense for the
years ended December 31, 1997, 1996 and 1995 aggregated $160,000,
$112,000 and $46,000, respectively.
Future minimum rental commitments under noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended December 31:
1998 $ 157,000
1999 81,000
2000 1,000
---------------------
$ 239,000
---------------------
---------------------
</TABLE>
At December 31, 1997 and 1996, the Company had approximately none and
$300,000, respectively, in standby and commercial letters of credit
outstanding under the revolving line of credit agreement with the bank
(Note 3).
(10) VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
The following is the Company's schedule of activity in the valuation and
qualifying accounts and reserves for the years ended December 31, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF YEAR EXPENSES DEDUCTIONS OF YEAR
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Allowance for sales returns
and doubtful accounts:
1995 70,000 1,394,000 1,326,000 138,000
1996 138,000 1,540,000 1,543,000 135,000
1997 135,000 1,169,000 1,169,000 135,000
Inventory reserves:
1995 261,000 186,000 - 447,000
1996 447,000 541,000 - 988,000
1997 988,000 303,000 - 1,291,000
</TABLE>
F-14
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of
the Company will appear in the Proxy Statement of the Annual Meeting of
Shareholders under the caption "Election of Directors" and is
incorporated herein by this reference. The Proxy Statement will be filed
with the SEC within 120 days following December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear in
the Proxy Statement for the Annual Meeting of Shareholders under the
caption "Executive Compensation" and is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain
beneficial owners and management will appear in the Proxy Statement for
the Annual Meeting of Shareholders under the caption "Security Ownership
of Certain Beneficial Owners and Management" and is incorporated herein
by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related
transactions will appear in the Proxy Statement for the Annual Meeting
of Shareholders under the caption "Certain Relationships and Related
Transactions" and is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) LIST THE FOLLOWING DOCUMENTS FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS:
Reference is made to the Financial Statements provided under Item 8 of
this report.
(2) FINANCIAL STATEMENT SCHEDULES:
Reference is made to the Financial Data Schedule provided as Exhibit 27.
22
<PAGE>
(3) EXHIBITS:
3.1 Articles of Incorporation of Taitron Components Incorporated
(the Registrant).*
3.2 Bylaws of the Registrant.*
4.1 Specimen certificate evidencing Class A Common Stock of the
Registrant.*
4.2 Form of Underwriter's Warrant.*
10.1 Form of Director and Officer Indemnification Agreement.*
10.2 1995 Stock Incentive Plan.*
10.3 Form of Employment Agreement, dated as of January 1, 1995, by and
between the Registrant and Stewart Wang.*
10.4 Loan and Security Agreement, dated May 5, 1994, between the
Registrant and Union Bank.*
10.5 Loan Agreement, dated October 15, 1993, by and between the
Registrant and California Statewide Certified Development
Corporation.*
10.6 Wm Michaels Limited Regional Prototype Defined Contribution
Plan and Trust
10.7 Form of Sales Representative Agreement.*
10.8 Loan Agreement, dated June 16, 1995, between Registrant and
Union Bank.**
10.9 Convertible Subordinated Note Agreement, dated May 18, 1996, by
and between the Registrant and Tenrich Holdings.***
10.10 Lease Agreement, dated May 29, 1996, by and between Scott
Valencia Property Company as Lessor and Taitron Components
Incorporated, as Lessee for property located at 27827 Ave. Scott,
Santa Clarita, California 91355.***
10.11 Amended Loan Agreement and Note, dated January 2, 1997, between
Registrant and Union Bank. Amended Loan Agreement and Note, dated
March 13, 1997, between Registrant and Union Bank. *****
10.12 Business Loan Agreement and Addendum, dated May 6, 1997, between
the Registrant and Comerica Bank - California. ****
10.13 Master Revolving Note and Addendum, dated May 6, 1997, between
the Registrant and Comerica Bank - California. ****
10.14 Security Agreement, dated May 6, 1997, between the Registrant
and Comerica Bank - California. ****
23.1 Consent of KPMG Peat Marwick.
24.1 Power of Attorney (see page 24 of this Annual Report on Form
10-K).
27 Financial Data Schedule
------------------------------------------------------------------------
23
<PAGE>
* Incorporation by reference from Taitron Components Incorporated
Registration Statement on Form SB-2, Registration No. 33-90294-LA.
** Incorporation by reference from Taitron Components Incorporated
Form 10-KSB for the Fiscal year ended December 31, 1995.
*** Incorporated by reference from Taitron Components Incorporated
Form 10-QSB for the quarter ended June 30, 1996.
**** Incorporated by reference from Taitron Components Incorporated
Form 10-QSB for the quarter ended June 30, 1997.
***** Incorporated by reference from Taitron Components Incorporated
Form 10-KSB for the fiscal year ended December 31, 1996.
(b) REPORTS ON FORM 8-K:
None
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TAITRON COMPONENTS INCORPORATED
(Registrant)
By /s/ Stewart Wang
------------------------------
Stewart Wang
Its: Chief Executive Officer
Date: March 27, 1998
----------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Stewart Wang his attorney-in-fact and
agent, with full power of substitution, for him in any and all capacities, to
sign any amendments to this Annual Report, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitutes, may do or cause to be done by
virtue hereof.
In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Johnson Ku Chairman of the Board March 27, 1998
- ---------------------------
Johnson Ku
/s/ Stewart Wang Chief Executive Officer, President March 27, 1998
- --------------------------- and Director
Stewart Wang (Principal Executive Officer)
/s/ David M. Batt Chief Financial Officer March 27, 1998
- --------------------------- and Secretary
David M. Batt (Principal Financial and Accounting
Officer)
/s/ Richard Chiang Director March 27, 1998
- ---------------------------
Richard Chiang
/s/ Winston Gu Director March 27, 1998
- ---------------------------
Winston Gu
/s/ Felix Sung Director March 27, 1998
- ---------------------------
Felix Sung
</TABLE>
25
<PAGE>
WM MICHAELS LIMITED REGIONAL PROTOTYPE
DEFINED CONTRIBUTION PLAN AND TRUST
Copyright 1992 WM MICHAELS LIMITED
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
<TABLE>
<S> <C> <C>
ARTICLE II
TOP HEAVY PROVISIONS AND ADMINISTRATION
2.1 TOP HEAVY PLAN REQUIREMENTS 7
2.2 DETERMINATION OF TOP HEAVY STATUS 7
2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER 9
2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY 10
2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES 10
2.6 POWERS AND DUTIES OF THE ADMINISTRATOR 10
2.7 RECORDS AND REPORTS 10
2.8 APPOINTMENT OF ADVISERS 10
2.9 INFORMATION FROM EMPLOYER 10
2.10 PAYMENT OF EXPENSES 11
2.11 MAJORITY ACTIONS 11
2.12 CLAIMS PROCEDURE 11
2.13 CLAIMS REVIEW PROCEDURE 11
ARTICLE III
ELIGIBILITY
3.1 CONDITIONS OF ELIGIBILITY 11
3.2 EFFECTIVE DATE OF PARTICIPATION 11
3.3 DETERMINATION OF ELIGIBILITY 11
3.4 TERMINATION OF ELIGIBILITY 11
3.5 OMISSION OF ELIGIBLE EMPLOYEE 12
3.6 INCLUSION OF INELIGIBLE EMPLOYEE 12
3.7 ELECTION NOT TO PARTICIPATE 12
3.8 CONTROL OF ENTITIES BY OWNER-EMPLOYEE 12
ARTICLE IV
CONTRIBUTION AND ALLOCATION
4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION 12
4.2 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION 13
4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS 13
4.4 MAXIMUM ANNUAL ADDITIONS 16
4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS 21
4.6 TRANSFERS FROM QUALIFIED PLANS 21
4.7 VOLUNTARY CONTRIBUTIONS 22
4.8 DIRECTED INVESTMENT ACCOUNT 22
4.9 QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS 22
4.10 ACTUAL CONTRIBUTION PERCENTAGE TESTS 23
4.11 INTEGRATION IN MORE THAN ONE PLAN 23
ARTICLE V
VALUATIONS
5.1 VALUATION OF THE TRUST FUND 23
5.2 METHOD OF VALUATION 23
<PAGE>
ARTICLE VI
DETERMINATION AND DISTRIBUTION OF BENEFITS
6.1 DETERMINATION OF BENEFITS UPON RETIREMENT 23
6.2 DETERMINATION OF BENEFITS UPON DEATH 23
6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY 24
6.4 DETERMINATION OF BENEFITS UPON TERMINATION 24
6.5 DISTRIBUTION OF BENEFITS 26
6.6 DISTRIBUTION OF BENEFITS UPON DEATH 28
6.7 TIME OF SEGREGATION OR DISTRIBUTION 31
6.8 DISTRIBUTION FOR MINOR BENEFICIARY 31
6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN 31
6.10 PRE-RETIREMENT DISTRIBUTION 31
6.11 ADVANCE DISTRIBUTION FOR HARDSHIP 31
6.12 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS 32
6.13 SPECIAL RULE FOR NON-ANNUITY PLANS 32
ARTICLE VII
TRUSTEE
7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE 32
7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE 32
7.3 OTHER POWERS OF THE TRUSTEE 33
7.4 LOANS TO PARTICIPANTS 35
7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS 36
7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES 36
7.7 ANNUAL REPORT OF THE TRUSTEE 36
7.8 AUDIT 36
7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE 37
7.10 TRANSFER OF INTEREST 37
7.11 TRUSTEE INDEMNIFICATION 37
7.12 EMPLOYER SECURITIES AND REAL PROPERTY 37
ARTICLE VIII
AMENDMENT, TERMINATION, AND MERGERS
8.1 AMENDMENT 37
8.2 TERMINATION 38
8.3 MERGER OR CONSOLIDATION 38
ARTICLE IX
MISCELLANEOUS
9.1 EMPLOYER ADOPTIONS 38
9.2 PARTICIPANT'S RIGHTS 38
9.3 ALIENATION 38
9.4 CONSTRUCTION OF PLAN 39
9.5 GENDER AND NUMBER 39
9.6 LEGAL ACTION 39
9.7 PROHIBITION AGAINST DIVERSION OF FUNDS 39
9.8 BONDING 39
9.9 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE 39
9.10 INSURER'S PROTECTIVE CLAUSE 39
9.11 RECEIPT AND RELEASE FOR PAYMENTS 39
9.12 ACTION BY THE EMPLOYER 39
9.13 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY 40
9.14 HEADINGS 40
9.15 APPROVAL BY INTERNAL REVENUE SERVICE 40
9.16 UNIFORMITY 40
<PAGE>
9.17 PAYMENT OF BENEFITS 40
ARTICLE X
PARTICIPATING EMPLOYERS
10.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER 40
10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS 40
10.3 DESIGNATION OF AGENT 41
10.4 EMPLOYEE TRANSFERS 41
10.5 PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES 41
10.6 AMENDMENT 41
10.7 DISCONTINUANCE OF PARTICIPATION 41
10.8 ADMINISTRATOR'S AUTHORITY 41
10.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE 41
ARTICLE XI
CASH OR DEFERRED PROVISIONS
11.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION 41
11.2 PARTICIPANT'S SALARY REDUCTION ELECTION 42
11.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS 44
11.4 ACTUAL DEFERRAL PERCENTAGE TESTS 45
11.5 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS 46
11.6 ACTUAL CONTRIBUTION PERCENTAGE TESTS 49
11.7 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS 50
11.8 ADVANCE DISTRIBUTION FOR HARDSHIP 52
</TABLE>
<PAGE>
ARTICLE I
DEFINITIONS
As used in this Plan, the following words and phrases shall have the
meanings set forth herein unless a different meaning is clearly required by
the context:
1.1 "Act" means the Employee Retirement Income Security Act of 1974, as
it may be amended from time to time.
1.2 "Administrator" means the person(s) or entity designated by the
Employer pursuant to Section 2.4 to administer the Plan on behalf of the
Employer.
1.3 "Adoption Agreement" means the separate Agreement which is executed
by the Employer and accepted by the Trustee which sets forth the elective
provisions of this Plan and Trust as specified by the Employer.
1.4 "Affiliated Employer" means the Employer and any corporation which
is a member of a controlled group of corporations (as defined in Code Section
414(b)) which includes the Employer; any trade or business (whether or not
incorporated) which is under common control (as defined in Code Section
414(c)) with the Employer; any organization (whether or not incorporated)
which is a member of an affiliated service group (as defined in Code Section
414(m)) which includes the Employer; and any other entity required to be
aggregated with the Employer pursuant to Regulations under Code Section
414(0).
1.5 "Aggregate Account" means with respect to each Participant, the
value of all accounts maintained on behalf of a Participant, whether
attributable to Employer or Employee contributions, subject to the provisions
of Section 2.2.
1.6 "Anniversary Date" means the anniversary date specified in C3 of
the Adoption Agreement.
1.7 "Beneficiary" means the person to whom a share of a deceased
Participant's interest in the Plan is payable, subject to the restrictions of
Sections 6.2 and 6.6.
1.8 "Code" means the Internal Revenue Code of 1986, as amended or
replaced from time to time.
1.9 "Compensation" with respect to any Participant means one of the
following as elected in the Adoption Agreement. However, compensation for
any Self-Employed Individual shall be equal to his Earned Income.
(a) Information required to be reported under sections 6041, 6051 and
6052 (Wages, Tips and Other Compensation Box on Form W-2). Compensation
is defined as wages as defined in section 3401(a) and all other payments
of compensation to an employee by the employer (in the course of the
employer's trade or business) for which the employer is required to
furnish the employee a written statement under sections 6041(d) and
6051(a)(3) of the Code. Compensation must be determined without regard
to any rules under section 3401(a) that limit the remuneration included
in wages based on the nature or location of the employment or the
services performed (such as the exception for agricultural labor in
section 3401(a)(2)).
(b) Section 3401(a) wages. Compensation is defined as wages within the
meaning of section 3401(a) for the purposes of income tax withholding at
the source but determined without regard to any rules that limit the
remuneration included in wages based on the nature or location of the
employment or the services performed (such as the exception for
agricultural labor in section 3401(a)(2)).
(c) 415 safe-harbor compensation. Compensation is defined as wages,
salaries, and fees for professional services and other amounts received
(without regard to whether or not an amount is paid in cash) for personal
services actually rendered in the course of employment with the employer
maintaining the plan to the extent that the amounts are includable in
gross income (including, but not limited to, commissions paid salesmen,
compensation for services on the basis of a percentage of profits,
commissions on insurance premiums, tips, bonuses, fringe benefits and
reimbursements or other expense allowances under a nonaccountable plan
(as described in 1.62-2(c)), and excluding the following:
(1) Employer contributions to a plan of deferred compensation
which are not includable in the employee's gross income for the
taxable year in which contributed, or employer contributions under a
simplified employee pension plan to the extent such contributions
are deductible by the employee, or any distributions from a plan of
deferred compensation;
(2) Amounts realized from the exercise of a non-qualified stock
option, or when.restricted stock (or property) held by the employee
either becomes freely transferable or is no longer subject to a
substantial risk of forfeiture;
(3) Amounts realized from the sale, exchange or other
disposition of stock acquired under a qualified stock option; and
(4) other amounts which received special tax benefits, or
contributions made by the employer (whether or not under a salary
reduction agreement) towards the purchase of an annuity contract
described in section 403(b) of the Code (whether or not the
<PAGE>
contributions are actually excludable from the gross income of the
employee).
If, in connection with the adoption of this or any other amendment, the
definition of Compensation has been modified, then, for Plan Years prior to
the Plan Year which includes the adoption date of such amendment,
Compensation means compensation determined pursuant to the Plan then in
effect.
In addition, if specified in the Adoption Agreement, Compensation for
all Plan purposes shall also include compensation which is not currently
includable in the participant's gross income by reason of the application of
Code Sections 125, 402(a)(8), 402(h)(1)(B), or 403(b).
Compensation in excess of $200,000 shall be disregarded. Such amount
shall be adjusted at the same time and in such manner as permitted under Code
Section 415(d). In applying this limitation, the family group of a Highly
Compensated Participant who is subject to the Family Member aggregation rules
of Code Section 414(q)(6) because such Participant is either a "five percent
owner" of the Employer or one of the ten (10) Highly Compensated Employees
paid the greatest "415 Compensation" during the year, shall be treated as a
single Participant, except that for this purpose Family Members shall include
only the affected Participant's spouse and any lineal descendants who have
not attained age nineteen (19) before the close of the year. If, as a result
of the application of such rules, the adjusted $200,000 limitation is
exceeded, then (except for purposes of determining the portion of
Compensation up to the integration level if this plan is integrated), the
limitation shall be prorated among the affected individuals in proportion to
each such individual's Compensation as determined under this Section prior to
the application of this limitation.
For Plan Years beginning prior to January 1, 1989, the $200,000 limit
(without regard to Family Member aggregation) shall apply only for Top Heavy
Plan Years and shall not be adjusted.
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 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 consists 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 plan year beginning on or after January 1, 1994, the OBRA
'93 annual compensation limit is $150,000.
1.10 "Contract" or "Policy" means any life insurance policy, retirement
income policy, or annuity contract (group or individual) issued by the
Insurer. In the event of any conflict between the terms of this Plan and the
terms of any insurance contract purchased hereunder, the Plan provisions
shall control.
1.11 "Deferred Compensation" means, with respect to any Participant,
that portion of the Participant's total Compensation which has been
contributed to the Plan in accordance with the Participant's deferral
election pursuant to Section 11.2.
1.12 "Early Retirement Date" means the date specified in the Adoption
Agreement on which a Participant or Former Participant has satisfied the age
and service requirements specified in the Adoption Agreement (Early
Retirement Age). A Participant shall become fully Vested upon satisfying this
requirement if still employed at his Early Retirement Age.
A Former Participant who terminates employment after satisfying the
service requirement for Early Retirement and who thereafter reaches the age
requirement contained herein shall be entitled to receive his benefits under
this Plan.
1.13 "Earned Income" means with respect to a Self-Employed Individual,
the net earnings from self-employment in the trade or business with respect
to which the Plan is established, for which the personal services of the
individual are a material income-producing factor. Net earnings will be
determined without regard to items not included in gross income and the
deductions allocable to such items. Net earnings are reduced by contributions
by the Employer to a qualified Plan to the extent deductible under Code
Section 404. In addition, for Plan Years beginning after December 31, 1989,
net earnings shall be determined with regard to the deduction allowed to the
Employer by Code Section 164(f).
<PAGE>
1.14 "Elective Contribution" means the Employer's contributions to the
Plan that are made pursuant to the Participant's deferral election pursuant
to Section 11.2, excluding any such amounts distributed as "excess annual
additions" pursuant to Section 4.4. In addition, if selected in E3 of the
Adoption Agreement, the Employer's matching contribution shall or shall not
be considered an Elective Contribution for purposes of the Plan, as provided
in Section 11.1(b). Elective Contributions shall be subject to the
requirements of Sections 11.2(b) and 11.2(c) and shall further be required to
satisfy the discrimination requirements of Regulation 1.401(k)-l(b)(3), the
provisions of which are specifically incorporated herein by reference.
1.15 "Eligible Employee" means any Employee specified in D1 of the
Adoption Agreement.
1.16 "Employee" means any person who is employed by the Employer, but
excludes any person who is employed as an independent contractor. The term
Employee shall also include Leased Employees as provided in Code Section
414(n) or (o).
Except as provided in the Non-Standardized Adoption Agreement, all
Employees of all entities which are an Affiliated Employer will be treated as
employed by a single employer.
1.17 "Employer" means the entity specified in the Adoption Agreement,
any Participating Employer (as defined in Section 10.1) which shall adopt
this Plan, any successor which shall maintain this Plan and any predecessor
which has maintained this Plan.
1.18 "Excess Compensation" means, with respect to a Plan that is
integrated with Social Security, a Participant's Compensation which is in
excess of the amount set forth in the Adoption Agreement.
1.19 "Excess Contributions" means, with respect to a Plan Year, the
excess of Elective Contributions and Qualified Non-Elective Contributions
made on behalf of Highly Compensated Participants for the Plan Year over the
maximum amount of such contributions permitted under Section 11.4(a).
1.20 "Excess Deferred Compensation" means, with respect to any taxable
year of a Participant, the excess of the aggregate amount of such
Participant's Deferred Compensation and the elective deferrals pursuant to
Section 11.2(f) actually made on behalf of such Participant for such taxable
year, over the dollar limitation provided for in Code Section 402(g), which
is incorporated herein by reference. Excess Deferred Compensation shall be
treated as an "annual addition" pursuant to Section 4.4 when contributed to
the Plan unless distributed to the affected Participant not later than the
first April 15th following the close of the Participant's taxable year.
1.21 "Family Member" means, with respect to an affected Participant,
such Participant's spouse, and such Participant's lineal descendants and
ascendants and their spouses, all as described in Code Section 414(q)(6)(B).
1.22 "Fiduciary" means any person who (a) exercises any discretionary
authority or discretionary control respecting management of the Plan or
exercises any authority or control respecting management or disposition of
its assets, (b) renders investment advice for a fee or other compensation,
direct or indirect, with respect to any monies or other property of the Plan
or has any authority or responsibility to do so, or (c) has any discretionary
authority or discretionary responsibility in the administration of the Plan,
including, but not limited to, the Trustee, the Employer and its
representative body, and the Administrator.
1.23 "Fiscal Year" means the Employer's accounting year as specified in
the Adoption Agreement.
1.24 "Forfeiture" means that portion of a Participant's Account that is
not Vested, and occurs on the earlier of:
(a) the distribution of the entire Vested portion of a Participant's
Account, or
(b) the last day of the Plan Year in which the Participant incurs five
(5) consecutive 1-Year Breaks in Service.
Furthermore, for purposes of paragraph (a) above, in the case of a
Terminated Participant whose Vested benefit is zero, such Terminated
Participant shall be deemed to have received a distribution of his Vested
benefit upon his termination of employment. In addition, the term Forfeiture
shall also include amounts deemed to be Forfeitures pursuant to any other
provision of this Plan.
1.25 "Former Participant" means a person who has been a Participant,
but who has ceased to be a Participant for any reason.
1.26 "414(s) Compensation" with respect to any Employee means his
Compensation as defined in Section 1.9. However, for purposes of this
Section, Compensation shall be Compensation paid and, if selected in the
Adoption Agreement, shall only be recognized as of an Employee's effective
date of participation. If, in connection with the adoption of this or any
other amendment, the definition of "414(s) Compensation" has been modified,
then, for Plan Years prior to the Plan Year which includes the adoption date
of such amendment, "414(s) Compensation" means compensation determined
pursuant to the Plan then in effect.
1.27 "415 Compensation" means compensation as defined in Section
4.4(f)(2).
If, in connection with the adoption of this or any other amendment, the
definition of "415
<PAGE>
Compensation" has been modified, then, for Plan Years prior the Plan Year
which includes the adoption date of such amendment, "415 Compensation" means
compensation determined pursuant to the Plan then in effect.
1.28 "Highly Compensated Employee" means an Employee described in Code
Section 414(q) and the Regulations thereunder and generally means an Employee
who performed services for the Employer during the "determination year" and
is in one or more of the following groups:
(a) Employees who at any time during the "determination year" or
"look-back year" were "five percent owners" as defined in Section
1.35(c).
(b) Employees who received "415 Compensation" during the "look-back"
year from the Employer in excess of $75,000.
(c) Employees who received "415 Compensation" during the "Look-back
year" from the Employer in excess of $50,000 and were in the Top Paid
Group of Employees for the Plan Year.
(d) Employees who during the "look-back year" were officers of the
Employer (as that term is defined within the meaning of the Regulations
under Code Section 416) and received "415 Compensation" during the
"look-back year" from the Employer greater than 50 percent of the limit
in effect under Code Section 415(b)(1)(A) for any such Plan Year. The
number of officers shall be limited to the lesser of (i) 50 employees;
or (ii) the greater of 3 employees or 10 percent of all employees, If
the Employer does not have at least one officer whose annual "415
Compensation" is in excess of 50 percent of the Code Section
415(b)(1)(A) limit, then the highest paid officer of the Employer will
be treated as a Highly Compensated Employee.
(e) Employees who are in the group consisting of the 100 Employees paid
the greatest "415 Compensation" during the "determination year" and are
also described in (b), (c) or (d) above when these paragraphs are
modified to substitute "determination year" for "look-back-year".
The "determination year" shall be the Plan Year for which testing is
being performed, and the "look-back year" shall be the immediately preceding
twelve-month period. However, if the Plan Year is a calendar year, or if
another Plan of the Employer so provides, then the "look-back year" shall be
the calendar year ending with or within the Plan Year for which testing is
being performed, and the "determination year" (if applicable) shall be the
period of time, if any, which extends beyond the "look-back year" and ends on
the last day of the Plan Year for which testing is being performed (the "lag
period"). With respect to this election, it shall-be applied on a uniform and
consistent basis to all plans, entities, and arrangements of the Employer.
For purposes of this Section, the determination of "415 Compensation"
shall be made by including amounts that would otherwise be excluded from a
Participant's gross income by reason of the application of Code Sections 125,
402(a)(8), 402(h)(1)(B) and, in the case of Employer contributions made
pursuant to a salary reduction agreement, Code Section 403(b). Additionally,
the dollar threshold amounts specified in (b) and (c) above shall be adjusted
at such time and in such manner as is provided in Regulations. In the case of
such an adjustment, the dollar limits which shall be applied are those for
the calendar year in which the "determination year" or "look back year"
begins.
In determining who is a Highly Compensated Employee, Employees who are
non-resident aliens and who received no earned income (within the meaning of
Code Section 911(d)) from the Employer constituting United States source
income within the meaning of Code Section 861(a)(3) shall not be treated as
Employees. Additionally, all Affiliated Employers shall be taken into account
as a single employer and Leased Employees within the meaning of Code Sections
414(n)(2) and 414(0)(2) shall be considered Employees unless such Leased
Employees are covered by a plan described in Code Section 414(n)(5) and are
not covered in any qualified plan maintained by the Employer. The exclusion
of Leased Employees for this purpose shall be applied on a uniform and
consistent basis for all of the Employer's retirement plans. In addition,
Highly Compensated Former Employees shall be treated as Highly Compensated
Employees without regard to whether they performed services during the
"determination year".
1.29 "Highly Compensated Former Employee" means a former Employee who
had a separation year prior to the "determination year" and was a Highly
Compensated Employee in the year of separation from service or in any
"determination year" after attaining age 55. Notwithstanding the foregoing,
an Employee who separated from service prior to 1987 will be treated as a
Highly Compensated Former Employee only if during the separation year (or
year preceding the separation year) or any year after the Employee attains
age 55 (or the last year ending before the Employee's 55th birthday), the
Employee either received "415 Compensation" in excess of $50,000 or was a
"five percent owner". For purposes of this Section, "determination year",
"415 Compensation" and "five percent owner" shall be determined in accordance
with Section 1.28. Highly Compensated Former Employees shall be treated as
Highly Compensated Employees. The method set forth in this Section for
determining who is a "Highly Compensated Former Employee" shall be applied on
a uniform and consistent basis for all purposes for which the Code Section
414(q) definition is applicable.
<PAGE>
1.30 "Highly Compensated Participant" means any Highly Compensated
Employee who is eligible to participate in the Plan.
1.31 "Hour of Service" means (1) each hour for which an Employee is
directly or indirectly compensated or entitled to compensation by the
Employer for the performance of duties during the applicable computation
period; (2) each hour for which an Employee is directly or indirectly
compensated or entitled to compensation by the Employer (irrespective of
whether the employment relationship has terminated) for reasons other than
performance of duties (such as vacation, holidays, sickness, jury duty,
disability, lay-off, military duty or leave of absence) during the applicable
computation period; (3) each hour for which back pay is awarded or agreed to
by the Employer without regard to mitigation of damages. The same Hours of
Service shall not be credited both under (1) or (2), as the case may be, and
under (3).
Notwithstanding the above, (i) no more than 501 Hours of Service are
required to be credited to an Employee on account of any single continuous
period during which the Employee performs no duties (whether or not such
period occurs in a single computation period); (ii) an hour for which an
Employee is directly or indirectly paid, or entitled to payment, on account
of a period during which no duties are performed is not required to be
credited to the Employee if such payment is made or due under a plan
maintained solely for the purpose of complying with applicable worker's
compensation, or unemployment compensation or disability insurance laws; and
(iii) Hours of Service are not required to be credited for a payment which
solely reimburses an Employee for medical or medically related expenses
incurred by the Employee.
For purposes of this Section, a payment shall be deemed to be made by
or due from the Employer regardless of whether such payment is made by or due
from the Employer directly, or indirectly through, among others, a trust
fund, or insurer, to which the Employer contributes or pays premiums and
regardless of whether contributions made or due to the trust fund, insurer,
or other entity are for the benefit of particular Employees or are on behalf
of a group of Employees in the aggregate.
An Hour of Service must be counted for the purpose of determining a
Year of Service, a year of participation for purposes of accrued benefits, a
1-Year Break in Service, and employment commencement date (or reemployment
commencement date). The provisions of Department of Labor regulations
2530.200b-2(b) and (c) are incorporated herein by reference.
Hours of Service will be credited for employment with all Affiliated
Employers and for any individual considered to be a Leased Employee pursuant
to Code Sections 414(n) or 414(0) and the Regulations thereunder.
Hours of Service will be determined on the basis of the method selected
in the Adoption Agreement.
1.32 "Insurer" means any legal reserve insurance company which shall
issue one or more policies under the Plan.
1.33 "Investment Manager" means an entity that (a) has the power to
manage, acquire, or dispose of Plan assets and (b) acknowledges fiduciary
responsibility to the Plan in writing. Such entity must be a person, firm, or
corporation registered as an investment adviser under the Investment Advisers
Act of 1940, a bank, or an insurance company.
1.34 "Joint and Survivor Annuity" means an annuity for the life of a
Participant with a survivor annuity for the life of the Participant's spouse
which is not less than 1/2, nor greater than the amount of the annuity
payable during the joint lives of the Participant and the Participant's
spouse. The Joint and Survivor Annuity will be the amount of benefit which
can be purchased with the Participant's Vested interest in the Plan.
1.35 "Key Employee" means an Employee as defined in Code Section 416(i)
and the Regulations thereunder. Generally, any Employee or former Employee
(as well as each of his Beneficiaries) is considered a Key Employee if he, at
any time during the Plan Year that contains the "Determination Date" or any
of the preceding four (4) Plan Years, has been included in one of the
following categories:
(a) an officer of the Employer (as that term is defined within the
meaning of the Regulations under Code Section 416) having annual "415
Compensation" greater than 50 percent of the amount in effect under
Code Section 415(b)(1)(A) for any such Plan Year.
(b) one of the ten employees having annual "415 Compensation" from the
Employer for a Plan Year greater than the dollar limitation in effect
under Code Section 415(c)(1)(A) for the calendar year in which such Plan
Year ends and owning (or considered as owning within the meaning of Code
Section 318) both more than one-half percent interest and the largest
interests in the Employer.
(c) a "five percent owner" of the Employer. "Five percent owner"
means any person who owns (or is " considered as owning within the
meaning of Code Section 318) more than five percent (5%) of the
outstanding stock of the Employer or stock possessing more than five
percent (5%) of the total combined voting power of all stock of the
Employer or, in the case of an unincorporated business, any person who
owns more than five percent (5%) of the
<PAGE>
capital or profits interest in the Employer. In determining percentage
ownership hereunder, employers that would otherwise be aggregated under
Code Sections 414(b), (c), (m) and (0) shall be treated as separate
employers.
(d) a "one percent owner" of the Employer having an annual "415
Compensation" from the Employer of more than $150,000. "One percent
owner" means any person who owns (or is considered as owning within the
meaning of Code Section 318) more than one percent (1%) of the
outstanding stock of the Employer or stock possessing more than one
percent (1%) of the total combined voting power of all stock of the
Employer or, in the case of an unincorporated business, any person who
owns more than one percent (1%) of the capital or profits interest in
the Employer. In determining percentage ownership hereunder, employers
that would otherwise be aggregated under Code Sections 414(b), (c), (m)
and (0) shall be treated as separate employers. However, in determining
whether an individual has "415 Compensation" of more than $150,000,
"415 Compensation" from each employer required to be aggregated under
Code Sections 414(b), (c), (m) and (0) shall be taken into account.
For purposes of this Section, the determination of "415 Compensation"
shall be made by including amounts that would otherwise be excluded from a
Participant's gross income by reason of the application of Code Sections 125,
402(a)(8), 402(h)(1)(B) and, in the case of Employer contributions made
pursuant to a salary reduction agreement, Code Section 403(b).
1.36 "Late Retirement Date" means the date of, or the first day of the
month or the Anniversary Date coinciding with or next following, whichever
corresponds to the election made for the Normal Retirement Date, a
Participant's actual retirement after having reached his Normal Retirement
Date.
1.37 "Leased Employee" means any person (other than an Employee of the
recipient) who pursuant to an agreement between the recipient and any other
person ("leasing organization") has performed services for the recipient (or
for the recipient and related persons determined in accordance with Code
Section 414(n)(6)) on a substantially full time basis for a period of at
least one year, and such services are of a type historically performed by
employees in the business field of the recipient employer. Contributions or
benefits provided a leased employee by the leasing organization which are
attributable to services performed for the recipient employer shall be
treated as provided by the recipient employer.
A leased employee shall not be considered an Employee of the recipient
if: (i) such employee is covered by a money purchase pension plan providing:
(1) a nonintegrated employer contribution rate of at least 10 percent of
compensation, as defined in Code Section 415(c)(3), but including amounts
contributed pursuant to a salary reduction agreement which are excludable
from the employee's gross income under Code Sections 125, 402(a)(8), 402(h)
or 403(b), (2) immediate participation, and (3) full and immediate vesting;
and (ii) leased employees do not constitute more than 20 percent of the
recipient's nonhighly compensated workforce.
1.38 "Net Profit" means with respect to any Fiscal Year the Employer's
net income or profit for such Fiscal Year determined upon the basis of the
Employer's books of account in accordance with generally accepted accounting
principles, without any reduction for taxes based upon income, or for
contributions made by the Employer to this Plan and any other qualified plan.
1.39 "Non-Elective Contribution" means the Employer's contributions to
the Plan other than those made pursuant to the Participant's deferral
election made pursuant to Section 11.2 and any Qualified Non-Elective
Contribution. In addition, if selected in E3 of the Adoption Agreement, the
Employer's Matching Contribution made pursuant to Section 4.3(b) shall be
considered a Non-Elective Contribution for purposes of the-Plan.
1.40 "Non-Highly Compensated Participant" means any Participant who is
neither a Highly Compensated Employee nor a Family Member.
1.41 "Non-Key Employee" means any Employee or former Employee (and his
Beneficiaries) who is not a Key Employee.
1.42 "Normal Retirement Age" means the age specified in the Adoption
Agreement at which time a Participant shall become fully Vested in his
Participant's Account.
1.43 "Normal Retirement Date" means the date specified in the Adoption
Agreement on which a Participant shall become eligible to have his benefits
distributed to him.
1.44 "1-Year Break in Service" means the applicable computation period
during which an Employee has not completed more than 500 Hours of Service with
the Employer. Further, solely for the purpose of determining whether a
Participant has incurred a 1-Year Break in Service, Hours of Service shall be
recognized for "authorized leaves of absence" and "maternity and paternity
leaves of absence."
"Authorized leave of absence" means an unpaid, temporary cessation from
active employment with the Employer pursuant to an established
nondiscriminatory policy, whether occasioned by illness, military service, or
any other reason.
A "maternity or paternity leave of absence" means, for Plan Years
beginning after December 31,
<PAGE>
1984, an absence from work for any period by reason of the Employee's
pregnancy, birth of the Employee's child, placement of a child with the
Employee in connection with the adoption of such child, or any absence for
the purpose of caring for such child for a period immediately following such
birth or placement. For this purpose, Hours of Service shall be credited for
the computation period in which the absence from work begins, only if credit
therefore is necessary to prevent the Employee from incurring a 1-Year Break
in Service, or, in any other case, in the immediately following computation
period. The Hours of Service credited for a "maternity or paternity leave of
absence" shall be those which would normally have been credited but for such
absence, or, in any case in which the administrator is unable to determine
such hours normally credited, eight (8) Hours of Service per day. The total
Hours of Service required to be credited for a "maternity or paternity leave
of absence" shall not exceed 501.
1.45 "Owner-Employee" means a sole proprietor who owns the entire
interest in the Employer or a partner who owns more than 10% of either the
capital interest or the profits interest in the Employer and who receives
income for personal services from the Employer.
1.46 "Participant" means any Eligible Employee who participates in the
Plan as provided in Section 3.2 and has not for any reason become ineligible
to participate further in the Plan.
1.47 "Participant's Account" means the account established and
maintained by the Administrator for each Participant with respect to his
total interest under the Plan resulting from (a) the Employer's contributions
in the case of a Profit Sharing Plan or Money Purchase Plan, and (b) the
Employer's Non-Elective Contributions in the case of a 401(k) Profit Sharing
Plan.
1.48 "Participant's Combined Account" means the account established and
maintained by the Administrator for each Participant with respect to his
total interest under the Plan resulting from the Employer's contributions.
1.49 "Participant's Elective Account" means the account established and
maintained by the Administrator for each Participant with respect to his
total interest in the Plan and Trust resulting from the Employer's Elective
Contributions and Qualified Non-Elective Contributions. A separate accounting
shall be maintained with respect to that portion of the Participant's
Elective Account attributable to Elective Contributions made pursuant to
Section 11.2, Employer matching contributions if they are deemed to be
Elective Contributions, and any Qualified Non-Elective Contributions.
1.50 "Participant's Rollover Account" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan resulting from amounts transferred from another qualified
plan or "conduit" Individual Retirement Account in accordance with Section 4.6.
1.51 "Plan" means this instrument (hereinafter referred to as WM MICHAELS
LIMITED REGIONAL PROTOTYPE Defined Contribution Plan and Trust Basic Plan
Document #01) including all amendments thereto, and the Adoption Agreement as
adopted by the Employer.
1.52 "Plan Year" means the Plan's accounting year as specified in C2 of
the Adoption Agreement.
1.53 "Pre-Retirement Survivor Annuity" means an immediate annuity for
the life of the Participant's spouse, the payments under which must be equal
to the actuarial equivalent of 50% of the Participant's Vested interest in
the Plan as of the date of death.
1.54 "Qualified Non-Elective Account" means the account established
hereunder to which Qualified Non-Elective Contributions are allocated.
1.55 "Qualified Non-Elective Contribution" means the Employer's
contributions to the Plan that are made pursuant to E5 of the Adoption
Agreement and Section 11.1(d) which are used to satisfy the "Actual Deferral
Percentage" tests, Qualified Non-Elective Contributions are nonforfeitable
when made and are distributable only as specified in Sections 11.2(c) and
11.8. In addition, the Employer's contributions to the Plan that are made
pursuant to Section 11.7(h) and which are used to satisfy the "Actual
Contribution Percentage" tests shall be considered Qualified Non-Elective
Contributions.
1.56 "Qualifies Voluntary Employee Contribution Account" means the
account established and maintained by the Administrator for each Participant
with respect to his total interest under the Plan resulting from the
Participant's tax deductible qualified voluntary employee contributions made
pursuant to Section 4.9.
1.57 "Regulation" means the Income Tax Regulations as promulgated by
the Secretary of the Treasury or his delegate, and as amended from time to
time.
1.58 "Retired Participant" means a person who has been a Participant,
but who has become entitled to retirement benefits under the Plan.
1.59 "Retirement Date" means the date as of which a Participant retires
for reasons other than Total and Permanent Disability, whether such
retirement occurs on a Participant's Normal Retirement Date, Early or Late
Retirement Date (see Section 6.1).
<PAGE>
1.60 "Self-Employed Individual" means an individual who has earned
income for the taxable year from the trade or business for which the Plan is
established, and, also, an individual who would have had earned income but
for the fact that the trade or business had no net profits for the taxable
year. A Self-Employed Individual shall be treated as an Employee.
1.61 "Shareholder-Employee" means a Participant who owns more than five
percent (5%) of the Employer's outstanding capital stock during any year in
which the Employer elected to be taxed as a Small Business Corporation under
the applicable Code Section.
1.62 "Short Plan Year" means, if specified in the Adoption Agreement,
that the Plan Year shall be less than a 12 month period. If chosen, the
following rules shall apply in the administration of this Plan. In
determining whether an Employee has completed a Year of Service for benefit
accrual purposes in the Short Plan Year, the number of the Hours of Service
required shall be proportionately reduced based on the number of days in the
Short Plan Year. The determination of whether an Employee has completed a
Year of Service for vesting and eligibility purposes shall be made in
accordance with Department of Labor Regulation 2530.203-2(c). In addition, if
this Plan is integrated with Social Security, the integration level shall
also be proportionately reduced based on the number of days in the Short Plan
Year.
1.63 "Super Top Heavy Plan" means a plan described in Section 2.2(b).
1.64 "Taxable Wage Base" means, with respect to any year, the maximum
amount of earnings which may be considered wages for such year under Code
Section 3121(a)(1).
1.65 "Terminated Participant" means a person who has been a
participant, but whose employment has been terminated other than by death,
Total and Permanent Disability or retirement.
1.66 "Top Heavy Plan" means a plan described in Section 2.2(a).
1.67 "Top Heavy Plan Year" means a Plan Year commencing after December
31, 1983 during which the Plan is a Top Heavy Plan.
1.68 "Top Paid Group" shall be determined pursuant to Code Section
414(q) and the Regulations thereunder and generally means the top 20 percent
of Employees who performed services for the Employer during the applicable
year, ranked according to the amount of "415 Compensation" (as determined
pursuant to Section 1.28) received from the Employer during such year. All
Affiliated Employers shall be taken into account as a single employer, and
Leased Employees shall be treated as Employees pursuant to Code Section
414(n) or (0). Employees who are non-resident aliens who received no earned
income (within the meaning of Code Section 911(d)(2)) from the Employer
constituting United States source income within the meaning of Code Section
861(a)(3) shall not be treated as Employees. Additionally, for the purpose of
determining the number of active Employees in any year, the following
additional Employees shall also be excluded, however, such Employees shall
still be considered for the purpose of identifying the particular Employees
in the Top Paid Group:
(a) Employees with less than six (6) months of service;
(b) Employees who normally work less than 17 1/2 hours per week;
(c) Employees who normally work less than six (6) months during a year;
and
(d) Employees who have not yet attained age 21.
In addition, if 90 percent or more of the Employees of the Employer are
covered under agreements the Secretary of Labor finds to be collective
bargaining agreements between Employee representatives and the Employer, and
the Plan covers only Employees who are not covered under such agreements,
then Employees covered by such agreements shall be excluded from both the
total number of active Employees as well as from the identification of
particular Employees in the Top Paid Group.
The foregoing exclusions set forth in this Section shall be applied on
a uniform and consistent basis for all purposes for which the Code Section
414(q) definition is applicable.
1.69 "Total and Permanent Disability" means the inability to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment that can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not
less than 12 months. The disability of a Participant shall be determined by a
licensed physician chosen by the Administrator. However, if the condition
constitutes total disability under the federal Social Security Acts, the
Administrator may rely upon such determination that the Participant is
Totally and Permanently Disabled for the purposes of this Plan. The
determination shall be applied uniformly to all Participants.
1.70 "Trustee" means the person or entity named in B6 of the Adoption
Agreement and any successors.
<PAGE>
1.71 "Trust Fund" means the assets of the Plan and Trust as the same
shall exist from time to time.
1.72 "Vested" means the nonforfeitable portion of any account
maintained on behalf of a Participant.
1.73 "Voluntary Contribution Account" means the account established and
maintained by the Administrator for each Participant with respect to his
total interest in the Plan resulting from the Participant's nondeductible
voluntary contributions made pursuant to Section 4.7.
1.74 "Year of Service" means the computation period of twelve (12)
consecutive months, herein set forth, and during which an Employee has
completed at least 1000 Hours of Service.
For purposes of eligibility for participation, the initial computation
period shall begin with the date on which the Employee first performs an Hour
of Service (employment commencement date). The computation period beginning
after a 1-Year Break in Service shall be measured from the date on which an
Employee again performs an Hour of Service. The succeeding computation
periods shall begin with the first anniversary of the Employee's employment
commencement date. However, if one (1) Year of Service or less is required as
a condition of eligibility, then after the initial eligibility computation
period, the eligibility computation period shall shift to the current Plan
Year which includes the anniversary of the date on which the Employee first
performed an Hour of Service. An Employee who is credited with 1,000 Hours of
Service in both the initial eligibility computation period and the first Plan
Year which commences prior to the first anniversary of the Employee's initial
eligibility computation period will be credited with two Years of Service for
purposes of eligibility to participate.
For vesting purposes, and all other purposes not specifically addressed
in this Section, the computation period shall be the Plan Year, including
periods prior to the Effective Date of the Plan unless specifically excluded
pursuant to the Adoption Agreement.
Years of Service and breaks in service will be measured on the same
computation period.
Years of Service with any predecessor Employer which maintained this
Plan shall be recognized. Years of Service with any other predecessor
Employer shall be recognized as specified in the Adoption Agreement.
Years of Service with any Affiliated Employer shall be recognized.
ARTICLE II
TOP HEAVY PROVISIONS AND ADMINISTRATION
2.1 TOP HEAVY PLAN REQUIREMENTS
For any Top Heavy Plan Year, the Plan shall provide the special
vesting requirements of Code Section 416(b) pursuant to Section 6.4 of the
Plan and the special minimum allocation requirements of Code Section 416(c)
pursuant to Section 4.3(i) of the Plan.
2.2 DETERMINATION OF TOP HEAVY STATUS
(a) This Plan shall be a Top Heavy Plan for any Plan Year beginning
after December 31, 1983, in which, as of the Determination Date, (1) the
Present Value of Accrued Benefits of Key Employees and (2) the sum of the
Aggregate Accounts of Key Employees under this Plan and all plans of an
Aggregation Group, exceeds sixty percent (60%) of the Present Value of
Accrued Benefits and the Aggregate Accounts of all Key and Non-Key
Employees under this Plan and all plans of an Aggregation Group. "
If any Participant is a Non-Key Employee for any Plan Year, but such
Participant was a Key Employee for any prior Plan Year, such Participant's
Present Value of Accrued Benefit and/or Aggregate Account balance shall not
be taken into account for purposes of determining whether this Plan is a Top
Heavy or Super Top Heavy Plan (or whether any Aggregation Group which
includes this Plan is a Top Heavy Group). In addition, if a Participant or
Former Participant has not performed any services for any Employer
maintaining the Plan at any time during the five year period ending on the
Determination Date, any accrued benefit for such Participant or Former
Participant shall not be taken into account for the purposes of determining
whether this Plan is a Top Heavy or Super Top Heavy Plan.
(b) This Plan shall be a Super Top Heavy Plan for any Plan Year
beginning after December 31, 1983, in which, as of the Determination
Date, (1) the Present Value of Accrued Benefits of Key Employees and (2)
the sum of the Aggregate Accounts of Key Employees under this Plan and
all plans of an Aggregation Group, exceeds ninety percent (90%) of the
Present Value of Accrued Benefits and the Aggregate Accounts of all Key
and Non-Key Employees under this Plan and are plans of an Aggregation
Group.
(c) Aggregate Account: A Participant's Aggregate Account as of the
Determination Date is the sum of:
(1) his Participant's Combined Account balance as of the most
recent valuation occurring within a twelve (12) month period ending
on the Determination Date;
<PAGE>
(2) for a Profit Sharing Plan, an adjustment for any
contributions due as of the Determination Date. Such adjustment
shall be the amount of any contributions actually made after the
valuation date but before the Determination Date, except for the
first Plan Year when such adjustment shall also reflect the amount
of any contributions made after the Determination Date that are
allocated as of a date in that first Plan Year;
(3) for a Money Purchase Plan, contributions that would be
allocated as of a date not later than the Determination Date, even
though those amounts are not yet made or required to be made.
(4) any Plan distributions made within the Plan Year that
includes the Determination Date or within the four (4) preceding
Plan Years. However, in the case of distributions made after the
valuation date and prior to the Determination Date, such
distributions are not included as distributions for top heavy
purposes to the extent that such distributions are already included
in the Participant's Aggregate Account balance as of the valuation
date. In the case of a distribution of an annuity Contract, the
amount of such distribution is deemed to be the current actuarial
value of the Contract, determined on the date of the distribution.
Notwithstanding anything herein to the contrary, all distributions,
including distributions made prior to January 1, 1984, and
distributions under a terminated plan which if it had not been
terminated would have been required to be included in an Aggregation
Group, will be counted. Further, distributions from the Plan
(including the cash value of life insurance policies) of a
Participant's account balance because of death shall be treated as a
distribution for the purpose of this paragraph.
(5) any Employee contributions, whether voluntary or mandatory.
However, amounts attributable to tax deductible qualified voluntary
employee contributions shall not be considered to be a part of the
Participant's Aggregate Account balance.
(6) with respect to unrelated rollovers and plan-to-plan
transfers (ones which are both initiated by the Employee and made
from a plan maintained by one employer to a plan maintained by
another employer), if this Plan provides the rollovers or
plan-to-plan transfers, it shall always consider such rollovers or
plan-to-plan transfers as a distribution for the purposes of this
Section. If this Plan is the plan accepting such rollovers or
plan-to-plan transfers, it shall not consider such rollovers or
plan-to-plan transfers accepted after December 31, 1983 as part of
the Participant's Aggregate Account balance. However, rollovers or
plan-to-plan transfers accepted prior to January 1, 1984 shall be
considered as part of the Participant's Aggregate Account balance.
(7) with respect to related rollovers and plan-to-plan transfers
(ones either not initiated by the Employee or made to a plan
maintained by the same employer), if this Plan provides the rollover
or plan-to-plan transfer, it shall not be counted as a distribution
for purposes of this Section. If this Plan is the plan accepting
such rollover or plan-to-plan transfer, it shall consider such
rollover or plan-to-plan transfer as part of the Participant's
Aggregate Account balance, irrespective of the date on which such
rollover or plan-to-plan transfer is accepted.
(8) For the purposes of determining whether two employers are to
be treated as the same employer in 2.2(c)(6) and 2.2(c)(7) above,
all employers aggregated under Code Section 414(b), (c), (m) and (0)
are treated as the same employer.
(d) "Aggregation Group" means either a Required Aggregation Group or a
Permissive Aggregation Group as hereinafter determined.
(1) Required Aggregation Group: In determining a Required
Aggregation Group hereunder, each qualified plan of the Employer,
including any Simplified Employee Pension Plan, in which a
<PAGE>
Key Employee is a participant in the Plan Year containing the
Determination Date or any of the four preceding Plan Years, and each
other qualified plan of the Employer which enables any qualified
plan in which a Key Employee participates to meet the requirements
of Code Sections 401(a)(4) or 410, will be required to be
aggregated. Such group shall be known as a Required Aggregation
Group.
In the case of a Required Aggregation Group, each plan in the group
will be considered a Top Heavy Plan if the Required Aggregation
Group is a Top Heavy Group. No plan in the Required Aggregation
Group will be considered a Top Heavy Plan if the Required
Aggregation Group is not a Top Heavy Group.
(2) Permissive Aggregation Group: The Employer may also include
any other plan of the Employer, including any Simplified Employee
Pension Plan, not required to be included in the Required
Aggregation Group, provided the resulting group, taken as a whole,
would continue to satisfy She provisions of Code Sections 401(a)(4)
and 410. Such group shall be known as a Permissive Aggregation
Group.
In the case of a Permissive Aggregation Group, only a plan that is part
of the Required Aggregation Group will be considered a Top Heavy Plan if the
Permissive Aggregation Group is a Top Heavy Group. No plan in the Permissive
Aggregation Group will be considered a Top Heavy Plan if the Permissive
Aggregation Group is not a Top Heavy Group.
(3) Only those plans of the Employer in which the Determination
Dates fall within the same calendar year shall be aggregated in
order to determine whether such plans are Top Heavy Plans.
(4) An Aggregation Group shall include any terminated plan of
the Employer if it was maintained within the last five (5) years
ending on the Determination Date.
(e) "Determination Date" means (a) the last day of the preceding Plan
Year, or (b) in the case of the first Plan Year, the last day of such
Plan Year.
(f) Present Value of Accrued Benefit: In the case of a defined benefit
plan, the Present Value of Accrued Benefit for a Participant other than a
Key Employee shall be as determined using the single accrual method used
for all plans of the Employer and Affiliated Employers, or if no such
single method exists, using a method which results in benefits accruing
not more rapidly than the slowest accrual rate permitted under Code
Section 411(b)(l)(C). The determination of the Present Value of Accrued
Benefit shall be determined as of the most recent valuation date that
falls within or ends with the 12-month period ending on the Determination
Date, except as provided in Code Section 416 and the Regulations
thereunder for the first and second plan years of a defined benefit plan.
However, any such determination must include present value of accrued
benefit attributable to any Plan distributions referred to in Section
2.2(c)(4) above, any Employee contributions referred to in Section 2.2(c)(5)
above or any related or unrelated rollovers referred to in Sections 2.2(c)(6)
and 2.2(c)(7) above.
(g) "Top Heavy Group" means an Aggregation Group in which, as of the
Determination Date, the sum of:
(1) the Present Value of Accrued Benefits of Key Employees under
all defined benefit plans included in the group, and
(2) the Aggregate Accounts of Key Employees under all defined
contribution plans included in the group, exceeds sixty percent
(60%) of a similar sum determined for all Participants.
(h) The Administrator shall determine whether this Plan is a Top Heavy
Plan on the Anniversary Date specified in the Adoption Agreement. Such
determination of the top heavy ratio shall be in accordance with Code
Section 416 and the Regulations thereunder.
2.3 POWERS AND RESPONSIBILITIES OF THE EMPLOYER
(a) The Employer shall be empowered to appoint and remove the Trustee
and the Administrator from time to time as it deems-necessary for the
proper administration of the Plan to assure that the Plan is being
operated for the exclusive benefit of the Participants and their
Beneficiaries in accordance with the terms of the Plan, the Code, and the
Act.
<PAGE>
(b) The Employer shall establish a "funding policy and method", i.e., it
shall determine whether the Plan has a short run need for liquidity
(e.g., to pay benefits) or whether liquidity is a long run goal and
investment growth (and stability of same) is a more current need, or
shall appoint a qualified person to do so. The Employer or its delegate
shall communicate such needs and goals to the Trustee, who shall
coordinate such Plan needs with its investment policy. The communication
of such a "funding policy and method" shall not, however, constitute a
directive to the Trustee as to investment of the Trust Funds. Such
"Funding policy and method" shall be consistent with the objectives of
this Plan and with the requirements of Title I of the Act.
(c) The Employer may, in its discretion, appoint an Investment Manager
to manage all or a designated portion of the assets of the Plan. In such
event, the Trustee shall follow the directive of the Investment Manager
in investing the assets of the Plan managed by the Investment Manager.
(d) The Employer shall periodically review the performance of any
Fiduciary or other person to whom duties have been delegated or allocated
by it under the provisions of this Plan or pursuant to procedures
established hereunder. This requirement may be satisfied by formal
periodic review by the Employer or by a qualified person specifically
designated by the Employer, through day-to-day conduct and evaluation, or
through other appropriate ways.
2.4 DESIGNATION OF ADMINISTRATIVE AUTHORITY
The Employer shall appoint one or more Administrators. Any person,
including, but not limited to, the Employees"of the Employer, shall be eligible
to serve as an Administrator. Any person so appointed shall signify his
acceptance by filing written acceptance with the Employer. An Administrator may
resign by delivering his written resignation to the Employer or be removed by
the Employer by delivery of written notice of removal, to take effect at a date
specified therein, or upon delivery to the Administrator if no date is
specified.
The Employer, upon the resignation or removal of an Administrator, shall
promptly designate in writing a successor to this position. If the Employer does
not appoint an Administrator, the Employer will function as the Administrator.
2.5 ALLOCATION AND DELEGATION OF RESPONSIBILITIES
If more than one person is appointed as Administrator, the
responsibilities of each Administrator may be specified by the Employer and
accepted in writing by each Administrator. In the event that no such delegation
is made by the Employer, the Administrators may allocate the responsibilities
among themselves, in which event the Administrators shall notify the Employer
and the Trustee in writing of such action and specify the responsibilities of
each Administrator. The Trustee thereafter shall accept and rely upon any
documents executed by the appropriate Administrator until such time as the
Employer or the Administrators file with the Trustee a written revocation of
such designation.
2.6 POWERS AND DUTIES OF THE ADMINISTRATOR
The primary responsibility of the Administrator is to administer the
Plan for the exclusive benefit of the Participants and their Beneficiaries,
subject to the specific terms of the Plan. The Administrator shall administer
the Plan in accordance with its terms and shall have the power and discretion
to construe the terms of the Plan and determine all questions arising in
connection with the administration, interpretation, and application of the
Plan. Any such determination by the Administrator shall be conclusive and
binding upon all persons. The Administrator may establish procedures, correct
any defect, supply any information, or reconcile any inconsistency in such
manner and to such extent as shall be deemed necessary or advisable to carry
out the purpose of the Plan; provided, however, that any procedure,
discretionary act, interpretation or construction shall be done in a
nondiscriminatory manner based upon uniform principles consistently applied
and shall be consistent with the intent that the Plan shall continue to be
deemed a qualified plan under the terms of Code Section 401(a), and shall
comply with the terms of the Act and all regulations issued pursuant thereto.
The Administrator shall have all powers necessary or appropriate to
accomplish his duties under this Plan.
The Administrator shall be charged with the duties of the general
administration of the Plan, including, but not limited to, the following:
(a) the discretion to determine all questions relating to the
eligibility of Employees to participate or remain a Participant hereunder
and to receive benefits under the Plan;
(b) to compute, certify, and direct the Trustee with respect to the
amount and the kind of benefits to which any Participant shall be
entitled hereunder;
(c) to authorize and direct the Trustee with respect to all
nondiscretionary or otherwise directed disbursements from the Trust Fund;
(d) to maintain all necessary records for the administration of the
Plan;
<PAGE>
(e) to interpret the provisions of the Plan and to make and publish such
rules for regulation of the Plan as are consistent with the terms hereof;
(f) to determine the size and type of any Contract to be purchased from
any Insurer, and to designate the Insurer from which such Contract shall
be purchased;
(g) to compute and certify to the Employer and to the Trustee from time
to time the sums of money necessary or desirable to be contributed to the
Trust Fund;
(h) to consult with the Employer and the Trustee regarding the short and
long-term liquidity needs of the Plan in order that the Trustee can
exercise any investment discretion in a manner designed to accomplish
specific objectives;
(i) to prepare and distribute to Employees a procedure for notifying
Participants and Beneficiaries of their rights to elect Joint and
Survivor Annuities and Pre-Retirement Survivor Annuities if required by
the Code and Regulations thereunder;
(j) to assist any Participant regarding his rights, benefits, or
elections available under the Plan.
2.7 RECORDS AND REPORTS
The Administrator shall keep a record of all actions taken and shall
keep all other books of account, records, and other data that may be
necessary for proper administration of the Plan and shall be responsible for
supplying all information and reports to the Internal Revenue Service,
Department of Labor, Participants, Beneficiaries and others as required by
law.
2.8 APPOINTMENT OF ADVISERS
The Administrator, or the Trustee with the consent of the Administrator,
may appoint counsel, specialists, advisers, and other persons as the
Administrator or the Trustee deems necessary or desirable in connection with the
administration of this Plan.
2.9 INFORMATION FROM EMPLOYER
To enable the Administrator to perform his functions, the Employer
shall supply full and timely information to the Administrator on all matters
relating to the Compensation of all Participants, their Hours of Service,
their Years of Service, their retirement, death, disability, or termination
of employment, and such other pertinent facts as the Administrator may
require; and the Administrator shall advise the Trustee of such of the
foregoing facts as may be pertinent to the Trustee's duties under the Plan.
The Administrator may rely upon such information as is supplied by the
Employer and shall have no duty or responsibility to verify such information.
2.10 PAYMENT OF EXPENSES
All expenses of administration may be paid out of the Trust Fund unless
paid by the Employer. Such expenses shall include any expenses incident to
the functioning of the Administrator, including, but not limited to, fees of
accountants, counsel, and other specialists and their agents, and other costs
of administering the Plan. Until paid, the expenses shall constitute a
liability of the Trust Fund. However, the Employer may reimburse the Trust
Fund for any administration expense incurred. Any administration expense paid
to the Trust Fund as a reimbursement shall not be considered an Employer
contribution.
2.11 MAJORITY ACTIONS
Except where there has been an allocation and delegation of
administrative authority pursuant to Section 2.5, if there shall be more than
one Administrator, they shall act by a majority of their number, but may
authorize one or more of them to sign all papers on their behalf.
2.12 CLAIMS PROCEDURE
Claims for benefits under the Plan may be filed in writing with the
Administrator. Written notice of the disposition of a claim shall be
furnished to the claimant within 90 days after the application is fired. In
the event the claim is denied, the reasons for the denial shall be
specifically set forth in the notice in language calculated to be understood
by the claimant, pertinent provisions of the Plan shall be cited, and, where
appropriate, an explanation as to how the claimant can perfect the claim will
be provided. In addition, the claimant shall be furnished with an explanation
of the Plan's claims review procedure.
2.13 CLAIMS REVIEW PROCEDURE
Any Employee, former Employee, or Beneficiary of either, who has been
denied a benefit by a decision of the Administrator pursuant to Section 2.12
shall be entitled to request the Administrator to give further consideration
to his claim by filing with the Administrator a written request for a
hearing. Such request, together with a written statement of the reasons why
the claimant believes his claim should be allowed, shall be filed with the
Administrator no later than 60 days after receipt of the written notification
provided for in Section 2.12. The Administrator shall then conduct a hearing
within the next 60 days, at which the claimant may be represented by an
attorney or any other representative of his choosing and expense and at which
the claimant shall have an opportunity to submit written and oral evidence
and arguments in support of his claim. At the hearing (or prior thereto
<PAGE>
upon 5 business days written notice to the Administrator) the claimant or his
representative shall have an opportunity to review all documents in the
possession of the Administrator which are pertinent to the claim at issue and
its disallowance. Either the claimant or the Administrator may cause a court
reporter to attend the hearing and record the proceedings. In such event, a
complete written transcript of the proceedings shall be furnished to both
parties by the court reporter. The full expense of any such court reporter
and such transcripts shall be borne by the party causing the court reporter
to attend the hearing. A final decision as to the allowance of the claim
shall be made by the Administrator within 60 days of receipt of the appeal
(unless there has been an extension of 60 days due to special circumstances,
provided the delay and the special circumstances occasioning it are
communicated to the claimant within the 60 day period). Such communication
shall be written in a manner calculated to be understood by the claimant and
shall include specific reasons for the decision and specific references to
the pertinent Plan provisions on which the decision is based.
ARTICLE III
ELIGIBILITY
3.1 CONDITIONS OF ELIGIBILITY
Any Eligible Employee shall be eligible to participate hereunder on the
date he has satisfied the requirements specified in the Adoption Agreement.
3.2 EFFECTIVE DATE OF PARTICIPATION
An Eligible Employee who has become eligible to be a Participant shall
become a Participant effective as of the day specified in the Adoption
Agreement.
In the event an Employee who has satisfied the Plan's eligibility
requirements and would otherwise have become a Participant shall go from a
classification of a noneligible Employee to an Eligible Employee, such
Employee shall become a Participant as of the date he becomes an Eligible
Employee.
In the event an Employee who has satisfied the Plan's eligibility
requirements and would otherwise become a Participant shall go from a
classification of an Eligible Employee to a noneligible Employee and becomes
ineligible to participate and has not incurred a 1-Year Break in Service,
such Employee shall participate in the Plan as of the date he returns to an
eligible class of Employees. If such Employee does incur a 1-Year Break in
Service, eligibility will be determined under the Break in Service rules of
the Plan.
3.3 DETERMINATION OF ELIGIBILITY
The Administrator shall determine the eligibility of each Employee for
participation in the Plan based upon information furnished by the Employer.
Such determination shall be conclusive and binding upon all persons, as long
as the same is made pursuant to the Plan and the Act. Such determination
shall be subject to review per Section 2.13.
3.4 TERMINATION OF ELIGIBILITY
In the event a Participant shall go from a classification of an
Eligible Employee to an ineligible Employee, such Former Participant shall
continue to vest in his interest in the Plan for each Year of Service
completed while a noneligible Employee, until such time as his Participant's
Account shall be forfeited or distributed pursuant to the terms of the Plan.
Additionally, his interest in the Plan shall continue to share in the
earnings of the Trust Fund.
3.5 OMISSION OF ELIGIBLE EMPLOYEE
If, in any Plan Year, any Employee who should be included as a
Participant in the Plan is erroneously omitted and discovery of such omission
is not made until after a contribution by his Employer for the year has been
made, the Employer shall make a subsequent contribution, if necessary after
the application of Section 4.3(e), so that the omitted Employee receives a
total amount which the said Employee would have received had he not been
omitted. Such contribution shall be made regardless of whether or not it is
deductible in whole or in part in any taxable year under applicable
provisions of the Code.
3.6 INCLUSION OF INELIGIBLE EMPLOYEE
If, in any Plan Year, any person who should not have been included as a
Participant in the plan is erroneously included and discovery of such
incorrect inclusion is not made until after a contribution for the year has
been made, the Employer shall not be entitled to recover the contribution
made with respect to the ineligible person regardless of whether or not a
deduction is allowable with respect to such contribution. In such event, the
amount contributed with respect to the ineligible person shall constitute a
Forfeiture for the Plan Year in which the discovery is made.
3.7 ELECTION NOT TO PARTICIPATE
An Employee may, subject to the approval of the Employer, elect
voluntarily not to participate in the Plan. The election not to participate
must be communicated to the Employer, in writing, at least thirty (30) days
before the beginning of a Plan Year. For Standardized Plans, a Participant or
an Eligible Employee may not elect not to participate. Furthermore, the
foregoing election not to participate shall not be available with respect to
partners in a partnership.
3.8 CONTROL OF ENTITIES BY OWNER-EMPLOYEE
(a) If this Plan provides contributions or benefits for one or more
Owner-Employees
<PAGE>
who control both the business for which this Plan is established and one
or more other entities, this Plan and the plan established for other
trades or businesses must, when looked at as a single Plan, satisfy Code
Sections 401(a) and (d) for the Employees of this and all other entities.
(b) If the Plan provides contributions or benefits for one or more
Owner-Employees who control one or more other trades or businesses, the
employees of the other trades or businesses must be included in a plan
which satisfies Code Sections 401(a) and (d) and which provides
contributions and benefits not less favorable than provided for
Owner-Employees under this Plan.
(c) If an individual is covered as an Owner-Employee under the plans of
two or more trades or businesses which are not controlled and the
individual controls a trade or business, then the benefits or
contributions of the employees under the plan of the trades or businesses
which are controlled must be as favorable as those provided for him under
the most favorable plan of the trade or business which is not controlled.
(d) For purposes of the preceding paragraphs, an Owner-Employee, or two
or more Owner-Employees, will be considered to control an entity if the
Owner-Employee, or two or more Owner-Employees together:
(1) own the entire interest in an unincorporated entity, or
(2) in the case of a partnership, own more than 50 percent of
either the capital interest or the profits interest in the
partnership.
(e) For purposes of the preceding sentence, an Owner-Employee, or two or
more Owner-Employees shall be treated as owning any interest in a
partnership which is owned, directly or indirectly, by a partnership
which such Owner-Employee, or such two or more Owner-Employees, are
considered to control within the meaning of the preceding sentence.
ARTICLE IV
CONTRIBUTION AND ALLOCATION
4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION
(a) For a Money Purchase Plan:
(1) The Employees shall make contributions over such period of
years as the Employer may determine on the following basis. On
behalf of each Participant eligible to share in allocations, for
each year of his participation in this Plan, the Employer shall
contribute the amount specified in the Adoption Agreement. All
contributions by the Employer shall be made in cash or in such
property as is acceptable to the Trustee. The Employer shall be
required to obtain a waiver from the Internal Revenue Service for
any Plan Year in which it is unable to make the full required
contribution to the Plan. In the event a waiver is obtained, this
Plan shall be deemed to be an individually designed plan.
(2) For any Plan Year beginning prior to January 1, 1990, and if
elected in the non-standardized Adoption Agreement for any Plan Year
beginning on or after January 1, 1990, the Employer shall not
contribute on behalf of a participant who performs less than a Year
of Service during any Plan Year, unless there is a Short Plan Year
or a contribution is required pursuant to 4.3(h).
(3) Notwithstanding the foregoing, the Employer's contribution
for any Fiscal Year shall not exceed the maximum amount allowable as
a deduction to the Employer under the provisions of Code Section
404. However, to the extent necessary to provide the top heavy
minimum allocations, the Employer shall make a contribution even if
it exceeds the amount which is deductible under Code Section 404.
(b) For a Profit Sharing Plan:
(1) For each Plan Year, the Employer shall contribute to the
Plan such amount as specified by the Employer in the Adoption
Agreement. Notwithstanding the foregoing, however, the Employer's
contribution for any Fiscal Year shall not exceed the maximum amount
allowable as a deduction to the Employer under the provisions of
Code Section 404. All contributions by the Employer shall be made in
cash or in such
<PAGE>
property as is acceptable to the Trustee.
(2) Except, however, to the extent necessary to provide the top
heavy minimum allocations, the Employer shall make a contribution
even if it exceeds current or accumulated Net Profit or the amount
which is deductible under Code Section 404.
4.2 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION
The Employer shall generally pay to the Trustee its contribution to the
Plan for each Plan Year within the time prescribed by law, including
extensions of time, for the filing of the Employer's federal income tax
return for the Fiscal Year.
4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS
(a) The Administrator shall establish and maintain an account in the
name of each Participant to which the Administrator shall credit as of each
Anniversary Date, or other valuation date, all amounts allocated to each such
Participant as set forth herein.
(b) The Employer shall provide the Administrator with all information
required by the Administrator to make a proper allocation of the Employer's
contributions for each Plan Year. Within a reasonable period of time after the
date of receipt by the administrator of such information, the Administrator
shall allocate such contribution as follows:
(1) For a Money Purchase Plan:
(i) The Employer's Contribution shall be allocated to each
Participant's Combined Account in the manner set forth in Section
4.1 herein and as specified in Section E2 of the Adoption
Agreement.
(2) For an Integrated Profit Sharing Plan:
(i) The Employer's contribution shall be allocated to each
Participant's Account, except as provided in Section 4.3(f), in a
dollar amount equal to 5.7% of the sum of each Participant's
total Compensation plus Excess Compensation. If the Employer does
not contribute such amount for all Participants, each Participant
will be allocated a share of the contribution in the same
proportion that his total Compensation plus his total Excess
Compensation for the Plan Year bears to the total Compensation
plus the total Excess Compensation of all Participants for that
year.
Regardless of the preceding, 4.3% shall be substituted for 5.7% above
if Excess Compensation is based on more than 20% and less than or equal to
80% of the Taxable Wage Base. If Excess Compensation is based on less than
100% and more than 80% of the Taxable Wage Base, then 5.4% shall be
substituted for 5.7% above.
(ii) The balance of the Employer's contribution over the amount
allocated above, if any, shall be allocated to each participant's
Combined Account in the same proportion that his total
Compensation for the Year bears to the total Compensation of all
Participants for such year.
(iii) Except, however, for any Plan Year beginning prior to
January 1, 1990, and if elected in the non-standardized Adoption
Agreement for any Plan Year beginning on or after January 1,
1990, a Participant who performs less than a Year of Service
during any Plan Year shall not share in the Employer's
contribution for that year, unless there is a Short Plan Year or
a contribution is required pursuant to Section 4.3(h).
(3) For a Non-Integrated Profit Sharing Plan:
(i) The Employer's contribution shall be allocated to each
Participant's Account in the same proportion that each such
Participant's
<PAGE>
Compensation for the year bears to the total
Compensation of all Participants for such year.
(ii) Except, however, for any Plan Year beginning prior to
January 1, 1990, and if elected in the non-standardized Adoption
Agreement for any Plan Year beginning on or after January 1,
1990, a Participant who performs less than a Year of Service
during any Plan Year shall not share in the Employer's
contribution for that year, unless there is a Short Plan Year or
a contribution is required pursuant to Section 4.3(h).
(c) As of each Anniversary Date or other valuation date, before
allocation of Employer contributions and Forfeitures, any earnings or
losses (net appreciation or net depreciation) of the Trust Fund shall be
allocated in the same proportion that each Participant's and Former
Participant's nonsegregated accounts bear to the total of all
Participants' and Former Participants' nonsegregated accounts as of such
date. If any nonsegregated account of a Participant has been distributed
prior to the Anniversary Date or other valuation date subsequent to a
Participant's termination of employment, no earnings or losses shall be
credited to such account.
Notwithstanding the above, with respect to contributions made to Plan
after the previous Anniversary Date or allocation date, the method specified in
the Adoption Agreement shall be used.
(d) Participants' Accounts shall be debited for any insurance or annuity
premiums paid, if any, and credited with any dividends or interest
received on insurance contracts.
(e) As of each Anniversary Date any amounts which became Forfeitures
since the last Anniversary Date shall first be made available to
reinstate previously forfeited account balances of Former Participants,
if any, in accordance with Section 6.4(g)(2) or be used to satisfy any
contribution that may be required pursuant to Section 3.5 and/or 6.9. The
remaining Forfeitures, if any, shall be treated in accordance with the
Adoption Agreement. Provided, however, that in the event the allocation
of Forfeitures provided herein shall cause the "annual addition" (as
defined in Section 4.4) to any Participant's Account to exceed the amount
allowable by the Code, the excess shall be reallocated in accordance with
Section 4.5. Except, however, for any Plan Year beginning prior to
January 1, 1990, and if elected in the non-standardized Adoption
Agreement for any Plan Year beginning on or after January 1, 1990, a
Participant who performs less than a Year of Service during any Plan Year
shall not share in the Plan Forfeitures for that year, unless there is a
Short Plan Year or a contribution required pursuant to Section 4.3(h).
(f) Minimum Allocations Required for Top Heavy Plan Years:
Notwithstanding the foregoing, for any Top Heavy plan Year, the sum of
the Employer's contributions and Forfeitures allocated to the
Participant's Combined Account of each Non-Key Employee shall be equal to
at least three percent (3%) of such Non-Key Employee's "415 Compensation"
(reduced by contributions and forfeitures, if any, allocated to each
Non-Key Employee in any defined contribution plan included with this plan
in a Required Aggregation Group). However, if (i) the sum of the
Employer's contributions and Forfeitures allocated to the Participant's
Combined Account of each Key Employee for such Top Heavy Plan Year is
less than three percent (3%) of each Key Employee's "415 Compensation"
and (ii) this Plan is not required to be included in an Aggregation Group
to enable a defined benefit plan to meet the requirements of Code Section
401(a)(4) or 410, the sum of the Employer's contributions and Forfeitures
allocated to the Participant's Combined Account of each Non-Key Employee
shall be equal to the largest percentage allocated to the Participant's
Combined Account of any Key Employee.
However, for each Non-Key Employee who is a Participant in a paired
Profit Sharing Plan or 401(k) Profit Sharing Plan and a paired Money Purchase
Plan, the minimum 3% allocation specified above shall be provided in the Money
Purchase Plan.
If this is an integrated Plan, then for any Top Heavy Plan Year the
Employer's contribution shall be allocated as follows:
(1) An amount equal to 3% multiplied by each Participant's
Compensation for the Plan Year shall be allocated to each
Participant's Account. If the Employer does not contribute such
amount for all Participants, the amount shall be allocated to each
Participant's Account in the same proportion that his total
Compensation for the Plan Year bears to the total Compensation of
all Participants for such year.
<PAGE>
(2) The balance of the Employer's contribution over the amount
allocated under subparagraph (1) hereof shall be allocated to each
Participant's Account in a dollar amount equal to 3% multiplied by a
Participant's Excess Compensation. If the Employer does not
contribute such amount for all Participants, each Participant will
be allocated a share of the contribution in the same proportion that
his Excess Compensation bears to the total Excess Compensation of
all Participants for that year.
(3) The balance of the Employer's contribution over the amount
allocated under subparagraph (2) hereof shall be allocated to each
Participant's Account in a dollar amount equal to 2.7% multiplied by
the sum of each Participant's total Compensation plus Excess
Compensation. If the Employer does not contribute such amount for
all Participants, each Participant will be allocated a share of the
contribution in the same proportion that his total Compensation plus
his total Excess Compensation for the Plan Year bears to the total
Compensation plus the total Excess Compensation of all Participants
for that year.
Regardless of the preceding, 1.3% shall be substituted for 2.7% above if
Excess Compensation is based on more than 20% and less than or equal to 80% of
the Taxable Wage Base. If Excess compensation is based on less than 100% and
more than 80% of the Taxable Wage Base, then 2.4% shall be substituted for 2.7%
above.
(4) The balance of the Employer's contributions over the amount
allocated above, if any, shall be allocated to each Participant's Account
in the same proportion that his total Compensation for the Plan Year
bears to the total Compensation of all Participants for such year.
For each Non-Key Employee who is a Participant in this Plan and another
non-paired defined contribution plan maintained by the Employer, the minimum 3%
allocation specified above shall be provided as specified in F3 of the Adoption
Agreement.
(g) For purposes of the minimum allocations set forth above, the
percentage allocated to the participant's Combined Account of any Key
Employee shall be equal to the ratio of the sum of the Employer's
contributions and Forfeitures allocated on behalf of such Key Employee
divided by the "415 Compensation" for such Key Employee.
(h) For any Top Heavy Plan Year, the minimum allocations set forth in
this Section shall be allocated to the Participant's Combined Account of
all - Non-Key Employees who are Participants and who are employed by the
Employer on the last day of the Plan Year, including Non-Key Employees
who have (1) failed to complete a Year of Service; or (2) declined to
make mandatory contributions (if required) or, in the case of a cash or
deferred arrangement, elective contributions to the Plan.
(i) Notwithstanding anything herein to the contrary, in any Plan Year in
which the Employer maintains both this Plan and a defined benefit pension
plan included in a Required Aggregation Group which is top heavy, the
Employer shall not be required to provide a Non-Key Employee with both
the full separate minimum defined benefit plan benefit and the full
separate defined contribution plan allocations. Therefore, if the
Employer maintains both a Defined Benefit and a Defined Contribution Plan
that are a Top Heavy Group, the top heavy minimum benefits shall be
provided as follows:
(1) Applies if F1b of the Adoption Agreement is Selected -
(i) The requirements of Section 2.1 shall apply except that each
Non-Key Employee who is a Participant in the Profit Sharing Plan
or Money Purchase Plan and who is also a Participant in the
Defined Benefit Plan shall receive a minimum allocation of five
percent (5%) of such Participant's "415 Compensation" from the
applicable Defined Contribution Plan(s).
(ii) For each Non-Key Employee who is a Participant only in the
Defined Benefit Plan the Employer will provide a minimum
non-integrated benefit equal to 2% of his highest five
consecutive year average "415 Compensation" for each Year of
Service while a
<PAGE>
Participant in the Plan, in which the Plan is top heavy, not to
exceed ten.
(iii) For each Non-Key Employee who is a Participant only in this
Defined Contribution Plan, the Employer shall provide a
contribution equal to 3% of his "415 Compensation".
(2) Applies if F1c of the Adoption Agreement is Selected
(i) The minimum allocation specified in Section 4.3(i)(l)(i)
shall be 7 1/2% if the Employer elects in the Adoption Agreement
for years in which the Plan is Top Heavy, but not Super Top
Heavy.
(ii) The minimum benefit specified in Section 4.3(i)(l)(ii) shall
be 3% if the Employer elects in the Adoption Agreement for years
in which the Plan is Top Heavy, but not Super Top Heavy.
(iii) The minimum allocation specified in Section 4.3(i)(l)(iii)
shall be 4% if the Employer elects in the Adoption Agreement for
years in which the Plan is Top Heavy, but not Super Top Heavy.
(j) For the purposes of this Section "415 Compensation" shall be limited
to $200,000 (unless adjusted in such manner as permitted under Code
Section 415(d)). However, for Plan Years beginning prior to January 1,
1989, the $200,000 limit shall apply only for Top Heavy Plan Years and
shall not be adjusted.
(k) Notwithstanding anything herein to the contrary, any Participant who
terminated employment during the Plan Year for reasons other than death,
Total and Permanent Disability, or retirement shall or shall not share in
the allocations of the Employer's Contributions and Forfeitures as
provided in the Adoption Agreement. Notwithstanding the foregoing, for
Plan Years beginning after 1989, if this is a standardized Plan, any such
terminated Participant shall share in the allocations as provided in this
Section provided such Participant completed more than 500 Hours of
Service.
(l) Notwithstanding anything herein to the contrary, Participants
terminating for reasons of death, Total and Permanent Disability, or
retirement shall share in the allocations as provided in this Section
regardless of whether they completed a Year of Service during the Plan
Year.
(m) If a Former Participant is reemployed after five (5) consecutive
1-Year Breaks in Service, then separate accounts shall be maintained as
follows;
(1) one account for nonforfeitable benefits attributable to
pre-break service; and
(2) one account representing his employer derived account
balance in the Plan attributable to post-break service.
(n) Notwithstanding any election in the Adoption Agreement to the
contrary, if this is a non-standardized Plan that would otherwise fail to
meet the requirements of Code Sections 401(a)(26), 410(b)(1), or
410(b)(2)(A)(i) and the Regulations thereunder because Employer
Contributions have not been allocated to a sufficient number or
percentage of Participants for a Plan Year, then the following rules
shall apply:
(1) The group of Participants eligible to share in the
Employer's contribution and Forfeitures for the Plan Year shall be
expanded to include the minimum number of Participants who would not
otherwise be eligible as are necessary to satisfy the applicable
test specified above. The specific participants who shall be come
eligible under the terms of this paragraph shall be those who are
actively employed on the last day of the Plan Year and, when
compared to similarly situated Participants, have completed the
greatest number of Hours of Service in the plan Year.
(2) If after application of paragraph (1) above, the applicable
test is still not satisfied, then the group of Participants eligible
to share in the Employer's contribution and Forfeitures for the Plan
Year shall be further expanded to include the minimum number of
Participants who are not actively employed on the last day of the
<PAGE>
Plan Year as are necessary to satisfy the applicable test, The
specific Participants who shall become eligible to share shall be
those Participants, when compared to similarly situated
Participants, who have completed the greatest number of Hours of
Service in the Plan Year before terminating employment.
Nothing in this Section shall permit the reduction of a Participant's
accrued benefit. Therefore any amounts that have previously been allocated to
Participants may not be reallocated to satisfy these requirements. In such
event, the Employer shall make an additional contribution equal to the amount
such affected Participants would have received had they been included in the
allocations, even if it exceeds the amount which would be deductible under Code
Section 404. Any adjustment to the allocations pursuant to this paragraph shall
be considered a retroactive amendment adopted by the last day of the Plan Year.
4.4 MAXIMUM ANNUAL ADDITIONS
(a)(1) If the Participant does not participate in, and has never
participated in another qualified plan maintained by the Employer, or a
welfare benefit fund (as defined in Code Section 419(e)), maintained by
the Employer, or an individual medical account (as defined in Code
Section 415(1)(2)) maintained by the Employer, which provides Annual
Additions, the amount of Annual Additions which may be credited to the
Participant's accounts for any Limitation Year shall not exceed the
lesser of the Maximum Permissible Amount or any other limitation
contained in this Plan. If the Employer contribution that would otherwise
be contributed or allocated to the Participant's accounts would cause the
Annual Additions for the Limitation Year to exceed the Maximum
Permissible Amount, the amount contributed or allocated will be reduced
so that the Annual Additions for the Limitation Year will equal the
Maximum Permissible Amount.
(2) Prior to determining the Participant's actual Compensation
for the Limitation Year, the Employer may determine the Maximum
Permissible Amount for a Participant on the basis of a reasonable
estimation of the Participant's Compensation for the Limitation
Year, uniformly determined for all Participants similarly situated.
(3) As soon as is administratively feasible after the end of the
Limitation Year, the Maximum Permissible Amount for such Limitation
Year shall be determined on the basis of the Participant's actual
compensation for such Limitation Year.
(4) If there is an excess amount pursuant to Section 4.4(a)(2)
or Section 4.5, the excess will be disposed of in one of the
following manners, as uniformly determined by the Plan Administrator
for all Participants similarly situated:
(i) Any Deferred Compensation or nondeductible Voluntary
Employee Contributions, to the extent they would reduce the
Excess Amount will be distributed to the Participant;
(ii) If, after the application of subparagraph (i), an Excess
Amount still exists, and the Participant is covered by the Plan
at the end of the Limitation Year, the Excess Amount in the
Participant's account will be used to reduce Employer
contributions (including any allocation of Forfeitures) for such
Participant in the next Limitation Year, and each succeeding
Limitation Year if necessary;
(iii) If, after the application of subparagraph (i), an Excess
Amount still exists, and the Participant is not covered by the
Plan at the end of a Limitation Year, the Excess Amount will be
held unallocated in a suspense account. The suspense account will
be applied to reduce future Employer contributions (including
allocation of any Forfeitures) for all remaining Participants in
the next Limitation Year, and each succeeding Limitation Year if
necessary;
(iv) If a suspense account is in existence at any time during a
Limitation Year pursuant
<PAGE>
to this Section, it will not participate in the allocation of
investment gains and losses. If a suspense account is in
existence at any time during a particular limitation year, all
amounts in the suspense account must be allocated and reallocated
to participants' accounts before any employer contributions or
any employee contributions may be made to the plan for that
limitation year. Excess amounts may not be distributed to
participants or former participants.
(b) (1) This subsection applies if, in addition to this Plan, the
Participant is covered under another qualified Regional Prototype defined
contribution plan maintained by the Employer, or a welfare benefit fund
(as defined in Code Section 419(e)) maintained by the Employer, or an
individual medical account (as defined in Code Section 415(1)(2))
maintained by the Employer, which provides Annual Additions, during any
Limitation Year. The Annual Additions which may be credited to a
Participant's accounts under this Plan for any such Limitation Year shall
not exceed the Maximum Permissible Amount reduced by the Annual Additions
credited to a Participant's accounts under the other plans and welfare
benefit funds for the same Limitation Year. If the Annual Additions with
respect to the participant under other defined contribution plans and
welfare benefit funds maintained by the Employer are less than the
Maximum Permissible Amount and the Employer contribution that would
otherwise be contributed or allocated to the Participant's accounts under
this Plan would cause the Annual Additions for the Limitation Year to
exceed this limitation, the amount contributed or allocated will be
reduced so that the Annual Additions under all such plans and welfare
benefit funds for the Limitation Year will equal the Maximum Permissible
Amount. If the Annual Additions with respect to the Participant under
such other defined contribution plans and welfare benefit funds in the
aggregate are equal to or greater than the Maximum Permissible Amount, no
amount will be contributed or allocated to the Participant's account
under this Plan for the Limitation Year.
(2) Prior to determining the Participant's actual Compensation
for the Limitation Year, the Employer may determine the Maximum
Permissible Amount for a Participant in the manner described in
Section 4.4(a)(2).
(3) As soon as is administratively feasible after the end of the
Limitation Year, the Maximum Permissible Amount for the Limitation
Year will be determined on the basis of the Participant's actual
Compensation for the Limitation Year.
(4) If, pursuant to Section 4.4(b)(2) or as a result of the
allocation of Forfeitures, a Participant's Annual Additions under
this Plan and such other plans would result in an Excess Amount for
a Limitation"Year, the Excess Amount will be deemed to consist of
the Annual Additions last allocated, except that Annual Additions
attributable to a welfare benefit fund or individual medical account
will be deemed to have been allocated first regardless of the actual
allocation date.
(5) If an Excess Amount was allocated to a Participant on an
allocation date of this Plan which coincides with an allocation date
of another plan, the Excess Amount attributed to this Plan will be
the product of,
(i) the total Excess Amount allocated as of such date, times
(ii) the ratio of (1) the Annual Additions allocated to the
Participant for the Limitation Year as of such date under this
Plan to (2) the total Annual Additions allocated to the
Participant for the Limitation Year as of such date under this
and all the other qualified defined contribution plans.
(6) Any Excess Amount attributed to this Plan will be
<PAGE>
disposed in the manner described in Section 4.4(a)(4).
(c) If the Participant is covered under another qualified defined
contribution plan maintained by the Employer which is not a Regional
Prototype Plan, Annual Additions which may be credited to the
Participant's account under this Plan for any Limitation Year will be
limited in accordance with Section 4.4(b), unless the Employer provides
other limitations in the Adoption Agreement.
(d) If the Employer maintains, or at any time maintained, a qualified
defined benefit plan covering any Participant in this Plan the sum of the
Participant's Defined Benefit Plan Fraction and Defined Contribution Plan
Fraction will not exceed 1.0 in any Limitation Year. The Annual Additions
which may be credited to the Participant's account under this Plan for
any Limitation Year will be limited in accordance with the Limitation on
Allocations Section of the Adoption Agreement.
(e) For purposes of applying the limitations of Code Section 415, the
transfer of funds from one qualified plan to another is not an "annual
addition". In addition, the following are not Employee contributions for
the purposes of Section 4.4(L)(1)(2): (1) rollover contributions (as
defined in Code Sections 402(a)(5), 403(a)(4), 403(b)(8) and 408(d)(3));
(2) repayments of loans made to a Participant from the Plan; (3)
repayments of distributions received by an Employee pursuant to Code
Section 411(a)(7)(B) (cash-outs); (4) repayments of distributions
received by an Employee pursuant to Code Section 411(a)(3)(D) (mandatory
contributions); and (5) Employee contributions to a simplified employee
pension excludable from gross income under Code Section 408(k)(6).
(f) For purposes of this Section, the following terms shall be defined
as follows:
(1) Annual Additions means the sum credited to a Participant's
accounts for any Limitation Year of (1) Employer contributions, (2)
effective with respect to "limitation years" beginning after
December 31, 1986, Employee contributions, (3) forfeitures, (4)
amounts allocated, after March 31, 1984, to an individual medical
account,- as defined in Code Section 415(1)(2), which is part of a
pension or annuity plan maintained by the Employer and (5) amounts
derived from contributions paid or accrued after December 31, 1985,
in taxable years ending after such date, which are attributable to
post-retirement medical benefits allocated to the separate account
of a key employee (as defined in Code Section 4r9A(d)(3)) under a
welfare benefit fund (as defined in Code Section 419(e)) maintained
by the Employer. Except, however, the "415-Compensation" percentage
limitation referred to in paragraph (a)(2) above shall not apply to:
(1) any contribution for medical benefits (within the meaning of
Code Section 419A(L)(2)) after separation from service which is
otherwise treated as an "annual addition", or (2) any amount
otherwise treated as an "annual addition" under Code Section
415(1)(1). Notwithstanding the foregoing, for "limitation years"
beginning prior to January 1, 1987, only that portion of Employee
contributions equal to the lesser of Employee contributions in
excess of six percent (6%) of "415 Compensation" or one-half of
Employee contributions shall be considered an "annual addition".
For this purpose, any Excess Amount applied under Sections 4.4(a)(4) and
4.4(b)(6) in the Limitation Year to reduce Employer contributions shall be
considered Annual Additions for such Limitation Year.
(2) Compensation means a Participant's Compensation as elected
in the Adoption Agreement. However, regardless of any selection
made in the Adoption Agreement, "415 Compensation" shall exclude
compensation which is not currently includable in the Participant's
gross income by reason of the application of Code Sections 125,
402(a)(8), 402(h)(1)(B), or 403(b).
For limitation years beginning after December 31, 1991, for purposes of
applying the limitations of this article, compensation for a limitation year is
the compensation actually paid or made available during such limitation year.
Notwithstanding the preceding sentence, compensation for a participant in
a defined contribution plan who is permanently and totally disabled (as defined
in section 22(e)(3) of the Internal Revenue Code) is the compensation such
participant would have received for the limitation year if the participant had
been paid at the rate of compensation paid immediately before becoming
permanently and totally disabled; such imputed compensation for the disabled
participant may be taken into account only if
<PAGE>
the participant is not a Highly Compensated Employee and contributions made
on behalf of such participant are nonforfeitable when made.
(3) Defined Benefit Fraction means a fraction, the numerator of
which is the sum of the Participant's Projected Annual Benefits
under all the defined benefit plans (whether or not terminated)
maintained by the Employer, and the denominator of which is the
lesser of 125 percent of the dollar limitation determined for the
Limitation Year under Code Sections 415(b) and (d) or 140 percent of
his Highest Average Compensation including any adjustments under
Code Section 415(b).
Notwithstanding the above, if the Participant was a Participant as of the
first day of the first Limitation Year beginning after December 31, 1986, in one
or more defined benefit plans maintained by the Employer which were in existence
on May 6, 1986, the denominator of this fraction will not be less than 125
percent of the sum of the annual benefits under such plans which the Participant
had accrued as of the end of the close of the last Limitation Year beginning
before January 1, 1987, disregarding any changes in the terms and conditions of
the plan after May 5, 1986. The preceding sentence applies only if the defined
benefit plans individually and in the aggregate satisfied the requirements of
Code Section 415 for all Limitation Years beginning before January 1, 1987.
Notwithstanding the foregoing, for any Top Heavy Plan Year, 100 shall be
substituted for 125 unless the extra minimum allocation is being made pursuant
to the Employer's election in Fl of the Adoption Agreement. However, for any
Plan Year in which this Plan is a Super Top Heavy Plan, 100 shall be substituted
for 125 in any event.
(4) Defined Contribution Dollar Limitation means $30,000, or, if
greater, one-fourth of the defined benefit dollar limitation set
forth in Code Section 415(b)(1) as in effect for the Limitation
Year.
(5) Defined Contribution Fraction means a fraction, the
numerator of which is the sum of the Annual Additions to the
Participant's account under all the defined contribution plans
(whether or not terminated) maintained by the Employer for the
current and all prior Limitation Years, (including the Annual
Additions attributable to the Participant's nondeductible voluntary
employee contributions to any defined benefit plans, whether or not
terminated, maintained by the Employer and the annual additions
attributable to all welfare benefit funds, as defined in Code
Section 419(e), and individual medical accounts, as defined in Code
Section 415(1)(2), maintained by the Employer), and the denominator
of which is the sum of the maximum aggregate amounts for the current
and all prior Limitation Years of Service with the Employer
(regardless of whether a defined contribution plan was maintained by
the Employer). The maximum aggregate amount in any Limitation Year
is the lesser of 125 percent of the Defined Contribution Dollar
Limitation or 35 percent of the Participant's Compensation for such
year. For Limitation Years beginning prior to January 1, 1987, the
"annual addition" shall not be recomputed to treat all Employee
contributions as an Annual Addition.
If the Employee was a Participant as of the end of the first day of the
first Limitation Year beginning after December 31, 1986, in one or more defined
contribution plans maintained by the Employer which were in existence on May 5,
1986, the numerator of this fraction will be adjusted if the sum of this
fraction and the Defined Benefit Fraction would otherwise exceed 1.0 under the
terms of this Plan. Under the adjustment, an amount equal to the product of (1)
the excess of the sum of the fractions over 1.0 times (2) the denominator of
this fraction, will be permanently subtracted from the numerator of this
fraction. The adjustment is calculated using the fractions as they would be
computed as of the end of the last Limitation Year beginning before January 1,
1987, and disregarding any changes in the terms and conditions of the plan made
after May 5, 1986, but using the Code Section 415 limitation applicable to the
first Limitation Year beginning on or after January 1, 1987.
Notwithstanding the foregoing, for any Top Heavy Plan Year, 100 shall be
substituted for 125 unless the extra minimum allocation is being made pursuant
to the Employer's election in Fl of the Adoption Agreement. However, for any
Plan Year in which this Plan is a Super Top Heavy Plan, 100 shall be substituted
for 125 in any event.
(6) Employer means the Employer that adopts this Plan and all
Affiliated Employers, except that for purposes of this Section,
Affiliated Employers shall be determined pursuant to the
modification made by Code Section 415(h).
(7) Excess Amount means the excess of the Participant's Annual
<PAGE>
Additions for the Limitation Year over the Maximum Permissible
Amount.
(8) Highest Average Compensation means the average Compensation
for the three consecutive Years of Service with the Employer that
produces the highest average. A Year of Service with the Employer is
the 12 consecutive month period defined in Section EI of the
Adoption Agreement which is used to determine Compensation under the
Plan.
(9) Limitation Year means the Compensation Year (a 12
consecutive month period) as erected by the Employer in the Adoption
Agreement. All qualified plans maintained by the Employer must use
the same Limitation Year. If the Limitation Year is amended to a
different 12 consecutive month period, the new Limitation Year must
begin on a date within the Limitation Year in which the amendment is
made.
(10) Maximum Permissible Amount means the maximum Annual Addition
that may be contributed or allocated to a Participant's account
under the plan for any Limitation Year, which shall not exceed the
lesser of:
(i) the Defined Contribution Dollar Limitation, or
(ii) 25 percent of the Participant's Compensation for the
Limitation Year.
The Compensation Limitation referred to in (ii) shall not apply to any
contribution for medical benefits (within the meaning of Code Sections 401(h) or
419A(L)(2)) which is otherwise treated as an annual addition under Code Sections
415(1)(1) or 419A(d)(2).
If a short Limitation Year is created because of an amendment changing
the Limitation Year to a different 12 consecutive month period, the Maximum
Permissible Amount will not exceed the Defined Contribution Dollar Contribution
multiplied by the following fraction:
NUMBER OF MONTHS IN THE SHORT LIMITATION YEAR
12
(11) Projected Annual Benefit means the annual retirement benefit
(adjusted to an actuarially equivalent straight life annuity if such
benefit is expressed in a form other than a straight life annuity or
qualified Joint and Survivor Annuity) to which the Participant would
be entitled under the terms of the plan assuming:
(i) the Participant will continue employment until Normal
Retirement Age (or current age, if later), and
(ii) the Participant's Compensation for the current Limitation
Year and all other relevant factors used to determine benefits
under the Plan will remain constant for all future Limitation
Years.
(g) Regional Prototype Plan means a plan the form of which has been the
subject of a favorable notification letter from the Internal Revenue
Service.
(h) Notwithstanding anything contained in this Section to the contrary,
the limitations, adjustments and other requirements prescribed in this
Section shall at all times comply with the provisions of Code Section 415
and the Regulations thereunder, the terms of which are specifically
incorporated herein by reference.
4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS
(a) If as a result of the allocation of Forfeitures, a reasonable error
in estimating a Participant's annual Compensation, a reasonable error in
determining the amount of elective deferrals (within the meaning of Code Section
402(g)(3)) that may be made with respect to any Participant under the limits of
Section 4.4, or other facts and circumstances to which Regulation 1.415-6(b)(6)
shall be applicable, the "annual additions" under this Plan would cause the
maximum provided in Section 4.4 to be exceeded, the Administrator shall treat
the excess in accordance with Section 4.4(a)(4).
4.6 TRANSFERS FROM QUALIFIED PLANS
(a) If specified in the Adoption Agreement and with the consent of the
Administrator, amounts may be transferred from other qualified plans,
provided that the trust from which such funds are transferred permits the
transfer to be made and the transfer will not jeopardize the tax exempt
<PAGE>
status of the Plan or create adverse tax consequences for the Employer.
The amounts transferred shall be set up in a separate account herein
referred to as a "Participant's Rollover Account". Such account shall be
fully Vested at all times and shall not be subject to forfeiture for any
reason.
(b) Amounts in a Participant's Rollover Account shall be held by the
Trustee pursuant to the provisions of this Plan and may not be withdrawn
by, or distributed to the Participant, in whole or in part, except as
provided in Paragraphs (c) and (d) of this Section.
(c) Amounts attributable to elective contributions (as defined in
Regulation 1.401(k)-1(g)(4)), including amounts treated as elective
contributions, which are transferred from another qualified plan in a
plan-to-plan transfer shall be subject to the distribution limitations
provided for in Regulation 1.401(k)-l(d).
(d) At Normal Retirement Date, or such other date when the Participant
or his Beneficiary shall be entitled to receive benefits, the fair market
value of the Participant's Rollover Account shall be used to provide
additional benefits to the Participant or his Beneficiary. Any
distributions of amounts held in a Participant's Rollover Account shall
be made in a manner which is consistent with and satisfies the provisions
of Section 6.5, including, but not limited to, all notice and consent
requirements of Code Sections 411(a)(11) and 417 and the Regulations
thereunder. Furthermore, such amounts shall be considered as part of a
Participant's benefit in determining whether an involuntary cash-out of
benefits without Participant consent may be made.
(e) The Administrator may direct that employee transfers made after a
valuation date be segregated into a separate account for each Participant
until such time as the allocations pursuant to this Plan have been made,
at which time they may remain segregated or be invested as part of the
general Trust Fund, to be determined by the Administrator.
(f) For purposes of this Section, the term "qualified plan" shall mean
any tax qualified plan under Code Section 401(a). The term "amounts
transferred from other qualified plans" shall mean: (i) amounts
transferred to this Plan directly from another qualified plan; (ii)
lump-sum distributions received by an Employee from another qualified
plan which are eligible for tax free rollover to a qualified plan and
which are transferred by the Employee to this Plan within sixty (60) days
following his receipt thereof; (iii) amounts transferred to this Plan
from a conduit individual retirement account provided that the conduit
individual retirement account has no assets other than assets which (A)
were previously distributed to the Employee by another qualified plan as
a lump-sum distribution (B) were eligible for tax-free rollover to a
qualified plan and (C) were deposited in such conduit individual
retirement account within sixty (60) days of receipt thereof and other
than earnings on said assets; and (iv) amounts distributed to the
Employee from a conduit individual retirement account meeting the
requirements of clause (iii) above, and transferred by the Employee to
this Plan within sixty (60) days of his receipt thereof from such conduit
individual retirement account.
(g) Prior to accepting any transfers to which this Section applies, the
Administrator may require the Employee to establish that the amounts to
be transferred to this Plan meet the requirements of this Section and may
also require the Employee to provide an opinion of counsel satisfactory
to the Employer that the amounts to be transferred meet the requirements
of this Section.
(h) Notwithstanding anything herein to the contrary, a transfer directly
to this Plan from another qualified plan (or a transaction having the
effect of such a transfer) shall only be permitted if it will not result
in the elimination or reduction of any "Section 411(d)(6) protected
benefit" as described in Section 8.1.
4.7 VOLUNTARY CONTRIBUTIONS
(a) If this is an amendment to a Plan that had previously allowed
voluntary Employee contributions, then, except as provided in 4.7(b)
below, this Plan will not accept voluntary Employee contributions for
Plan Years beginning after the Plan Year in which this Plan is adopted by
the Employer.
(b) For 401(k) Plans, if elected in the Adoption Agreement, each
Participant may, at the discretion of the Administrator in a
nondiscriminatory manner, elect to voluntarily contribute a portion of
his compensation earned while a Participant under this Plan. Such
contributions shall be paid to the Trustee within a reasonable period of
time but in no event later than 90 days after the receipt of the
contribution.
(c) The balance in each Participant's Voluntary Contribution Account
shall be fully Vested at all times and shall not be subject to Forfeiture
for any reason.
<PAGE>
(d) A Participant may elect to withdraw his voluntary contributions from
his voluntary Contribution Account and the actual earnings thereon in a
manner which is consistent with and satisfies the provisions of Section
6.5, including, but not limited to, all notice and consent requirements
of Code Sections 411(a)(11) and 417 and the Regulations thereunder. If
the Administrator maintains sub-accounts with respect to voluntary
contributions (and earnings thereon) which were made on or before a
specified date, a Participant shall be permitted to designate which
sub-account shall be the source for his withdrawal. No Forfeitures shall
occur solely as a result of an Employee's withdrawal of Employee
contributions.
In the event such a withdrawal is made, or in the event a Participant has
received a hardship distribution pursuant to Regulation 1.401(k)-l(d)(2)(iii)(B)
from any plan maintained by the Employer, then such Participant shall be barred
from making any voluntary contributions for a period of twelve (12) months after
receipt of the withdrawal or distribution.
(e) At Normal Retirement Date, or such other date when the Participant
or his Beneficiary shall be entitled to receive benefits, the fair market
value of the Voluntary Contribution Account shall be used to provide
additional benefits to the Participant or his Beneficiary.
(f) The Administrator may direct that voluntary contributions made after
a valuation date be segregated into a separate account until such time as
the allocations pursuant to this Plan have been made, at which time they
may remain segregated or be invested as part of the general Trust Fund,
to be determined by the Administrator.
4.8 DIRECTED INVESTMENT ACCOUNT
(a) If elected in the Adoption Agreement, all Participants may direct
the Trustee as to the investment of all or a portion of any one or more
of their individual account balances. Participants may direct the Trustee
in writing to invest their account in specific assets as permitted by the
Administrator provided such investments are in accordance with the
Department of Labor regulations and are permitted by the Plan. That
portion of the account of any Participant so directing will thereupon be
considered a Directed Investment Account.
(b) A separate Directed Investment Account shall be established for each
Participant who has directed an investment. Transfers between the
Participant's regular account and their Directed Investment Account shall
be charged and credited as the case may be to each account. The Directed
Investment Account shall not share in Trust Fund Earnings, but it shall
be charged or credited as appropriate with the net earnings, gains,
losses and expenses as well as any appreciation or depreciation in market
value during each Plan Year attributable to such account.
(c) The Administrator shall establish a procedure, to be applied in a
uniform and nondiscriminatory manner, setting forth the permissible
investment options under this Section, how often changes between
investments may be made, and any other limitations that the Administrator
shall impose on a Participant's right to direct investments.
4.9 QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS
(a) If this is an amendment to a Plan that previously permitted
deductible voluntary contributions, then each Participant who made a
"Qualified Voluntary Employee Contribution" within the meaning of Code
Section 219(e)(2) as it existed prior to the enactment of the Tax Reform
Act of 1986, shall have his contribution held in a separate Qualified
Voluntary Employee Contribution Account which shall be fully Vested at
all times. Such contributions, however, shall not be permitted if they
are attributable to taxable years beginning after December 31, 1986.
(b) A Participant may, upon written request delivered to the
Administrator, make withdrawals from his Qualified Voluntary Employee
Contribution Account. Any distribution shall be made in a manner which is
consistent with and satisfies the provisions of Section 6.5, including,
but not limited to, all notice and consent requirements of Code Sections
411(a)(11) and 417 and the Regulations thereunder.
(c) At Normal Retirement Date, or such other date when the Participant
or his Beneficiary shall be entitled to receive benefits, the fair market
value of the Qualified Voluntary Employee Contribution Account shall be
used to provide additional benefits to the Participant or his
Beneficiary.
(d) Unless the Administrator directs Qualified Voluntary Employee
Contributions made pursuant to this Section be segregated into a separate
account for each Participant, they shall be invested as part of the
general Trust Fund and share in earnings and losses.
<PAGE>
4.10 ACTUAL CONTRIBUTION PERCENTAGE TESTS
In the event this Plan previously provided for voluntary or mandatory
Employee contributions, then, with respect to Plan Years beginning after
December 31, 1986, such contributions must satisfy the provisions of Code
Section 401(m) and the Regulations thereunder.
4.11 INTEGRATION IN MORE THAN ONE PLAN
If the Employer and/or an Affiliated Employer maintain qualified
retirement plans integrated with Social Security such that any Participant in
this Plan is covered under more than one of such plans, then such plans will be
considered to be one plan and will be considered to be integrated if the extent
of the integration of all such plans does not exceed 100%. For purposes of the
preceding sentence, the extent of integration of a plan is the ratio, expressed
as a percentage, which the actual benefits, benefit rate, offset rate, or
employer contribution rate, whatever is applicable, under the Plan bears to the
limitation applicable to such Plan. If the Employer maintains two or more
standardized paired plans, only one plan may be integrated with Social Security.
ARTICLE V
VALUATIONS
5.1 VALUATION OF THE TRUST FUND
The Administrator shall direct the Trustee, as of each Anniversary Date,
and at such other date or dates deemed necessary by the Administrator, herein
called "valuation date", to determine the net worth of the assets comprising the
Trust Fund as it exists on the "valuation date". In determining such net worth,
the Trustee shall value the assets comprising the TrUSt Fund at their fair
market value as of the "valuation date" and shall deduct all expenses for which
the Trustee has not yet obtained reimbursement from the Employer or the Trust
Fund.
5.2 METHOD OF VALUATION
In determining the fair market value of securities held in the Trust Fund
which are listed on a registered stock exchange, the Administrator shall direct
the Trustee to value the same at the prices they were last traded on such
exchange preceding the close of business on the "valuation date". If such
securities were not traded on the "valuation date", or if the exchange on which
they are traded was not open for business on the "valuation date", then the
securities shall be valued at the prices at which they were last traded prior to
the "valuation date". Any unlisted security held in the Trust Fund shall be
valued at its bid price next preceding the close of business on the "valuation
date", which bid price shall be obtained from a registered broker or an
investment banker. In determining the fair market value of assets other than
securities for which trading or bid prices can be obtained, the Trustee may
appraise such assets itself, or in its discretion, employ one or more appraisers
for that purpose and rely on the values established by such appraiser or
appraisers.
ARTICLE VI
DETERMINATION AND DISTRIBUTION OF BENEFITS
6.1 DETERMINATION OF BENEFITS UPON RETIREMENT
Every Participant may terminate his employment with the Employer and
retire for the purposes hereof on or after his Normal Retirement Date or Early
Retirement Date. Upon such Normal Retirement Date or Early Retirement Date, all
amounts credited to such Participant's Combined Account shall become
distributable. However, a Participant may postpone the termination of his
employment with the Employer to a later date, in which event the participation
of such Participant in the Plan, including the right to receive allocations
pursuant to Section 4.3, shall continue until his Late Retirement Date. Upon a
Participant's Retirement Date, or as soon thereafter as is practicable, the
Administrator shall direct the distribution of all amounts credited to such
Participant's Combined Account in accordance with Section 6.5.
6.2 DETERMINATION OF BENEFITS UPON DEATH
(a) Upon the death of a Participant before his Retirement Date or other
termination of his employment, all amounts credited to such Participant's
Combined Account shall become fully Vested. The Administrator shall
direct, in accordance with the provisions of Sections 6.6 and 6.7, the
distribution of the deceased Participant's accounts to the Participant's
Beneficiary.
(b) Upon the death of a Former Participant, the Administrator shall
direct, in accordance with the provisions of Sections 6.6 and 6.7, the
distribution of any remaining amounts credited to the accounts of such
deceased Former Participant to such Former Participant's Beneficiary.
(c) The Administrator may require such proper proof of death and such
evidence of the right of any person to receive payment of the value of
the account of a deceased Participant or Former Participant as the
Administrator may deem desirable. The Administrator's determination of
death and of the right of any person to receive payment shall be
conclusive.
(d) Unless otherwise elected in the manner prescribed in Section 6.6,
the Beneficiary of the Pre-Retirement Survivor Annuity shall be the
Participant's spouse. Except, however, the Participant may designate a
Beneficiary other than his spouse for the Pre-Retirement Survivor Annuity
if:
<PAGE>
(1) the Participant and his spouse have validly waived the
Pre-Retirement Survivor Annuity in the manner prescribed in Section
6.6, and the spouse has waived his or her right to of the
Participant's Beneficiary, or
(2) the Participant is legally separated or has been abandoned
(within the meaning of local law) and the Participant has a court order
to such effect (and there is no "qualified domestic relations order" as
defined in Code Section 414(p) which provides otherwise), or
(3) the Participant has no spouse, or
(4) the spouse cannot be located.
In such event, the designation of a Beneficiary shall be made on a form
satisfactory to the Administrator. A Participant may at any time revoke his
designation of a Beneficiary or change his Beneficiary by filing written notice
of such revocation or change with the Administrator. However, the Participant's
spouse must again consent in writing to any change in Beneficiary unless the
original consent acknowledged that the spouse had the right to limit consent
only to a specific Beneficiary and that the spouse voluntarily elected to
relinquish such right. The Participant may, at any time, designate a Beneficiary
for death benefits payable under the Plan that are in excess of the
pre-Retirement Survivor Annuity. In the event no valid designation of
Beneficiary exists at the time of the Participant's death, the death benefit
shall be payable to his estate.
(e) If the plan provides an insured death benefit and a Participant dies
before any insurance coverage to which he is entitled under the Plan is
effected, his death benefit from such insurance coverage shall be limited
to the standard rated premium which was or should have been used for such
purpose.
(f) In the event of any conflict between the terms of this Plan and the
terms of any Contract issued hereunder, the Plan provisions shall
control.
6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY
In the event of a Participant's Total and Permanent Disability prior to
his Retirement Date or other termination of his employment, all amounts credited
to such Participant's Combined Account shall become fully Vested. In the event
of a Participant's Total and Permanent Disability, the Administrator, in
accordance with the provisions of Sections 6.5 and 6.7, shall direct the
distribution to such Participant of all amounts credited to such Participant's
Combined Account as though he had retired.
6.4 DETERMINATION OF BENEFITS UPON TERMINATION
(a) On or before the Anniversary Date, or other valuation date,
coinciding with or subsequent to the termination of a Participant's
employment for any reason other than retirement, death, or Total and
Permanent Disability, the Administrator may direct that the amount of the
Vested portion of such Terminated Participant's Combined Account be
segregated and invested separately. In the event the Vested portion of a
participant's Combined Account is not segregated, the amount shall remain
in a separate account for the Terminated Participant and share in
allocations pursuant to Section 4.3 until such time as a distribution is
made to the Terminated Participant. The amount of the portion of the
Participant's Combined Account which is not vested may be credited to a
separate account (which will always share in gains and losses of the
Trust Fund) and at such time as the amount becomes a Forfeiture shall be
treated in accordance with the provisions of the Plan regarding
Forfeitures.
Regardless of whether distributions in kind are permitted, in the event
that the amount of the Vested portion of the Terminated Participant's Combined
Account equals or exceeds the fair market value of any insurance Contracts, the
Trustee, when so directed by the Administrator and agreed to by the Terminated
Participant, shall assign, transfer, and set over to such Terminated Participant
all Contracts on his life in such form or with such endorsements, so that the
settlement options and forms of payment are consistent with the provisions of
Section 6.5. In the event that the Terminated Participant's Vested portion does
not at least equal the fair market value of the Contracts, if any, the
Terminated Participant may pay over to the Trustee the sum needed to make the
distribution equal to the value of the Contracts being assigned or transferred,
or the Trustee, pursuant to the Participant's election, may borrow the cash
value of the Contracts from the Insurer so that the value of the Contracts is
equal to the Vested portion of the Terminated Participant's Combined Account and
then assign the Contracts to the Terminated Participant.
Distribution of the funds due to a Terminated Participant shall be made
on the occurrence of an event which would result in the distribution had the
Terminated Participant remained in the employ of the Employer (upon the
Participant's death, Total and Permanent Disability, Early or Normal
Retirement). However, at the election of the Participant, the Administrator
shall direct that the entire Vested portion of the Terminated Participant's
Combined Account to be payable to such Terminated Participant provided the
conditions, if any, set forth in the
<PAGE>
Adoption Agreement have been satisfied. Any distribution under this paragraph
shall be made in a manner which is consistent with and satisfies the
provisions of Section 6.5, including but not limited to, all notice and
consent requirements of Code Sections 411(a)(11) and 417 and the Regulations
thereunder.
Notwithstanding the above, if the value of a Terminated Participant's
Vested benefit derived from Employer and Employee contributions does not exceed,
and at the time of any prior distribution, has never exceeded $3,500, the
Administrator shall direct that the entire Vested benefit be paid to such
Participant in a single lump-sum without regard to the consent of the
Participant or the Participant's spouse. A Participant's Vested benefit shall
not include Qualified Voluntary Employee Contributions within the meaning of
Code Section 72(0)(5)(B) for Plan Years beginning prior to January 1, 1989.
(b) The Vested portion of any Participant's Account shall be a
percentage of such Participant's Account determined on the basis of the
Participant's number of Years of Service according to the vesting schedule
specified in the Adoption Agreement.
(c) For any Top Heavy Plan Year, one of the minimum top heavy vesting
schedules as elected by the Employer in the Adoption Agreement will
automatically apply to the Plan. The minimum top heavy vesting schedule
applies to all benefits within the meaning of Code Section 411(a)(7)
except those attributable to Employee contributions, including benefits
accrued before the effective date of Code Section 416 and benefits
accrued before the Plan became top heavy. Further, no decrease in a
Participant's Vested percentage may occur in the event the Plan's status
as top heavy changes for any Plan Year. however, this Section does not
apply to the account balances of any Employee who does not have an Hour
of Service after the Plan has initially become top heavy and the Vested
percentage of such Employee's Participant's Account shall be determined
without regard to this Section 6.4(c).
If in any subsequent Plan Year, the Plan ceases to be a Top Heavy Plan,
the Administrator shall continue to use the vesting schedule in effect while the
Plan was a Top Heavy Plan for each Employee who had an Hour of Service during a
Plan Year when the Plan was Top Heavy.
(d) Notwithstanding the vesting schedule above, upon the complete
discontinuance of the Employer's contributions to the Plan or upon any
full or partial termination of the Plan, all amounts credited to the
account of any affected Participant shall become 100% Vested and shall
not thereafter be subject to Forfeiture.
(e) If this is an amended or restated Plan, then notwithstanding the
vesting schedule specified in the Adoption Agreement, the Vested
percentage of a Participant's account shall not be less than the Vested
percentage attained as of the later of the effective date or adoption
date of this amendment and restatement. The computation of a
Participant's nonforfeitable percentage of his interest in the Plan shall
not be reduced as the result of any direct or indirect amendment to this
Article, or due to changes in the Plan's status as a Top Heavy Plan.
(f) If the Plan's vesting schedule is amended, or if the Plan is amended
in any way that directly or indirectly affects the computation of the
Participant's nonforfeitable percentage or if the Plan is deemed amended
by an automatic change to a top heavy vesting schedule, then each
Participant with at least 3 Years of Service as of the expiration date of
the election period may elect to have his nonforfeitable percentage
computed under the Plan without regard to such amendment or change.
Notwithstanding the foregoing, for Plan Years beginning before January 1,
1989, or with respect to Employees who fail to complete at least one (1)
Hour of Service in a Plan Year beginning after December 31, 1988, five
(5) shall be substituted for three (3) in the preceding sentence. If a
Participant fails to make such election, then such Participant shall be
subject to the new vesting schedule. The Participant's election period
shall commence on the adoption date of the amendment and shall end 60
days after the latest of;
(1) the adoption date of the amendment,
(2) the effective date of the amendment, or
(3) the date the Participant receives written notice of the
amendment from the Employer or Administrator.
(g) (1) If any Former Participant shall be reemployed by the
Employer before a 1-Year Break in Service occurs, he shall continue to
participate in the Plan in the same manner as if such termination had not
occurred.
(2) If any Former Participant shall be reemployed by the Employer
before five (5) consecutive 1-Year Breaks in Service, and such
Former Participant had received a distribution of his entire Vested
<PAGE>
interest prior to his reemployment, his forfeited account shall be
reinstated only if he repays the full amount distributed to him
before the earlier of five (5) years after the first date on which
the Participant is subsequently reemployed by the Employer or the
close of the first period of 5 consecutive 1-Year Breaks in Service
commencing after the distribution. If a distribution occurs for any
reason other than a separation from service, the time for repayment
may not end earlier than five (5) years after the date of
separation. In the event the Former Participant does repay the full
amount distributed to him, the undistributed portion of the
Participant's Account must be restored in full, unadjusted by any
gains or losses occurring subsequent to the Anniversary Date or
other valuation date preceding his termination. If an employee
receives a distribution pursuant to this section and the employee
resumes employment covered under this plan, the employee's
employer-derived account balance will be restored to the amount on
the date of distribution if the employee repays to the plan the full
amount of the distribution attributable to employer contributions
before the earlier of 5 years after the first date on which the
participant is subsequently re-employed by the employer, or the date
the participant incurs 5 consecutive 1-year breaks in service
following the date of the distribution. If a non-Vested Former
Participant was deemed to have received a distribution and such
Former Participant is reemployed by the Employer before five (5)
consecutive 1-Year Breaks in Service, then such Participant will be
deemed to have repaid the deemed distribution as of the date of
reemployment.
(3) If any Former Participant is reemployed after a 1-Year Break
in Service has occurred, Years of Service shall include Years of
Service prior to his 1-Year Break in Service subject to the
following rules:
(i) Any Former Participant who under the Plan does not have a
nonforfeitable right to any interest in the Plan resulting from
Employer contributions shall lose credits if his consecutive
1-Year Breaks in Service equal or exceed the greater of (A) five
(5) or (B) the aggregate number of his pre-break Years of
Service;
(ii) After five (5) consecutive 1-Year Breaks in Service, a
Former Participant's Vested Account balance attributable to
pre-break service shall not be increased as a result of
post-break service;
(iii) A Former Participant who is reemployed and who has not had
his Years of Service before a 1-Year Break in Service disregarded
pursuant to (i) above, shall participate in the Plan as of his
date of reemployment;
(iv) If a Former Participant completes a Year of Service (a
1-Year Break in Service previously occurred, but employment had
not terminated), he shall participate in the Plan retroactively
from the first day of the Plan Year during which he completes one
(1) Year of Service.
(h) In determining Years of Service for purposes of vesting under the
Plan, Years of Service shall be excluded as specified in the Adoption
Agreement.
6.5 DISTRIBUTION OF BENEFITS
(a) (1) Unless otherwise elected as provided below, a Participant who is
married on the "annuity starting date" and who does not die before the
"annuity starting date" shall receive the value of all of his benefits in
the form of a Joint and Survivor Annuity. The Joint and Survivor Annuity
is an annuity that commences immediately and shall be equal in value to a
single life annuity. Such joint and survivor benefits following the
Participant's death shall continue to the spouse during the spouse's
lifetime at a rate equal to 50% of the rate at which such benefits were
payable
<PAGE>
to the Participant. This Joint and Survivor Annuity shall be
considered the designated qualified Joint and Survivor Annuity and
automatic form of payment for the purposes of this Plan. However, the
Participant may elect to receive a smaller annuity benefit with
continuation of payments to the spouse at a rate of seventy-five percent
(75%) or one hundred percent (100%) of the rate payable to a Participant
during his lifetime which alternative Joint and Survivor Annuity shall be
equal in value to the automatic Joint and 50% Survivor Annuity. An
unmarried Participant shall receive the value of his benefit in the form
of a life annuity. Such unmarried Participant, however, may elect in
writing to waive the life annuity. The election must comply with the
provisions of this Section as if it were an election to waive the Joint
and Survivor Annuity by a married Participant, but without the spousal
consent requirement. The Participant may elect to have any annuity
provided for in this Section distributed upon the attainment of the
earliest retirement age" under the Plan. The "earliest retirement age" is
the earliest date on which, under the Plan, the Participant could elect
to receive retirement benefits.
(2) Any election to waive the Joint and Survivor Annuity must be
made by the Participant in writing during the election period and
be consented to by the Participant's spouse. If the spouse is
legally incompetent to give consent, the spouse's legal guardian,
even if such guardian is the Participant, may give consent.
Such election shall designate a Beneficiary (or a form of benefits) that
may not be changed without spousal consent (unless the consent of the spouse
expressly permits designations by the Participant without the requirement of
further consent by the spouse). Such spouse's consent shall be irrevocable and
must acknowledge the effect of such election and be witnessed by a Plan
representative or a notary public. Such consent shall not be required if it is
established to the satisfaction of the Administrator that the required consent
cannot be obtained because there is no spouse, the spouse cannot be located, or
other circumstances that may be prescribed by Regulations. The election made by
the participant and consented to by his spouse may be revoked by the Participant
in writing without the consent of the spouse at any time during the election
period. The number of revocations shall not be limited. Any new election must
comply with the requirements of this paragraph. A former spouse's waiver shall
not be binding on a new spouse.
(3) The election period to waive the Joint and Survivor Annuity
shall be the 90 day period ending on the "annuity starting date."
(4) For purposes of this Section and Section 6.6, the "annuity
starting date" means the first day of the first period for which an
amount is paid as an annuity, or, in the case of a benefit not
payable in the form of an annuity, the first day on which all events
have occurred which entitles the Participant to such benefit.
(5) With regard to the election, the Administrator shall provide
to the Participant no less than 30 days and no more than 90 days
before the "annuity starting date" a written explanation of:
(i) the terms and conditions of the Joint and Survivor Annuity,
and
(ii) the Participant's right to make and the effect of an
election to waive the Joint and Survivor Annuity, and
(iii) the right of the Participant's spouse to consent to any
election to waive the Joint and Survivor Annuity, and
(iv) the right of the Participant to revoke such election, and
the effect of such revocation.
(b) In the event a married Participant duly elects pursuant to paragraph
(a)(2) above not to receive his benefit in the form of a Joint and
Survivor Annuity, or if such Participant is not married, in the form of a
life annuity, the Administrator, pursuant to the election of the
Participant, shall direct the distribution to a Participant or his
Beneficiary any amount to which he is entitled under the Plan in one or
more of the following methods which are permitted pursuant to the
Adoption Agreement:
<PAGE>
(1) One lump-sum payment in cash or in property;
(2) Payments over a period certain in monthly, quarterly,
semiannual, or annual cash installments. In order to provide such
installment payments, the Administrator may direct that the
Participant's interest in the Plan be segregated and invested
separately, and that the funds in the segregated account be used for
the payment of the installments. The period over which such payment
is to be made shall not extend beyond the Participant's life
expectancy (or the life expectancy of the Participant and his
designated Beneficiary);
(3) Purchase of or providing an annuity. However, such annuity
may not be in any form that will provide for payments over a period
extending beyond either the life of the Participant (or the lives of
the Participant and his designated Beneficiary) or the life
expectancy of the Participant (or the life expectancy of the
Participant and his designated Beneficiary).
(c) The present value of a Participant's Joint and Survivor Annuity
derived from Employer and Employee contributions may not be paid without
his written consent if the value exceeds, or has ever exceeded at the
time of any prior distribution, $3,500. Further, the spouse of a
Participant must consent in writing to any immediate distribution. If the
value of the Participant's benefit derived from Employer and Employee
contributions does not exceed $3,500 and has never exceeded $3,500 at the
time of any prior distribution, the Administrator may immediately
distribute such benefit without such Participant's consent. NO
distribution may be made under the preceding sentence after the "annuity
starting date" unless the Participant and his spouse consent in writing
to such distribution. Any written consent required under this paragraph
must be obtained not more than 90 days before commencement of the
distribution and shall be made in a manner consistent with Section
6.5(a)(2).
(d) Any distribution to a Participant who has a benefit which exceeds,
or has ever exceeded at the time of any prior distribution, $3,500 shall
require such Participant's consent if such distribution commences prior
to the later of his Normal Retirement Age or age 62. With regard to this
required consent:
(1) No consent shall be valid unless the Participant has
received a general description of the material features and an
explanation of the relative values of the optional forms of benefit
available under the Plan that would satisfy the notice requirements
of Code Section 417.
(2) The Participant must be informed of his right to defer
receipt of the distribution. If a Participant fails to consent, it
shall be deemed an election to defer the commencement of payment of
any benefit. However, any election to defer the receipt of benefits
shall not apply with respect to distributions which are required
under Section 6.5(e).
(3) Notice of the rights specified under this paragraph shall be
provided no less than 30 days and no more than 90 days before the
"annuity starting date".
(4) Written consent of the Participant to the distribution must
not be made before the Participant receives the notice and must not
be made more than 90 days before the "annuity starting date".
(5) No consent shall be valid if a significant detriment is
imposed under the Plan on any Participant who does not consent to
the distribution.
(e) Notwithstanding any provision in the Plan to the contrary, the
distribution of a Participant's benefits, made on or after January 1,
1985, whether under the Plan or through the purchase of an annuity
Contract, shall be made in accordance with the following requirements and
shall otherwise comply with Code Section 401(a)(9) and the Regulations
thereunder (including Regulation Section 1.401(a)(9)-2), the provisions
of which are incorporated herein by reference:
(1) A Participant's benefits shall be distributed to him not
later than April 1st of the calendar year following the later of (i)
the calendar year in which the Participant attains age 70 1/2 or
(ii) the calendar year in which the Participant retires, provided,
however, that this clause (ii) shall not apply in the case of a
<PAGE>
Participant who is a "five (5) percent owner" at any time during the
five (5) Plan Year period ending in the calendar year in which he
attains age 70 1/2 or, in the case of a Participant who becomes a
"five (5) percent owner" during any subsequent Plan Year, clause
(ii) shall no longer apply and the required beginning date shall be
the April 1st of the calendar year following the calendar year in
which such subsequent Plan Year ends. Alternatively, distributions
to a Participant must begin no later than the applicable April 1st
as determined under the Preceding sentence and must be made over the
life of the Participant (or the lives of the Participant and the
Participant's designated Beneficiary) or, if benefits are paid in
the form of a Joint and Survivor Annuity, the life expectancy of the
Participant (or the life expectancies of the Participant and his
Designated Beneficiary) in accordance with Regulations. For Plan
Years beginning after December 31, 1988, clause (ii) above shall not
apply to any Participant unless the Participant had attained age 70
1/2 before January 1, 1988 and was not a "five (5) percent owner" at
any time during the Plan Year ending with or within the calendar
year in which the Participant attained age 66 1/2 or any subsequent
Plan Year.
(2) Distributions to a Participant and his Beneficiaries shall
only be made in accordance with the incidental death benefit
requirements of Code Section 401(a)(9)(G) and the Regulations
thereunder.
Additionally, for calendar years beginning before 1989, distributions may
also be made under an alternative method which provides that the then present
value of the payments to be made over the period of the Participant's life
expectancy exceeds fifty percent (50%) of the then present value of the total
payments to be made to the Participant and his Beneficiaries.
(f) For purposes of this Section, the life expectancy of a Participant
and a Participant's spouse (other than in the case of a life annuity)
shall be redetermined annually in accordance with Regulations if
permitted pursuant to the Adoption Agreement. If the Participant or the
Participant's spouse may elect whether recalculations will be made, then
the election, once made, shall be irrevocable. If no election is made by
the time distributions must commence, then the life expectancy of the
Participant and the Participant's spouse shall not be subject to
recalculation. Life expectancy and joint and last survivor expectancy
shall be computed using the return multiples in Tables v and VI of
Regulation 1.72-9.
(g) All annuity Contracts under this Plan shall be non-transferable when
distributed. Furthermore, the terms of any annuity Contract purchased and
distributed to a Participant or spouse shall comply with all of the
requirements of this Plan.
(h) Subject to the spouse's right of consent afforded under the Plan,
the restrictions imposed by this Section shall not apply if a Participant
has, prior to January 1, 1984, made a written designation to have his
retirement benefit paid in an alternative method acceptable under Code
Section 401(a) as in effect prior to the enactment of the Tax Equity and
; Fiscal Responsibility Act of 1982.
(i) If a distribution is made at a time when a Participant who has not
terminated employment is not fully Vested in his Participant's Account
and the Participant may increase the Vested percentage in such account:
(1) A separate account shall be established for the
Participant's interest in the Plan as of the time of the
distribution, and
(2) At any relevant time the Participant's Vested portion of the
separate account shall be equal to an amount ("X") determined by the
formula:
x equals P(AB plus (RxD)) - (R x D)
For purposes of applying the formula: P is the Vested percentage at
the relevant time, AB is the account balance at the relevant time, D
is the amount of distribution, and R is the ratio of the account
balance at the relevant time to the account balance after
distribution.
6.6 DISTRIBUTION OF BENEFITS UPON DEATH
(a) Unless otherwise elected as provided below, a Vested Participant who
dies before the annuity starting date and who has a surviving spouse
shall have the Pre-Retirement Survivor Annuity paid to his surviving
spouse. The Participant's spouse
<PAGE>
may direct that payment of the Pre-Retirement Survivor Annuity commence
within a reasonable period after the Participant's death. If the spouse
does not so direct, payment of such benefit will commence at the time
the participant would have attained the later of his Normal Retirement
Age or age 62. However, the spouse may elect a later commencement date.
Any distribution to the Participant's spouse shall be subject to the
rules specified in Section 6.6(h).
(b) Any election to waive the Pre-Retirement Survivor Annuity before
the Participant's death must be made by the Participant in writing
during the election period and shall require the spouse's irrevocable
consent in the same manner provided for in Section 6.5(a)(2). Further,
the spouse's consent must acknowledge the specific nonspouse
Beneficiary. Notwithstanding the foregoing, the nonspouse Beneficiary
need not be acknowledged, provided the consent of the spouse
acknowledges that the spouse has the right to limit consent only to a
specific Beneficiary and that the spouse voluntarily elects to
relinquish such right.
(c) The election period to waive the Pre-Retirement Survivor Annuity
shall begin on the first day of the Plan Year in which the Participant
attains age 35 and end on the date of the Participant's death. An
earlier waiver (with spousal consent) may be made provided a written
explanation of the Pre-Retirement Survivor Annuity is given to the
Participant and such waiver becomes invalid at the beginning of the
Plan Year in which the Participant turns age 35. In the event a Vested
Participant separates from service prior to the beginning of the
election period, the election period shall begin on the date of such
separation from service.
(d) With regard to the election, the Administrator shall provide each
Participant within the applicable period, with respect to such
Participant (and consistent with Regulations), a written explanation of
the Pre-Retirement Survivor Annuity containing comparable information
to that required pursuant to Section 6.5(a)(5). For the purposes of
this paragraph, the term "applicable period" means, with respect to a
Participant, whichever of the following periods ends last:
(1) The period beginning with the first day of the Plan Year in
which the Participant attains age 32 and ending with the close of
the Plan Year preceding the Plan Year in which the Participant
attains age 35;
(2) A reasonable period after the individual becomes a
Participant. For this purpose, in the case of an individual who
becomes a Participant after age 32, the explanation must be
provided by the end of the three-year period beginning with the
first day of the first Plan Year for which the individual is a
participant;
(3) A reasonable period ending after the Plan no longer fully
subsidizes the cost of the pre-Retirement Survivor Annuity with
respect to the Participant;
(4) A reasonable period ending after Code Section 401(a)(11)
applies to the Participant; or
(5) A reasonable period after separation from service in the case
of a Participant who separates before attaining age 35. For this
purpose, the Administrator must provide the explanation
<PAGE>
beginning one year before the separation from service and ending
one year after separation,
(e) The Pre-Retirement Survivor Annuity provided for in this Section
shall apply only to Participants who are credited with an Hour of
Service on or after August 23, 1984. Former Participants who are not
credited with an Hour of Service on or after August 23, 1984 shall be
provided with rights to the pre-Retirement Survivor Annuity in
accordance with Section 303(e)(2) of the Retirement Equity Act of 1984.
(f) If the value of the Pre-Retirement Survivor Annuity derived from
Employer and Employee contributions does not exceed $3,500 and has
never exceeded $3,500 at the time of any prior distribution, the
Administrator shall direct the immediate distribution of such amount to
the Participant's spouse. No distribution may be made under the
preceding sentence after the annuity starting date unless the spouse
consents in writing. If the value exceeds, or has ever exceeded at the
time of any prior distribution, $3,500, an immediate distribution of
the entire amount may be made to the surviving spouse, provided such
surviving spouse consents in writing to such distribution. Any written
consent required under this paragraph must be obtained not more than 90
days before commencement of the distribution and shall be made in a
manner consistent with Section 6.5(a)(2).
(g) (1) In the event there is an election to waive the Pre-Retirement
Survivor Annuity, and for death benefits in excess of the
Pre-Retirement Survivor Annuity, such death benefits shall be paid
to the Participant's Beneficiary by either of the following
methods, as elected by the Participant (or if no election has been
made prior to the Participant's death, by his Beneficiary) subject
to the rules specified in Section 6.6(h) and the selections made
in the Adoption Agreement:
(i) One lump-sum payment in cash or in property;
(ii) Payment in monthly, quarterly, semi-annual, or annual
cash installments over a period to be determined by the
Participant or his Beneficiary. After periodic installments
commence, the Beneficiary shall have the right to reduce the
period over which such periodic installments shall be made,
and the cash amount of such periodic installments shall be
adjusted accordingly.
(iii) If death benefits in excess of the Pre-Retirement
Survivor Annuity are to be paid to the surviving spouse, such
benefits may be paid pursuant to (i) or (ii) above, or used to
purchase an annuity so as to increase the payments made
pursuant to the pre-Retirement Survivor Annuity;
(2) In the event the death benefit payable pursuant to Section 6.2
is payable in installments, then, upon the death of the
Participant, the Administrator may direct that the death benefit
be segregated and invested separately, and that the funds
accumulated in the segregated account be used for the payment of
the installments.
(h) Notwithstanding any provision in the Plan to the contrary,
distributions upon the death of a Participant made on or after January
1, 1985, shall be made in accordance with the following requirements
and shall otherwise comply with Code Section 401(a)(9) and the
Regulations thereunder.
(1) If it is determined, pursuant to Regulations, that the
distribution of a Participant's interest has begun and the
Participant dies before his entire interest has been distributed
to him, the remaining portion of such interest shall be
distributed at least as rapidly as under the method of
distribution selected pursuant to Section 6.5 as of his date of
death.
(2) If a Participant dies before he has begun to receive any
distributions of his interest in the Plan or before distributions
are deemed to have begun pursuant to Regulations, then his death
benefit shall be distributed to his Beneficiaries in accordance
with the following rules subject to the selections made in the
Adoption
<PAGE>
Agreement and Subsections 6.6(h)(3) and 6.6(i) below:
(i) The entire death benefit shall be distributed to the
Participant's Beneficiaries by December 31st of the calendar
year in which the fifth anniversary of the Participant's death
occurs;
(ii) The 5-year distribution requirement of (i) above shall
not apply to any portion of the deceased Participant's
interest which is payable to or for the benefit of a
designated Beneficiary. In such event, such portion shall be
distributed over the life of such designated Beneficiary (or
over a period not extending beyond the life expectancy of such
designated Beneficiary) provided such distribution begins not
later than December 31st of the calendar year immediately
following the calendar year in which the Participant died;
(iii) However, in the event the Participant's spouse
(determined as of the date of the Participant's death) is his
designated Beneficiary, the provisions of (ii) above shall
apply except that the requirement that distributions commence
within one year of the Participant's death shall not apply. In
lieu thereof, distributions must commence on or before the
later of: (1) December 31st of the calendar year immediately
following the calendar year in which the Participant died; or
(2) December 31st of the calendar year in which the
Participant would have attained age ; 70 1/2. If the surviving
spouse dies before distributions to such spouse begin, then
the 5-year distribution requirement of this Section shall
apply as if the spouse was the Participant.
(3) Notwithstanding subparagraph (2) above, or any selections made
in the Adoption Agreement, if a participant's death benefits are to be
paid in the form of a Pre-Retirement Survivor Annuity, then
distributions to the Participant's surviving spouse must commence on or
before the later of: (1) December 31st of the calendar year immediately
following the calendar year in which the Participant died; or (2)
December 31st of the calendar year in which the Participant would have
attained age 70 1/2.
(i) For purposes of Section 6.6(h)(2), the election by a designated
Beneficiary to be excepted from the 5-year distribution requirement (if
permitted in the Adoption Agreement) must be made no later than
December 31st of the calendar year following the calendar year of the
Participant's death. Except, however, with respect to a designated
Beneficiary who is the Participant's surviving spouse, the election
must be made by the earlier of: (1) December 31st of the calendar year
immediately following the calendar year in which the Participant died
or, if later, the calendar year in which the Participant would have
attained age 70 1/2; or (2) December 31st of the calendar year which
contains the fifth anniversary of the date of the Participant's death.
An election by a designated Beneficiary must be in writing and shall be
irrevocable as of the last day of the election period stated herein. In
the absence of an election by the Participant or a designated
Beneficiary, the 5-year distribution requirement shall apply.
(j) For purposes of this Section, the life expectancy of a Participant
and a Participant's spouse (other than in the case of a life annuity)
shall or shall not be redetermined annually as provided in the Adoption
Agreement and in accordance with Regulations. If the Participant or the
Participant's spouse may elect, pursuant to the Adoption Agreement, to
have life expectancies recalculated, then the election, once made shall
be irrevocable. If no election is made by the time distributions must
commence, then the life expectancy of the Participant and the
Participant's spouse shall not be subject to recalculation. Life
expectancy and joint and last survivor expectancy shall be computed
using the return multiples in Tables V and VI of Regulation Section
1.72-9.
(k) In the event that less than 100% of a Participant's interest in
the Plan is distributed to such Participant's spouse, the
<PAGE>
portion of the distribution attributable to the Participant's Voluntary
Contribution Account shall be in the same proportion that the
Participant's Voluntary Contribution Account bears to the Participant's
total interest in the Plan.
(l) Subject to the spouse's right of consent afforded under the Plan,
the restrictions imposed by this Section shall not apply if a
Participant has, prior to January 1, 1984, made a written designation
to have his death benefits paid in an alternative method acceptable
under Code Section 401(a) as in effect prior to the enactment of the
Tax Equity and Fiscal Responsibility Act of 1982.
6.7 TIME OF SEGREGATION OR DISTRIBUTION
Except as limited by Sections 6.5 and 6.6, whenever a distribution is
to be made, or a series of payments are to commence, on or as of an
Anniversary Date, the distribution or series of payments may be made or begun
on such date or as soon thereafter as is practicable, but in no event later
than 180 days after the Anniversary Date. However, unless a Former
Participant elects in writing to defer the receipt of benefits (such election
may not result in a death benefit that is more than incidental), the payment
of benefits shall begin not later than the 60th day after the close of the
Plan Year in which the latest of the following events occurs: (a) the date on
which the Participant attains the earlier of age 65 or the Normal Retirement
Age specified herein; (b) the 10th anniversary of the year in which the
Participant commenced participation in the Plan; or (c) the date the
Participant terminates his service with the Employer.
Notwithstanding the foregoing, the failure of a Participant and, if
applicable, the Participant's spouse, to consent to a distribution pursuant
to Section 6.5(d), shall be deemed to be an election to defer the
commencement of payment of any benefit sufficient to satisfy this Section.
6.8 DISTRIBUTION FOR MINOR BENEFICIARY
In the event a distribution is to be made to a minor, then the
Administrator may direct that such distribution be paid to the legal
guardian, or if none, to a parent of such Beneficiary or a responsible adult
with whom the Beneficiary maintains his residence, or to the custodian for
such Beneficiary under the Uniform Gift to Minors Act or Gift to Minors Act,
if such is permitted by the laws of the state in which said Beneficiary
resides. Such a payment to the legal guardian, custodian or parent of a minor
Beneficiary shall fully discharge the Trustee, Employer, and Plan from
further liability on account thereof.
6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN
In the event that all, or any portion, of the distribution payable to a
Participant or his Beneficiary hereunder shall, at the later of the
Participant's attainment of age 62 or his Normal Retirement Age, remain
unpaid solely by reason of the inability of the Administrator, after sending
a registered letter, return receipt requested, to the last known address, and
after further diligent effort, to ascertain the whereabouts of such
Participant or his Beneficiary, the amount so distributable shall be treated
as a Forfeiture pursuant to the Plan. In the event a Participant or
Beneficiary is located subsequent to his benefit being reallocated, such
benefit shall be restored, first from Forfeitures, if any, and then from an
additional Employer contribution if necessary.
6.10 PRE-RETIREMENT DISTRIBUTION
For Profit Sharing Plans and 401(k) Profit Sharing plans, if elected in
the Adoption Agreement, at such time as a Participant shall have attained the
age specified in the Adoption Agreement, the Administrator, at the election
of the Participant, shall direct the distribution of up to-the entire amount
then credited to the accounts maintained on behalf of the Participant.
However, no such distribution from the Participant's Account shall occur
prior to 100% Vesting. In the event that the Administrator makes such a
distribution, the Participant shall continue to be eligible to participate in
the Plan on the same basis as any other Employee. Any distribution made
pursuant to this Section shall be made in a manner consistent with Section
6.5, including, but not limited to, all notice and consent requirements of
Code Sections 411(a)(11) and 417 and the Regulations thereunder.
6.11 ADVANCE DISTRIBUTION FOR HARDSHIP
(a) For Profit Sharing Plans, if elected in the Adoption Agreement,
the Administrator, at the election of the Participant, shall direct the
distribution to any Participant in any one Plan Year up to the lesser
of 100% of his Participant's Combined Account valued as of the last
Anniversary Date or other valuation date or the amount necessary to
satisfy the immediate and heavy financial need of the Participant. Any
distribution made pursuant to this Section shall be deemed to be made
as of the first day of the Plan Year or, if later, the valuation date
immediately preceding the date of distribution, and the account from
which the distribution is made shall be reduced accordingly. Withdrawal
under this Section shall be authorized only if the distribution is on
account of:
(1) medical expenses described in Code Section 213(d) incurred by
the Participant, his spouse, or any of his dependents (as defined
in Code Section 152) or expenses necessary for these persons to
obtain medical care;
<PAGE>
(2) The purchase (excluding mortgage payments) of a principal
residence for the Participant;
(3) Funeral expenses for a member of the Participant's family;
(4) Payment of tuition and related educational fees for the next
12 months of post-secondary education for the Participant, his
spouse, children, or dependents; or
(5) The need to prevent the eviction of the Participant from his
principal residence or foreclosure on the mortgage of the
Participant's principal residence.
(b) No such distribution shall be made from the Participant's Account
until such Account has become fully Vested.
(c) Any distribution made pursuant to this Section shall be made in a
manner which is consistent with and satisfies the provisions of Section
6.5, including, but not limited to, all notice and consent requirements
of Code Sections 411(a)(11) and 417 and the Regulations thereunder.
6.12 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS
All rights and benefits, including elections, provided to a Participant
in this Plan shall be subject to the rights afforded to any "alternate payee"
under a "qualified domestic relations order." Furthermore, a distribution to
an "alternate payee" shall be permitted if such distribution is authorized by
a "qualified domestic relations order," even if the affected Participant has
not reached the "earliest retirement age" under the Plan. For the purposes of
this Section, "alternate payee," "qualified domestic relations order" and
"earliest retirement age" shall have the meaning set forth under Code Section
414(p).
6.13 SPECIAL RULE FOR NON-ANNUITY PLANS
If elected in the Adoption Agreement, the following shall apply to a
Participant in a Profit Sharing Plan or 401(k) Profit Sharing Plan and to any
distribution, made on or after the first day of the first plan year beginning
after December 31, 1988, from or under a separate account attributable solely
to accumulated deductible employee contributions, as defined in Code Section
72(0)(5)(B), and maintained on behalf of a participant in a money purchase
pension plan, (including a target benefit plan):
(a) The Participant shall be prohibited from electing benefits in the
form of a life annuity;
(b) Upon the death of the Participant, the Participant's entire Vested
account balances will be paid to his or her surviving spouse, or, if
there is no surviving spouse or the surviving spouse has already
consented to waive his or her benefit, in accordance with Section 6.6,
to his designated Beneficiary;
(c) Except to the extent otherwise provided in this Section and
Section 6.5(h), the other provisions of Sections 6.2, 6.5 and 6.6
regarding spousal consent and the forms of distributions shall be
inoperative with respect to this Plan.
(d) If a distribution is one to which Sections 401(a)(11) and 417 of
the Internal Revenue Code do not apply, such distribution may commence
less than 30 days after the notice required under Section
1.411(a)-11(c) of the Income Tax Regulations is given, provided that:
(1) the Plan Administrator clearly informs the Participant that
the Participant has a right to a period of at least 30 days after
the notice to consider the decision of whether or not to elect a
distribution (and, if applicable, a particular distribution
option), and
(2) the Participant, after receiving the notice, affirmatively
elects a distribution.
This Section shall not apply to any Participant if it is determined
that this Plan is a direct or indirect transferee of a defined benefit plan
or money purchase plan, or a target benefit plan, stock bonus or profit
sharing plan which would otherwise provide for a life annuity form of payment
to the Participant.
ARTICLE VII
TRUSTEE
7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE
The Trustee shall have the following categories of responsibilities:
(a) Consistent with the "funding policy and method" determined by the
Employer to invest, manage, and control the Plan assets subject,
however, to the direction of an Investment Manager if the Employer
should appoint such manager as to all or a portion of the assets of the
Plan;
(b) At the direction of the Administrator, to pay benefits required
under the Plan to be paid to Participants, or, in the event of their
death, to their Beneficiaries;
<PAGE>
(c) To maintain records of receipts and disbursements and furnish to
the Employer and/or Administrator for each Plan Year a written annual
report per Section 7.7; and
(d) If there shall be more than one Trustee, they shall act by a
majority of their number, but may authorize one or more of them to sign
papers on their behalf.
7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE
(a) The Trustee shall invest and reinvest the Trust Fund to keep the
Trust Fund invested without distinction between principal and income
and in such securities or property, real or personal, wherever
situated, as the Trustee shall deem advisable, including, but not
limited to, stocks, common or preferred, bonds and other evidences of
indebtedness or ownership, and real estate or any interest therein. The
Trustee shall at all times in making investments of the Trust Fund
consider, among other factors, the short and long-term financial needs
of the Plan on the basis of information furnished by the Employer. In
making such investments, the Trustee shall not be restricted to
securities or other property of the character expressly authorized by
the applicable law for trust investments; however, the Trustee shall
give due regard to any limitations imposed by the Code or the Act so
that at all times this Plan may qualify as a qualified Plan and Trust.
(b) The Trustee may employ a bank or trust company pursuant to the
terms of its usual and customary bank agency agreement, under which the
duties of such bank or trust company shall be of a custodial, clerical
and record-keeping nature.
(c) The Trustee may from time to time transfer to a common,
collective, or pooled trust fund maintained by any corporate Trustee
hereunder pursuant to Revenue Ruling 81-100, all or such part of the
Trust Fund as the Trustee may deem advisable, and such part or all of
the Trust Fund so transferred shall be subject to all the terms and
provisions of the common, collective, or pooled trust fund which
contemplate the commingling for investment purposes of such trust
assets with trust assets of other trusts. The Trustee may withdraw from
such common, collective, or pooled trust fund all or such part of the
Trust Fund as the Trustee may deem advisable.
(d) The Trustee, at the direction of the Administrator and pursuant to
instructions from the individual designated in the Adoption Agreement
for such purpose and subJect to the conditions set forth in the
Adoption Agreement, shall ratably apply for, own, and pay all premiums
on Contracts on the lives of the Participants. Any initial or
additional Contract purchased on behalf of a Participant shall have a
face amount of not less than $1,000, the amount set forth in the
Adoption Agreement, or the limitation of the Insurer, whichever is
greater. If a life insurance Contract is to be purchased for a
Participant, the aggregate premium for ordinary life insurance for each
Participant must be less than 50% of the aggregate contributions and
Forfeitures allocated to a Participant's Combined Account. For purposes
of this limitation, ordinary life insurance Contracts are Contracts
with both non-decreasing death benefits and non-increasing premiums. If
term insurance or universal life insurance is purchased with such
contributions, the aggregate premium must be 25% or less of the
aggregate contributions and Forfeitures allocated to a Participant's
Combined Account. If both term insurance and ordinary life insurance
are purchased with such contributions, the amount expended for term
insurance plus one-half of the premium for ordinary life insurance may
not in the aggregate exceed 25% of the aggregate Employer contributions
and Forfeitures allocated to a Participant's Combined Account. The
Trustee must distribute the Contracts to the Participant or convert the
entire value of the Contracts at or before retirement into cash or
provide for a periodic income so that no portion of such value may be
used to continue life insurance protection beyond retirement.
Notwithstanding the above, the limitations imposed herein with respect
to the purchase of life insurance shall not apply, in the case of a
profit Sharing Plan, to the portion of a Participant's Account that has
accumulated for at least two (2) Plan Years.
Notwithstanding anything hereinabove to the contrary, amounts credited
to a Participant's Qualified - voluntary Employee Contribution Account
pursuant to Section 4.9, shall not be applied to the purchase of life
insurance contracts.
(e) The Trustee will be the owner of any life insurance Contract
purchased under the terms of this Plan. The Contract must provide that
the proceeds will be payable to the Trustee; however, the Trustee shall
be required to pay over all proceeds of the Contract to the
Participant's designated Beneficiary in accordance with the
distribution provisions of Article VI. A Participant's spouse will be
the designated Beneficiary pursuant to Section 6.2, unless a qualified
election has been made in accordance with Sections 6.5 and 6.6 of the
Plan, if applicable. Under no circumstances
<PAGE>
shall the Trust retain any part of the proceeds. However, the Trustee
shall not pay the proceeds in a method that would violate the
requirements of the Retirement Equity Act, as stated in Article VI of
the Plan, or Code Section 401(a)(9) and the Regulations thereunder.
7.3 OTHER POWERS OF THE TRUSTEE
The Trustee, in addition to all powers and authorities under common
law, statutory authority, including the Act, and other provisions of this
Plan, shall have the following powers and authorities to be exercised in the
Trustee's sole discretion:
(a) To purchase, or subscribe for, any securities or other property
and to retain the same. In conjunction with the purchase of securities,
margin accounts may be opened and maintained;
(b) To sell, exchange, convey, transfer, grant options to purchase, or
otherwise dispose of any securities or other property held by the
Trustee, by private contract or at public auction, No person dealing
with the Trustee shall be bound to see to the application of the
purchase money or to inquire into the validity, expediency, or
propriety of any such sale or other disposition, with or without
advertisement;
(c) To vote upon any stocks, bonds, or other securities; to give
general or special proxies or powers of attorney with or without power
of substitution; to exercise any conversion privileges, subscription
rights or other options, and to make any payments incidental thereto;
to oppose, or to consent to, or otherwise participate in, corporate
reorganizations or other changes affecting corporate securities, and to
delegate discretionary powers, and to pay any assessments or charges in
connection therewith; and generally to exercise any of the powers of an
owner with respect to stocks, bonds, securities, or other property;
(d) To cause any securities or other property to be registered in the
Trustee's own name or in the name of one or more of the Trustee's
nominees, and to hold any investments in bearer form, but the books and
records of the Trustee shall at all times show that all such
investments are part of the Trust Fund;
(e) To borrow or raise money for the purposes of the Plan in such
amount, and upon such terms and conditions, as the Trustee shall deem
advisable; and for any sum so borrowed, to issue a promissory note as
Trustee, and to secure the repayment thereof by pledging all, or any
part, of the Trust Fund; and no person lending money to the Trustee
shall be bound to see to the application of the money lent or to
inquire into the validity, expediency, or propriety of any borrowing;
(f) To keep such portion of the Trust Fund in cash or cash balances as
the Trustee may, from time to time, deem to be in the best interests of
the Plan, without liability for interest thereon;
(g) to accept and retain for such time as it may deem advisable any
securities or other property received or acquired by it as Trustee
hereunder, whether or not such securities or other property would
normally be purchased as investments hereunder;
(h) To make, execute, acknowledge, and deliver any and all documents
of transfer and conveyance and any and all other instruments that may
be necessary or appropriate to carry out the powers herein granted;
(i) To settle, compromise, or submit to arbitration any claims, debts,
or damages due or owing to or from the Plan, to commence or defend
suits or legal or administrative proceedings, and to represent the Plan
in all suits and legal and administrative proceedings;
(j) To employ suitable agents and counsel and to pay their reasonable
expenses and compensation, and such agent or counsel may or may not be
agent or counsel for the Employer;
(k) To apply for and procure from the Insurer as an investment of the
Trust Fund such annuity, or other Contracts (on the life of any
Participant) as the Administrator shall deem proper; to exercise, at
any time or from time to time, whatever rights and privileges may be
granted under such annuity, or other Contracts; to collect, receive,
and settle for the proceeds of all such annuity, or other Contracts as
and when entitled to do so under the provisions thereof;
(l) To invest funds of the Trust in time deposits or savings accounts
bearing a reasonable rate of interest in the Trustee's bank;
(m) To invest in Treasury Bills and other forms of United States
government obligations;
(n) To sell, purchase and acquire put or call options if the options
are traded on and purchased through a national securities exchange
registered under the Securities
<PAGE>
Exchange Act of 1934, as amended, or, if the options are not traded on
a national securities exchange, are guaranteed by a member firm of the
New York Stock Exchange;
(o) To deposit monies in federally insured savings accounts or
certificates of deposit in banks or savings and loan associations;
(p) To pool all or any of the Trust Fund, from time to time, with
assets belonging to any other qualified employee pension benefit trust
created by the Employer or any Affiliated Employer, and to commingle
such assets and make joint or common investments and carry joint
accounts on behalf of this Plan and such other trust or trusts,
allocating undivided shares or interests in such investments or
accounts or any pooled assets of the two or more trusts in accordance
with their respective interests;
(q) To do all such acts and exercise all such rights and privileges,
although not specifically mentioned herein, as the Trustee may deem
necessary to carry out the purposes of the Plan.
(r) Directed Investment Account. The powers granted to the Trustee
shall be exercised in the sole fiduciary discretion of the Trustee.
However, if elected in the Adoption Agreement, each Participant may
direct the Trustee to separate and keep separate all or a portion of
his interest in the Plan; and further each Participant is authorized
and empowered, in his sole and absolute discretion, to give directions
to the Trustee in such form as the Trustee may require concerning the
investment of the Participant's Directed Investment Account, which
directions must be followed by the Trustee subject, however, to
restrictions on payment of life insurance premiums. Neither the Trustee
nor any other persons including the Administrator or otherwise shall be
under any duty to question any such direction of the Participant or to
review any securities or other property, real or personal, or to make
any suggestions to the Participant in connection therewith, and the
Trustee shall comply as promptly as practicable with directions given
by the Participant hereunder. Any such direction may be of a continuing
nature or otherwise and may be revoked by the participant at any time
in such form as the Trustee may require. The Trustee may refuse to
comply with any direction from the Participant in the event the
Trustee, in its sole and absolute discretion, deems such directions
improper by virtue of applicable law, and in such event, the Trustee
shall not be responsible or liable for any loss or expense which may
result. Any costs and expenses related to compliance with the
Participant's directions shall be borne by the Participant's Directed
Investment Account.
Notwithstanding anything hereinabove to the contrary, the Trustee shall
not, at any time after December 31, 1981, invest any portion of a Directed
Investment Account in "collectibles" within the meaning of that term as
employed in Code Section 408(m).
7.4 LOANS TO PARTICIPANTS
(a) If specified in the Adoption Agreement, the Trustee (or, if loans
are treated as Directed Investment pursuant to the Adoption Agreement,
the Administrator) may, in the Trustee's (or, if applicable, the
Administrator's) sole discretion, make loans to Participants or
Beneficiaries under the following circumstances: (1) loans shall be
made available to all Participants and Beneficiaries on a reasonably
equivalent basis; (2) loans shall not be made available to Highly
Compensated Employees in an amount greater than the amount made
available to other participants; (3) loans shall bear a reasonable rate
of interest; (4) loans shall be adequately secured; and (5) shall
provide for periodic repayment over a reasonable period of time.
(b) Loans shall not be made to any Shareholder-Employee or
Owner-Employee unless an exemption for such loan is obtained pursuant
to Act Section 408 and further provided that such loan would not be
subject to tax pursuant to Code Section 4975.
(c) Loans shall not be granted to any Participant that provide for a
repayment period extending beyond such Participant's Normal Retirement
Date.
(d) Loans made pursuant to this Section (when added to the outstanding
balance of all other loans made by the Plan to the Participant) shall
be limited to the lesser of:
(1) $50,000 reduced by the excess (if any) of the highest
outstanding balance of loans from the Plan to the Participant
during the one year period ending on the day before the date on
which such loan is made, over the outstanding balance of loans
from the Plan to the Participant on the date on which such loan
was made, or
(2) the greater of (A) one-half (1/2) of the present value of the
non-forfeitable accrued benefit of
<PAGE>
the Employee under the Plan, or (B), if permitted pursuant to the
Adoption Agreement, $10,000.
For purposes of this limit, all plans of the Employer shall be
considered one plan. Additionally, with respect to any loan made prior to
January 1, 1987, the $50,000 limit specified in (1) above shall be unreduced.
(e) No Participant loan shall take into account the present value of
such Participant's Qualified Voluntary Employee Contribution Account.
(f) Loans shall provide for level amortization with payments to be
made not less frequently than quarterly over a period not to exceed
five (5) years. However, loans used to acquire any dwelling unit which,
within a reasonable time, is to be used (determined at the time the
loan is made) as a principal residence of the Participant shall provide
for periodic repayment over a reasonable period of time that may exceed
five (5) years. Notwithstanding the foregoing, loans made prior to
January 1, 1987 which are used to acquire, construct, reconstruct or
substantially rehabilitate any dwelling unit which, within a reasonable
period of time is to be used (determined at the time the loan is made)
as a principal residence of the Participant or a member of his family
(within the meaning of Code Section 267(c)(4)) may provide for periodic
repayment over a reasonable period of time that may exceed five (5)
years. Additionally, loans made prior to January 1, 1987, may provide
for periodic payments which are made less frequently than quarterly and
which do not necessarily result in level amortization.
(g) An assignment or pledge of any portion of a Participant's interest
in the Plan and a loan, pledge, or assignment with respect to any
insurance Contract purchased under the Plan, shall be treated as a loan
under this Section.
(h) Any loan made pursuant to this Section after August 18, 1985 where
the Vested interest of the Participant is used to secure such loan
shall require the written consent of the Participant's spouse in a
manner consistent with Section 6.5(a) provided the spousal consent
requirements of such Section apply to the Plan. Such written consent
must be obtained within the 90-day period prior to the date the loan is
made. Any security interest herd by the Plan by reason of an
outstanding loan to the Participant shall be taken into account in
determining the amount of the death benefit or pre-Retirement Survivor
Annuity. However, no spousal consent shall be required under this
paragraph if the total accrued benefit subject to the security is not
in excess of $3,500.
(i) With regard to any loans granted or renewed on or after the last
day of the first Plan Year beginning after December 31, 1988, a
Participant loan program shall be established which must include, but
need not be limited to, the following:
(1) the identity of the person or positions authorized to
administer the Participant loan program;
(2) a procedure for applying for loans;
(3) the basis on which loans will be approved or denied;
(4) limitations, if any, on the types and amounts of loans
offered, including what constitutes a hardship or financial need if
selected in the Adoption Agreement;
(5) the procedure under the program for determining a reasonable
rate of interest;
(6) the types of collateral which may secure a Participant loan;
and
(7) the events constituting default and the steps that will be
taken to preserve plan assets.
Such Participant loan program shall be contained in a separate written
document which, when Properly executed, is hereby incorporated by reference
and made a part of this plan. Furthermore, such Participant loan program may
be modified or amended in writing from time to time without the necessity of
amending this Section of the Plan.
7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS
At the direction of the Administrator, the Trustee shall, from time to
time, in accordance with the terms of the Plan, make payments out of the
Trust Fund. The Trustee shall not be responsible in any way for the
application of such payments.
7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES
The Trustee shall be paid such reasonable compensation as set forth in
the Trustee's fee schedule (if the Trustee has such a schedule) or as agreed
upon in writing by the Employer and the Trustee. An individual serving as
Trustee who already receives full-time pay from the Employer shall not
receive compensation from this Plan. In addition, the
<PAGE>
Trustee shall be reimbursed for any reasonable expenses, including reasonable
counsel fees incurred by it as Trustee. Such compensation and expenses shall
be paid from the Trust Fund unless paid or advanced by the Employer. All
taxes of any kind and all kinds whatsoever that may be levied or assessed
under existing or future laws upon, or in respect of, the Trust Fund or the
income thereof, shall be paid from the Trust Fund.
7.7 ANNUAL REPORT OF THE TRUSTEE
Within a reasonable period of time after the later of the Anniversary
Date or receipt of the Employer's contribution for each Plan Year, the
Trustee, or its agent, shall furnish to the Employer and Administrator a
written statement of account with respect to the Plan Year for which such
contribution was made setting forth:
(a) the net income, or loss, of the Trust Fund;
(b) the gains, or losses, realized by the Trust Fund upon sales or
other disposition of the assets;
(c) the increase, or decrease, in the value of the Trust Fund;
(d) all payments and distributions made from the Trust Fund; and
(e) such further information as the Trustee and/or Administrator deems
appropriate. The Employer, forthwith upon its receipt of each such
statement of account, shall acknowledge receipt thereof in writing and
advise the Trustee and/or Administrator of its approval or disapproval
thereof. Failure by the Employer to disapprove any such statement of
account within thirty (30) days after its receipt thereof shall be deemed
an approval thereof. The approval by the Employer of any statement of
account shall be binding as to all matters embraced therein as between
the Employer and the Trustee to the same extent as if the account of the
Trustee had been settled by judgment or decree in an action for a
Judicial settlement of its account in a court of competent jurisdiction
in which the Trustee, the Employer and all persons having or claiming an
interest in the Plan were parties; provided, however, that nothing herein
contained shall deprive the Trustee of its right to have its accounts
judicially settled if the Trustee so desires.
7.8 AUDIT
(a) If an audit of the Plan's records shall be required by the Act and
the regulations thereunder for any Plan Year, the Administrator shall
direct the Trustee to engage on behalf of all Participants an independent
qualified public accountant for that purpose. Such accountant shall,
after an audit of the books and records of the Plan in accordance with
generally accepted auditing standards, within a reasonable period after
the close of the Plan Year, furnish to the Administrator and the Trustee
a report of his audit setting forth his opinion as to whether any
statements, schedules or lists, that are required by Act Section 103 or
the Secretary of Labor to be filed with the Plan's annual report, are
presented fairly in conformity with generally accepted accounting
principles applied consistently.
(b) All auditing and accounting fees shall be an expense of and may, at
the election of the Administrator, be paid from the Trust Fund.
(c) If some or all of the information necessary to enable the
Administrator to comply with Act Section 103 is maintained by a bank,
insurance company, or similar institution, regulated and supervised and
subject to periodic examination by a state or federal agency, it shall
transmit and certify the accuracy of that information to the
Administrator as provided in Act Section 103(b) within one hundred twenty
(120) days after the end of the Plan Year or such other date as may be
prescribed under regulations of the Secretary of Labor.
7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE
(a) The Trustee may resign at any time by delivering to the Employer, at
least thirty (30) days before its effective date, a written notice of his
resignation.
(b) The Employer may remove the Trustee by mailing by registered or
certified mail, addressed to such Trustee at his last known address, at
least thirty (30) days before its effective date, a written notice of his
removal.
(c) upon the death, resignation, incapacity, or removal of any Trustee,
a successor may be appointed by the Employer; and such successor, upon
accepting such appointment in writing and delivering same to the
Employer, shall, without further act, become vested with all the estate,
rights, powers, discretions, and duties of his predecessor with like
respect as if he were originally named as a Trustee herein. Until such a
successor is appointed, the remaining Trustee or Trustees shall have full
authority to act under the terms of the Plan.
(d) The Employer may designate one or more successors prior to the
death, resignation, incapacity, or removal of a
<PAGE>
Trustee. In the event a successor is so designated by the Employer and
accepts such designation, the successor shall, without further act,
become vested with all the estate, rights, powers, discretions, and
duties of his predecessor with the like effect as if he were originally
named as Trustee herein immediately upon the death, resignation,
incapacity, or removal of his predecessor.
(e) Whenever any Trustee hereunder ceases to serve as such, he shall
furnish to the Employer and Administrator a written statement of account
with respect to the portion of the Plan Year during which he served as
Trustee. This statement shall be either (i) included as part of the
annual statement of account for the Plan Year required under Section 7.7
or (ii) set forth in a special statement. Any such special statement of
account should be rendered to the Employer no later than the due date of
the annual statement of account for the Plan Year, The procedures set
forth in Section 7.7 for the approval by the Employer of annual
statements of account shall apply to any special statement of account
rendered hereunder and approval by the Employer of any such special
statement in the manner provided in Section 7.7 shall have the same
effect upon the statement as the Employer's approval of an annual
statement of account. No successor to the Trustee shall have any duty or
responsibility to investigate the acts or transactions of any predecessor
who has rendered all statements of account required by Section 7.7 and
this subparagraph.
7.10 TRANSFER OF INTEREST
Notwithstanding any other provision contained in this Plan, the Trustee
at the direction of the Administrator shall transfer the Vested interest, if
any, of such Participant in his account to another trust forming part of a
pension, profit sharing, or stock bonus plan maintained by such Participant's
new employer and represented by said employer in writing as meeting the
requirements of Code Section 401(a), provided that the trust to which such
transfers are made permits the transfer to be made.
(a) Notwithstanding any provision of the plan to the contrary, with
respect to distributions made after December 31, 1992, a Participant
shall be permitted to elect to have any "eligible rollover distribution"
transferred directly to an "eligible retirement plan" specified by the
Participant. The Plan provisions otherwise applicable to distributions
continue to apply to the direct transfer option. The Participant shall,
in the time and manner prescribed by the Administrator, specify the
amount to be directly transferred and the "eligible retirement plan" to
receive the transfer. Any portion of a distribution which is not
transferred shall be distributed to the Participant.
(b) For purposes of this Section, the term "eligible rollover
distribution" means any distribution other than a distribution of
substantially equal periodic payments over the life or life expectancy of
the Participant (or joint life or joint life expectancies of the
Participant and the designated beneficiary) or a distribution over a
period certain of ten years or more. Amounts required to be distributed
under Code Section 401(a)(9) are not eligible rollover distributions.
The direct transfer option described in subsection (a) applies only to
eligible rollover distributions which would otherwise be includable in
gross income if not transferred.
(c) For.purposes of this Section, the term "eligible retirement plan"
means an individual retirement account as described in Code Section
408(a), an individual retirement annuity as described in Code Section
408(b), an annuity plan as described in Code Section 403(a), or a defined
contribution plan as described in Code Section 401(a) which is exempt
from tax under Code Section 501(a) and which accepts rollover
distributions.
(d) The election described in subsection (a) also applies to the
surviving spouse after the Participant's death; however, distributions to
the surviving spouse may only be transferred to an individual retirement
account or individual retirement annuity. For purposes of subsection
(a), a spouse or former spouse who is the alternate payee under a
qualified domestic relations order as defined in Code Section 414(p) will
be treated as the Participant.
7.11 TRUSTEE INDEMNIFICATION
The Employer agrees to indemnify and save harmless the Trustee against
any and all claims, losses, damages, expenses and liabilities the Trustee may
incur in the exercise and performance of the Trustee's powers and duties
hereunder, unless the same are determined to be due to gross negligence or
willful misconduct.
7.12 EMPLOYER SECURITIES AND REAL PROPERTY
The Trustee shall be empowered to acquire and hold "qualifying Employer
securities" and "qualifying Employer real property," as those terms are
defined in the Act. However, no more than 100%, in the case of a Profit
Sharing Plan or 401(k) Plan or 10%, in the case of a Money Purchase Plan of
the fair market value of all the assets in the Trust Fund
<PAGE>
may be invested in "qualifying Employer securities" and "qualifying Employer
real property".
ARTICLE VIII
AMENDMENT, TERMINATION, AND MERGERS
8.1 AMENDMENT
(a) The Employer shall have the right at any time to amend this Plan
subject to the limitations of this Section. However, any amendment which
affects the rights, duties or responsibilities of the Trustee and
Administrator may only be made with the Trustee's and Administrator's
written consent. Any such amendment shall become effective as provided
therein upon its execution. The Trustee shall not be required to execute
any such amendment unless the amendment affects the duties of the Trustee
hereunder.
(b) The Employer may (1) change the choice of options in the Adoption
Agreement, (2) add overriding language in the Adoption Agreement when
such language is necessary to satisfy Code Sections 415 or 416 because of
the required aggregation of multiple plans, and (3) add certain model
amendments published by the Internal Revenue Service which specifically
provide that their adoption will not cause the Plan to be treated as an
individually designed plan. An Employer that amends the Plan for any
other reason, including a waiver of the minimum funding requirement under
Code Section 412(d), will no longer participate in this Regional
Prototype Plan and will be considered to have an individually designed
plan.
(c) The Employer expressly delegates authority to the sponsoring
organization of this Plan, the right to amend this Plan by submitting a
copy of the amendment to each Employer who has adopted this Plan after
first having received a ruling or favorable determination from the
Internal Revenue Service that the Plan as amended qualifies under Code
Section 401(a) and the Act.
(d) No amendment to the Plan shall be effective if it authorizes or
permits any part of the Trust Fund (other than such part as is required
to pay taxes and administration expenses) to be used for or diverted to
any purpose other than for the exclusive benefit of the Participants or
their Beneficiaries or estates; or causes any reduction in the amount
credited to the account of any Participant; or causes or permits any
portion of the Trust Fund to revert to or become property of the
Employer.
(e) Except as permitted by Regulations (including Regulation
1.411(d)-4), no Plan amendment or transaction having the effect of a Plan
amendment (such as a merger, plan transfer or similar transaction) shall
be effective if it eliminates or reduces any "Section 411(d)(6) protected
benefit" or adds or modifies conditions relating to "Section 411(d)(6)
protected benefits" the result of which is a further restriction on such
benefit unless such protected benefits are preserved with respect to
benefits accrued as of the later of the adoption date or effective date
of the amendment. "Section 411(d)(6) protected benefits" are benefits
described in Code Section 411(d)(6)(A), early retirement benefits and
retirement-type subsidies, and optional forms of benefit.
8.2 TERMINATION
(a) The Employer shall have the right at any time to terminate the Plan
by delivering to the Trustee and Administrator written notice of such
termination. upon any full or partial termination all amounts credited to
the affected Participants' Combined Accounts shall become 100% Vested and
shall not thereafter be subject to forfeiture, and all unallocated
amounts shall be allocated to the accounts of all Participants in
accordance with the provisions hereof.
(b) Upon the full termination of the Plan, the Employer shall direct the
distribution of the assets to Participants in a manner which is
consistent with and satisfies the provisions of Section 6.5.
Distributions to a Participant shall be made in cash (or in property if
permitted in the Adoption Agreement) or through the purchase of
irrevocable nontransferable deferred commitments from the Insurer. Except
as permitted by Regulations, the termination of the Plan shall not result
in the reduction of "Section 411(d)(6) protected benefits" as described
in Section 8.1.
8.3 MERGER OR CONSOLIDATION
This Plan may be merged or consolidated with, or its assets and/or
liabilities may be transferred to any other plan only if the benefits which
would be received by a Participant of this Plan, in the event of a termination
of the plan immediately after such transfer, merger or consolidation, are at
least equal to the benefits the Participant would have received if the Plan had
terminated immediately before the transfer, merger or consolidation and such
merger or consolidation does not otherwise result in the elimination or
reduction of any "Section 411(d)(6) protected benefits" as described in Section
8.l(e).
ARTICLE IX
MISCELLANEOUS
9.1 EMPLOYER ADOPTIONS
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(a) Any organization may become the Employer hereunder by executing the
Adoption Agreement in form satisfactory to the Trustee, and it shall
provide such additional information as the Trustee may require. The
consent of the Trustee to act as such shall be signified by its execution
of the Adoption Agreement.
(b) Except as otherwise provided in this Plan, the affiliation of the
Employer and the participation of its Participants shall be separate and
apart from that of any other employer and its participants hereunder.
9.2 PARTICIPANT'S RIGHTS
This Plan shall not be deemed to constitute a contract between the
Employer and any Participant or to be a consideration or an inducement for
the employment of any Participant or Employee. Nothing contained in this Plan
shall be deemed to give any Participant or Employee the right to be retained
in the service of the Employer or to interfere with the right of the Employer
to discharge any Participant or Employee at any time regardless of the effect
which such discharge shall have upon him as a Participant of this Plan.
9.3 ALIENATION
(a) Subject to the exceptions provided below, no benefit which shall be
payable to any person (including a Participant or his Beneficiary) shall
be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or charge, and any attempt to
anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge
the same shall be void; and no such benefit shall in any manner be liable
for, or subject to, the debts, contracts, liabilities, engagements, or
torts of any such person, nor shall it be subject to attachment or legal
process for or against such person, and the same shall not be recognized
except to such extent as may be required by law.
(b) This provision shall not apply to the extent a Participant or
Beneficiary is indebted to the Plan, for any reason, under any provision
of this Plan. At the time a distribution is to be made to or for a
Participant's or Beneficiary's benefit, such proportion of the amount to
be distributed as shall equal such indebtedness shall be paid to the
Plan, to apply against or discharge such indebtedness. prior to making a
payment, however, the Participant or Beneficiary must be given written
notice by the Administrator that such indebtedness is to be so paid in
whole or part from his Participant's Combined Account. If the Participant
or Beneficiary does not agree that the indebtedness is a valid claim
against his Vested Participant's Combined Account, he shall be entitled
to a review of the validity of the claim in accordance with procedures
provided in Sections 2.12 and 2.13.
(c) This provision shall not apply to a "qualified domestic relations
order" defined in Code Section 414(p), and those other domestic relations
orders permitted to be so treated by the Administrator under the
provisions of the Retirement Equity Act of 1984. The Administrator shall
establish a written procedure to determine the qualified status of
domestic relations orders and to administer distributions under such
qualified orders. Further, to the extent provided under a "qualified
domestic relations order", a former spouse of a Participant shall be
treated as the spouse or surviving spouse for all purposes under the
Plan.
9.4 CONSTRUCTION OF PLAN
This plan and Trust shall be construed and enforced according to the
Act and the laws of the State or Commonwealth in which the Employer's
principal office is located, other than its laws respecting choice of law, to
the extent not pre-empted by the Act.
9.5 GENDER AND NUMBER
Wherever any words are used herein in the masculine, feminine or neuter
gender, they shall be construed as though they were also used in another
gender in all cases where they would so apply, and whenever any words are
used herein in the singular or plural form, they shall be construed as though
they were also used in the other form in all cases where they would so apply.
9.6 LEGAL ACTION
In the event any claim, suit, or proceeding is brought regarding the
Trust and/or Plan established hereunder to which the Trustee or the
Administrator may be a party, and such claim, suit, or proceeding is resolved
in favor of the Trustee or Administrator, they shall be entitled to be
reimbursed from the Trust Fund for any and all costs, attorney's fees, and
other expenses pertaining thereto incurred by them for which they shall have
become liable.
9.7 PROHIBITION AGAINST DIVERSION OF FUNDS
(a) Except as provided below and otherwise specifically permitted by
law, it shall be impossible by operation of the Plan or of the Trust, by
termination of either, by power of revocation or amendment, by the
happening of any contingency, by collateral arrangement or by any other
means, for any part of the corpus or income of any Trust Fund maintained
pursuant to the Plan or any
<PAGE>
funds contributed thereto to be used for, or diverted to, purposes other
than the exclusive benefit of Participants, Retired Participants, or
their Beneficiaries.
(b) In the event the Employer shall make a contribution under a mistake
of act pursuant to Section 403(c)(2)(A) of the Act, the Employer may
demand repayment of such contribution at any time within one (1) year
following the time of payment and the Trustees shall return such amount
to the Employer within the one (1) year period. Earnings of the Plan
attributable to the contributions may not be returned to the Employer but
any losses attributable thereto must reduce the amount so returned.
9.8 BONDING
Every Fiduciary, except a bank or an insurance company, unless exempted
by the Act and regulations thereunder, shall be bonded in an amount not less
than 10% of the amount of the funds such Fiduciary handles; provided,
however, that the minimum bond shall be $1,000 and the maximum bond,
$500,000. The amount of funds handled shall be determined at the beginning of
each Plan Year by the amount of funds handled by such person, group, or class
to be covered and their predecessors, if any, during the preceding Plan Year,
or if there is no preceding Plan Year, then by the amount of the funds to be
handled during the then current year. The bond shall provide protection to
the Plan against any loss by reason of acts of fraud or dishonesty by the
Fiduciary alone or in connivance with others. The surety shall be a corporate
surety company (as such term is used in Act Section 412(a)(2)), and the bond
shall be in a form approved by the Secretary of Labor. Notwithstanding
anything in the Plan to the contrary, the cost of such bonds shall be an
expense of and may, at the election of the Administrator, be paid from the
Trust Fund or by the Employer.
9.9 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE
Neither the Employer nor the Trustee, nor their successors, shall be
responsible for the validity of any Contract issued hereunder or for the
failure on the part of the Insurer to make payments provided by any such
Contract, or for the action of any person which may delay payment or render a
Contract null and void or unenforceable in whole or in part.
9.10 INSURER'S PROTECTIVE CLAUSE
The Insurer who shall issue Contracts hereunder shall not have any
responsibility for the validity of this Plan or for the tax or legal aspects
of this Plan. The Insurer shall be protected and held harmless in acting in
accordance with any written direction of the Trustee, and shall have no duty
to see to the application of any funds paid to the Trustee, nor be required
to question any actions directed by the Trustee. Regardless of any provision
of this Plan, the Insurer shall not be required to take or permit any action
or allow any benefit or privilege contrary to the terms of any Contract which
it issues hereunder, or the rules of the Insurer.
9.11 RECEIPT AND RELEASE FOR PAYMENTS
Any payment to any Participant, his legal representative, Beneficiary,
or to any guardian or committee appointed for such Participant or Beneficiary
in accordance with the provisions of this Plan, shall, to the extent thereof,
be in full satisfaction of all claims hereunder against the Trustee and the
Employer.
9.12 ACTION BY THE EMPLOYER
Whenever the Employer under the terms of the Plan is permitted or
required to do or perform any act or matter or thing, it shall be done and
performed by a person duly authorized by its legally constituted authority.
9.13 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY
The "named Fiduciaries" of this Plan are (1) the Employer, (2) the
Administrator, (3) the Trustee, and (4) any Investment Manager appointed
hereunder. The named Fiduciaries shall have only those specific powers,
duties, responsibilities, and obligations as are specifically given them
under the Plan. In general, the Employer shall have the sole responsibility
for making the contributions provided for under Section 4.1; and shall have
the sole authority to appoint and remove the Trustee and the Administrator;
to formulate the Plan's "funding policy and method"; and to amend the
elective provisions of the Adoption Agreement or terminate, in whole or in
part, the Plan. The Administrator shall have the sole responsibility for the
administration of the Plan, which responsibility is specifically described in
the Plan. The Trustee shall have the sole responsibility of management of the
assets held under the Trust, except those assets, the management of which has
been assigned to an Investment Manager, who shall be solely responsible for
the management of the assets assigned to it, all as specifically provided in
the Plan. Each named Fiduciary warrants that any directions given,
information furnished, or action taken by it shall be in accordance with the
provisions of the Plan, authorizing or providing for such direction,
information or action. Furthermore, each named Fiduciary may rely upon any
such direction, information or action of another named Fiduciary as being
proper under the Plan, and is not required under the Plan to inquire into the
propriety of any such direction, information or action. It is intended under
the Plan that each named Fiduciary shall be responsible for the proper
exercise of its own powers, duties, responsibilities and obligations under
the Plan. NO named Fiduciary shall guarantee the Trust Fund in any manner
against investment loss or depreciation in asset value. Any person or group
may serve in more than one Fiduciary capacity.
9.14 HEADINGS
<PAGE>
The headings and subheadings of this Plan have been inserted for
convenience of reference and are to be ignored in any construction of the
provisions hereof.
9.15 APPROVAL BY INTERNAL REVENUE SERVICE
(a) Notwithstanding anything herein to the contrary, if, pursuant to a
timely application filed by or in behalf of the Plan, the Commissioner of
Internal Revenue Service or his delegate should determine that the Plan
does not initially qualify as a tax-exempt plan under Code Sections 401
and 501, and such determination is not contested, or if contested, is
finally upheld, then if the Plan is a new plan, it - shall be void ab
initio and all amounts contributed to the Plan, by the Employer, less
expenses paid, shall be returned within one year and the Plan shall
terminate, and the Trustee shall be discharged from all further
obligations. If the disqualification relates to an amended plan, then the
Plan shall operate as if it had not been amended and restated. In the
event that a contribution is made to the Plan conditioned upon
qualification of the Plan as amended, such contribution must be returned
to Employer upon the determination that the amended Plan fails to qualify
under the Code.
(b) Except as specifically stated in the Plan, any contribution by the
Employer to the Trust Fund is conditioned upon the deductibility of the
contribution by the Employer under the Code and, to the extent any such
deduction is disallowed, the Employer may within one (1) year following a
final determination of the disallowance, whether by agreement with the
Internal Revenue Service or by final decision of a court of competent
jurisdiction, demand repayment of such disallowed contribution and the
Trustee shall return such contribution within one (1) year following the
disallowance. Earnings of the Plan attributable to the excess
contribution may not be returned to the Employer, but any losses
attributable thereto must reduce the amount so returned.
9.16 UNIFORMITY
All provisions of this Plan shall be interpreted and applied in a
uniform, nondiscriminatory manner.
9.17 PAYMENT OF BENEFITS
Benefits under this Plan shall be paid, subject to Section 6.10 and
Section 6.11 only upon death, Total and Permanent Disability, normal or early
retirement, termination of employment, or upon Plan Termination.
ARTICLE X
PARTICIPATING EMPLOYERS
10.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER
Notwithstanding anything herein to the contrary, with the consent of
the Employer and Trustee, any Affiliated Employer may adopt this Plan and all
of the provisions hereof, and participate herein and be known as a
Participating Employer, by a properly executed document evidencing said
intent and will of such Participating Employer.
10.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS
(a) Each Participating Employer shall be required to select the same
Adoption Agreement provisions as those selected by the Employer other
than the Plan Year, the Fiscal Year, and such other items that must, by
necessity, vary among employers.
(b) Each such Participating Employer shall be required to use the same
Trustee as provided in this Plan.
(c) The Trustee may, but shall not be required to, commingle, hold and
invest as one Trust Fund all contributions made by Participating
Employers, as well as all increments thereof.
(d) The transfer of any Participant from or to an Employer participating
in this Plan, whether he be an Employee of the Employer or a
Participating Employer, shall not affect such Participant's rights under
the Plan, and all amounts credited to such Participant's Combined Account
as well as his accumulated service time with the transferor or
predecessor, and his length of participation in the Plan, shall continue
to his credit.
(e) Any expenses of the Plan which are to be paid by the Employer or
borne by the Trust Fund shall be paid by each Participating Employer in
the same proportion that the total amount standing to the credit of all
Participants employed by such Employer bears to the total standing to the
credit of all Participants.
10.3 DESIGNATION OF AGENT
Each Participating Employer shall be deemed to be a part of this Plan;
provided, however, that with respect to all of its relations with the Trustee
and Administrator for the purpose of this Plan, each Participating Employer
shall be deemed to have designated irrevocably the Employer as its agent.
Unless the context of the Plan clearly indicates the contrary, the word
"Employer" shall be deemed to include each Participating Employer as related
to its adoption of the Plan.
<PAGE>
10.4 EMPLOYEE TRANSFERS
It is anticipated that an Employee may be transferred between
Participating Employers, and in the event of any such transfer, the Employee
involved shall carry with him his accumulated service and eligibility. NO
such transfer shall effect a termination of employment hereunder, and the
Participating Employer to which the Employee is transferred shall thereupon
become obligated hereunder with respect to such Employee in the same manner
as was the participating Employer from whom the Employee was transferred.
10.5 PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES
Any contribution or Forfeiture subject to allocation during each Plan
Year shall be allocated among all Participants of all Participating Employers
in accordance with the provisions of this Plan. On the basis of the
information furnished by the Administrator, the Trustee shall keep separate
books and records concerning the affairs of each Participating Employer
hereunder and as to the accounts and credits of the Employees of each
participating Employer. The Trustee may, but need not, register contracts so
as to evidence that a particular Participating Employer is the interested
Employer hereunder, but in the event of an Employee transfer from one
Participating Employer to another, the employing Employer shall immediately
notify the Trustee thereof.
10.6 AMENDMENT
Amendment of this Plan by the Employer at any time when there shall be
a Participating Employer hereunder shall only be by the written action of
each and every Participating Employer and with the consent of the Trustee
where such consent is necessary in accordance with the terms of this Plan.
10.7 DISCONTINUANCE OF PARTICIPATION
Except in the case of a Standardized Plan, any Participating Employer
shall be permitted to discontinue or revoke its participation in the Plan at
any time. At the time of any such discontinuance or revocation, satisfactory
evidence thereof and of any applicable conditions imposed shall be delivered
to the Trustee. The Trustee shall thereafter transfer, deliver and assign
Contracts and other Trust Fund assets allocable to the Participants of such
Participating Employer to such new Trustee as shall have been designated by
such participating Employer, in the event that it has established a separate
pension plan for its Employees provided, however, that no such transfer shall
be made if the result is the elimination or reduction of any "Section
411(d)(6) protected benefits" in accordance with Section 8.l(e). If no
successor is designated, the Trustee shall retain such assets for the
Employees of said participating Employer pursuant to the provisions of
Article VII hereof. In no such event shall any part of the corpus or income
of the Trust Fund as it relates to such Participating Employer be used for or
diverted for purposes other than for the exclusive benefit of the Employees
of such Participating Employer.
10.8 ADMINISTRATOR'S AUTHORITY
The Administrator shall have authority to make any and all necessary
rules or regulations, binding upon all Participating Employers and all
Participants, to effectuate the purpose of this Article.
10.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE
If any Participating Employer is prevented in whole or in part from
making a contribution which it would otherwise have made under the Plan by
reason of having no current or accumulated earnings or profits, or because
such earnings or profits are less than the contribution which it would
otherwise have made, then, pursuant to Code Section 404(a)(3)(B), so much of
the contribution which such Participating Employer was so prevented from
making may be made, for the benefit of the participating employees of such
Participating Employer, by other Participating Employers who are members of
the same affiliated group within the meaning of Code Section 1504 to the
extent of their current or accumulated earnings or profits, except that such
contribution by each such other Participating Employer shall be limited to
the proportion of its total current and accumulated earnings or profits
remaining after adjustment for its contribution to the Plan made without
regard to this paragraph which the total prevented contribution bears to the
total current and accumulated earnings or profits of all the Participating
Employers remaining after adjustment for all contributions made to the Plan
without regard to this paragraph.
A Participating Employer on behalf of whose employees a contribution is
made under this paragraph shall not be required to reimburse the contributing
Participating Employers.
ARTICLE XI
CASH OR DEFERRED PROVISIONS
Notwithstanding any provisions in the Plan to the contrary, the
provisions of this Article shall apply with respect to any 401(k) Profit
Sharing Plan.
Not withstanding anything in this Article to the contrary, effective as
of the Plan Year in which this amendment becomes effective, the Actual
Deferral Percentage Test shall be applied (and adjusted) by applying the
Family Member aggregation rules of Code Section 414(q)(6).
11.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION
For each Plan Year, the Employer shall contribute to the Plan:
<PAGE>
(a) The amount of the total salary reduction elections of all
Participants made pursuant to Section 11.2(a), which amount shall be
deemed an Employer's Elective Contribution, plus
(b) If specified in E3 of the Adoption Agreement, a matching
contribution equal to the percentage specified in the Adoption Agreement
of the Deferred Compensation of each Participant eligible to share in the
allocations of the matching contribution, which amount shall be deemed an
Employer's Non-Elective or Elective Contribution as selected in the
Adoption Agreement, plus
(c) If specified in E4 of the Adoption Agreement, a discretionary
amount, if any, which shall be deemed an Employer's Non-Elective
Contribution, plus
(d) If specified in E5 of the Adoption Agreement, a Qualified
Non-Elective Contribution.
(e) Notwithstanding the foregoing, however, the Employer's contributions
for any Fiscal Year shall not exceed the maximum amount allowable as a
deduction to the Employer under the provisions of Code Section 404. All
contributions by the Employer shall be made in cash or in such property
as is acceptable to the Trustee.
(f) Except, however, to the extent necessary to provide the top heavy
minimum allocations, the Employer shall make a contribution even if it
exceeds current or accumulated Net Profit or the amount which is
deductible under Code Section 404.
(g) Employer Elective Contributions accumulated through payroll
deductions shall be paid to the Trustee as of the earliest date on which
such contributions can reasonably be segregated from the Employer's
general assets, but in any event within ninety (90) days from the date on
which such amounts would otherwise have been payable to the Participant
in cash. The provisions of Department of Labor regulations 2510.3-102 are
incorporated herein by reference. Furthermore, any additional Employer
contributions which are allocable to the Participant's Elective Account
for a Plan Year shall be paid to the Plan no later than the twelve-month
period immediately following the close of such Plan Year.
11.2 PARTICIPANT'S SALARY REDUCTION ELECTION
(a) If selected in the Adoption Agreement, each Participant may elect to
defer his Compensation which would have been received in the Plan Year,
but for the deferral election, subject to the limitations of this Section
and the Adoption Agreement. A deferral election (or modification of an
earlier election) may not be made with respect to Compensation which is
currently available on or before the date the Participant executed such
election, or if later, the latest of the date the Employer adopts this
cash or deferred arrangement, or the date such arrangement first became
effective. Any elections made pursuant to this Section shall become
effective as soon as is administratively feasible.
Additionally, if elected in the Adoption Agreement, each Participant
may elect to defer and have allocated for a Plan Year all or a portion of any
cash bonus attributable to services performed by the Participant for the
Employer during such Plan Year and which would have been received by the
Participant on or before two and one-half months following the end of the
Plan Year but for the deferral. A deferral election may not be made with
respect to cash bonuses which are currently available on or before the date
the Participant executed such election. Notwithstanding the foregoing, cash
bonuses attributable to services performed by the Participant during a Plan
Year but which are to be paid to the Participant later than two and one-half
months after the close of such Plan Year will be subjected to whatever
deferral election is in effect at the time such cash bonus would have
otherwise been received.
The amount by which Compensation and/or cash bonuses are reduced shall
be that Participant's Deferred Compensation and be treated as an Employer
Elective Contribution and allocated to that Participant's Elective Account.
Once made, a Participant's election to reduce Compensation shall remain
in effect until modified or terminated. Modifications may be made as
specified in the Adoption Agreement, and terminations may be made at any
time. Any modification or termination of an election will become effective as
soon as is administratively feasible.
(b) The balance in each Participant's Elective Account shall be fully
Vested at all times and shall not be subject to Forfeiture for any
reason.
(c) Amounts held in the Participant's Elective Account and Qualified
Non-Elective Account may be distributable as permitted under the Plan,
but in no event prior to the earlier of:
(1) a Participant's termination of employment, Total and
Permanent Disability, or death;
<PAGE>
(2) a Participant's attainment of age 59 1/2;
(3) the proven financial hardship of a Participant, subject to
the limitations of Section 11.8;
(4) the termination of the Plan without the existence at the
time of Plan termination of another defined contribution plan (other
than an employee stock ownership plan as defined in Code Section
4975(e)(7)) or the establishment of a successor defined contribution
plan (other than an employee stock ownership plan as defined in Code
Section 4975(e)(7)) by the Employer or an Affiliated Employer within
the period ending twelve months after distribution of all assets
from the Plan maintained by the Employer;
(5) the date of the sale by the Employer to an entity that is
not an Affiliated Employer of substantially all of the assets
(within the meaning of Code Section 409(d)(2)) with respect to a
Participant who continues employment with the corporation acquiring
such assets; or
(6) the date of the sale by the Employer or an Affiliated
Employer of its interest in a subsidiary (within the meaning of Code
Section 409(d)(3)) to an entity that is not an Affiliated Employer
with respect to a Participant who continues employment with such
subsidiary.
(d) In any Plan Year beginning after December 31, 1986, a Participant'S
Deferred Compensation made under this Plan and all other plans, contracts
or arrangements of the Employer maintaining this Plan shall not exceed
the limitation imposed by Code Section 402(g), as in effect for the
calendar year in which such Plan Year began. If such dollar limitation
is exceeded solely from elective deferrals made under this Plan or any
other Plan maintained by the Employer, a Participant will be deemed to
have notified the Administrator of such excess amount which shall be
distributed in a manner consistent with Section 11.2(f). This dollar
limitation shall be adjusted annually pursuant to the method provided in
Code Section 415(d) in accordance with Regulations.
(e) In the event a Participant has received a hardship distribution
pursuant to Regulation 1.401(k)-1(d)(2)(iii)(B) from any other plan
maintained by the Employer or from his Participant's Elective Account
pursuant to Section 11.8, then such Participant shall not be permitted to
elect to have Deferred Compensation contributed to the Plan on his behalf
for a period of twelve (12) months following the receipt of the
distribution. Furthermore, the dollar limitation under Code Section
402(g) shall be reduced, with respect to the Participant's taxable year
following the taxable year in which the hardship distribution was made,
by the amount of such Participant's Deferred Compensation, if any, made
pursuant to this Plan (and any other plan maintained by the Employer) for
the taxable year of the hardship distribution.
(f) If a Participant's Deferred Compensation under this Plan together
with any elective deferrals (as defined in Regulation 1.402(g)-l(b))
under another qualified cash or deferred arrangement (as defined in Code
Section 401(k)), a simplified employee pension (as defined in Code
Section 408(k)), a salary reduction arrangement (within the meaning of
Code Section 3121(a)(5)(D)), a deferred compensation plan under Code
Section 457, or a trust described in Code Section 501(c)(18) cumulatively
exceed the limitation imposed by Code Section 402(g) (as adjusted
annually in accordance with the method-provided in Code Section 415(d)
pursuant to Regulations) for such Participant's taxable year, the
Participant may, not later than March 1st following the close of his
taxable year, notify the Administrator in writing of such excess and
request that his Deferred Compensation under this Plan be reduced by an
amount specified by the Participant. In such event, the Administrator
shall direct the Trustee to distribute such excess amount (and any Income
allocable to such excess amount) to the Participant not later than the
first April 15th following the close of the Participant's taxable year.
Distributions in accordance with this paragraph may be made for any
taxable year of the Participant which begins after December 31, 1986. Any
distribution of less than the entire amount of Excess Deferred
Compensation and Income shall be treated as a pro rata distribution of
Excess Deferred Compensation and Income. The amount distributed shall not
exceed the Participant's Deferred Compensation under the Plan for the
taxable year. Any distribution on or before the last day of the
Participant's taxable year must satisfy each of the following conditions:
(1) the Participant shall designate the distribution as Excess
Deferred Compensation;
(2) the distribution must be made after the date on which the
<PAGE>
Plan received the Excess Deferred Compensation; and
(3) the Plan must designate the distribution as a distribution
of Excess Deferred Compensation.
Any distribution under this Section shall be made first from unmatched
Deferred Compensation and, thereafter, simultaneously from Deferred
Compensation which is matched and matching contributions which relate to such
Deferred Compensation. However, any such matching contributions which are
not vested shall be forfeited in lieu of being distributed.
For the purpose of this Section, "Income" means the amount of income or
loss allocable to a Participant's Excess Deferred Compensation and shall be
equal to the sum of the allocable gain or loss for the taxable year of the
Participant and the allocable gain or loss for the period between the end of
the taxable year of the Participant and the date of distribution ("gap
period"). The income or loss allocable to each such period is calculated
separately and is determined by multiplying the income or loss allocable to
the Participant's Deferred Compensation for the respective period by a
fraction. The numerator of the fraction is the Participant's Excess Deferred
Compensation for the taxable year of the Participant. The denominator is the
balance, as of the last day of the respective period, of the Participant's
Elective Account that is attributable to the Participant's Deferred
Compensation reduced by the gain allocable to such total amount for the
respective period and increased by the loss allocable to such total amount
for the respective period.
In lieu of the "fractional method" described above, a "safe harbor
method" may be used to calculate the allocable income or loss for the "gap
period". Under such "safe harbor method", allocable income or loss for the
"gap period" shall be deemed to equal ten percent (10%) of the income or loss
allocable to a Participant's Excess Deferred Compensation for the taxable
year of the Participant multiplied by the number of calendar months in the
"gap period". For purposes of determining the number of calendar months in
the "gap period", a distribution occurring on or before the fifteenth day of
the month shall be treated as having been made on the last day of the
preceding month and a distribution occurring after such fifteenth day shall
be treated as having been made on the first day of the next subsequent month.
Income or loss allocable to any distribution of Excess Deferred
Compensation on or before the last day of the taxable year of the Participant
shall be calculated from the first day of the taxable year of the Participant
to the date on which the distribution is made pursuant to either the
"fractional method" or the "safe harbor method".
Notwithstanding the above, for any distribution under this Section
which is made after August 15, 1991, such distribution shall not include any
income for the "gap period". Further provided, for any distribution under
this Section which is made after August 15, 1991, the amount of Income may be
computed using a reasonable method that is consistent with Section 4.3(c),
provided such method is used consistently for all Participants and for all
such distributions for the Plan Year.
Notwithstanding the above, for the 1987 calendar year, Income during
the "gap period" shall not be taken into account.
(g) Notwithstanding the above, a Participant's Excess Deferred
Compensation shall be reduced, but not below zero, by any distribution
and/or recharacterization of Excess Contributions pursuant to Section
11.5(a) for the Plan Year beginning with or within the taxable year of
the Participant.
(h) At Normal Retirement Date, or such other date when the Participant
shall be entitled to receive benefits, the fair market value of the
Participant's Elective Account shall be used to provide benefits to the
Participant or his Beneficiary.
(i) Employer Elective Contributions made pursuant to this Section may be
segregated into a separate account for each Participant in a federally
insured savings account, certificate of deposit in a bank or savings and
loan association, money market certificate, or other short-term debt
security acceptable to the Trustee until such time as the allocations
pursuant to Section 11.3 have been made.
(j) The Employer and the Administrator shall adopt a procedure necessary
to implement the salary reduction elections provided for herein.
11.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS
(a) The Administrator shall establish and maintain an account in the
name of each Participant to which the Administrator shall credit as of
each Anniversary Date, or other valuation date, all amounts allocated to
each such Participant as set forth herein.
(b) The Employer shall provide the Administrator with all information
required by the Administrator to make a proper allocation of the
Employer's contributions for each Plan Year. Within a reasonable period
of time after the date of receipt by the Administrator of such
information, the Administrator shall allocate such contribution as
follows:
(1) With respect to the Employer's Elective Contribution made
pursuant to Section 11.l(a), to
<PAGE>
each Participant's Elective Account in an amount equal to each such
Participant's Deferred Compensation for the year.
(2) With respect to the Employer's Matching Contribution made
pursuant to Section 11.l(b), to each Participant's Account, or
Participant's Elective Account as selected in E3 of the Adoption
Agreement, in accordance with Section 11.1(b).
Except, however, a Participant who is not credited with a Year of
Service during any Plan Year shall or shall not share in the Employer's
Matching Contribution for that year as provided in E3 of the Adoption
Agreement. However, for Plan Years beginning after 1989, if this is a
standardized Plan, a Participant shall share in the Employer's Matching
Contribution regardless of Hours of Service.
(3) With respect to the Employer's Non-Elective Contribution
made pursuant to Section 11.l(c), to each Participant's Account in
accordance with the provisions of Sections 4.3(b)(2) or 4.3(b)(3),
whichever is applicable, 4.3(k) and 4.3(1).
(4) With respect to the Employer's Qualified Non-Elective
Contribution made pursuant to Section 11.l(d), to each Participant's
Qualified Non-Elective Contribution Account in the same proportion
that each such Participant's compensation for the year bears to the
total compensation of all Participants for such year. However, for
any Plan Year beginning prior to January 1, 1990, and if elected in
the non-standardized Adoption Agreement for any Plan Year beginning
on or after January 1, 1990, a Participant who is not credited with
a Year of Service during any Plan Year shall not share in the
Employer's Qualified Non-Elective Contribution for that year, unless
required pursuant to Section 4.3(h). In addition, the provisions of
Sections 4.3(k) and 4.3(1) shall apply with respect to the
allocation of the Employer's Qualified Non-Elective contribution.
(c) Notwithstanding anything in the Plan to the contrary, for Plan Years
beginning after December 31, 1988, in determining whether a Non-Key
Employee has received the required minimum allocation pursuant to section
4.3(f) such Non-Key Employee's Deferred Compensation and matching
contributions used to satisfy the "Actual Deferral Percentage" test
pursuant to Section 11.4(a) or the "Actual Contribution Percentage" test
of Section 11.6(a) shall not be taken into account.
(d) Notwithstanding anything herein to the contrary, participants who
terminated employment during the Plan Year shall share in the salary
reduction contributions made by the Employer for the year of termination
without regard to the Hours of Service credited.
(e) Notwithstanding anything herein to the contrary (other than Sections
11.3(d) and 11.3(g)), any Participant who terminated employment during
the Plan Year for reasons other than death, Total and Permanent
Disability, or retirement shall or shall not share in the allocations of
the Employer's Matching Contribution made pursuant to Section 11.l(b),
the Employer's Non-Elective Contributions made pursuant to Section
11.1(c), the Employer's Qualified Non-Elective Contribution made pursuant
to Section 11.l(d), and Forfeitures as provided in the Adoption
Agreement. Notwithstanding the foregoing, for Plan Years beginning after
1989, if this is a standardized Plan, any such terminated Participant
shall share in such allocations provided the terminated Participant
completed more than 500 Hours of Service.
(f) Notwithstanding anything herein to the contrary, Participants
terminating for reasons of death, Total and Permanent Disability, or
retirement shall share in the allocation of the Employer's Matching
Contribution made pursuant to Section 11.l(b), the Employer's
Non-Elective Contributions made pursuant to Section 11.l(c), the
Employer's Qualified Non-Elective Contribution made pursuant to Section
11.1(d), and Forfeitures as provided in this Section regardless of
whether they completed a Year of Service during the Plan Year.
(g) Notwithstanding any election in the Adoption Agreement to the
contrary, if this is a non-standardized Plan that would otherwise fail to
meet the requirements of Code Sections 401(a)(26), 410(b)(1), or
410(b)(2)(A)(i) and the Regulations thereunder because Employer matching
Contributions made pursuant to Section 11.l(b), Employer Non-Elective
Contributions made pursuant to Section 11.l(c) or Employer Qualified
Non-Elective Contributions made pursuant to Section 11.l(d) have not been
allocated to a sufficient number or percentage of
<PAGE>
Participants for a Plan Year, then the following rules shall apply:
(1) The group of Participants eligible to share in the respective
contributions for the Plan Year shall be expanded to include the
minimum number of Participants who would not otherwise be eligible
as are necessary to satisfy the applicable test specified above.
The specific participants who shall be come eligible under the
terms of this paragraph shall be those who are actively employed
on the last day of the Plan Year and, when compared to similarly
situated Participants, have completed the greatest number of Hours
of Service in the Plan Year.
(2) If after application of paragraph (1) above, the applicable
test is still not satisfied, then the group of Participants
eligible to share for the Plan Year shall be further expanded to
include the minimum number of Participants who are not actively
employed on the last day of the Plan Year as are necessary to
satisfy the applicable test. The specific Participants who shall
become eligible to share shall be those Participants, when
compared to similarly situated Participants, who have completed
the greatest number of Hours of Service in the Plan Year before
terminating employment.
11.4 ACTUAL DEFERRAL PERCENTAGE TESTS
(a) Maximum Annual Allocation: For each Plan Year beginning after
December 31, 1986, the annual allocation derived from Employer Elective
Contributions and Qualified Non-Elective Contributions to a Participant's
Elective Account and Qualified Non-Elective Account shall satisfy one of
the following tests:
(1) The "Actual Deferral Percentage" for the Highly Compensated
Participant group shall not be more than the "Actual Deferral
Percentage" of the Non-Highly Compensated Participant group
multiplied by 1.25, or
(2) The excess of the "Actual Deferral Percentage" for the
Highly Compensated Participant group over the "Actual Deferral
Percentage" for the Non-highly Compensated Participant group shall
not be more than two percentage points. Additionally, the "Actual
Deferral Percentage" for the Highly Compensated Participant group
shall not exceed the "Actual Deferral Percentage" for the Non-Highly
Compensated Participant group multiplied by 2. The provisions of
Code Section 401(k)(3) and Regulation 1.401(k)-l(b) are incorporated
herein by reference.
However, for Plan Years beginning after December 31, 1988, to prevent
the multiple use of the alternative method described in (2) above and Code
Section 401(m)(9)(A), any Highly Compensated Participant eligible to make
elective deferrals pursuant to Section 11.2 and to make Employee
contributions or to receive matching contributions under this Plan or under
any other plan maintained by the Employer or an Affiliated Employer shall
have his actual contribution ratio reduced pursuant to Regulation 1.401(m)-2,
the provisions of which are incorporated herein by reference.
(b) For the purposes of this Section "Actual Deferral Percentage" means,
with respect to the Highly Compensated Participant group and Non-Highly
Compensated Participant group for a Plan Year, the average of the ratios,
calculated separately for each Participant in such group, of the amount
of Employer Elective Contributions and Qualified Non-Elective
Contributions allocated to each Participant's Elective Account and
Qualified Non-Elective Account for such Plan Year, to such Participant's
"414(s) Compensation" for such Plan Year. The actual deferral ratio for
each Participant and the "Actual Deferral Percentage" for each group, for
Plan Years beginning after December 31, 1988, shall be calculated to the
nearest one-hundredth of one percent of the Participant's "414(s)
Compensation". Employer Elective Contributions allocated to each
Non-Highly Compensated Participant's Elective Account shall be reduced by
Excess Deferred Compensation to the extent such excess amounts are made
under this Plan or any other plan maintained by the Employer.
(c) For the purpose of determining the actual deferral ratio of a Highly
Compensated Participant who is subject to the Family Member aggregation
rules of Code Section 414(q)(6) because such Participant is either a
"five percent owner" of the Employer or one of the ten (10) Highly
Compensated Employees paid the greatest "415 Compensation" during the
year, the following shall apply:
<PAGE>
(1) The combined actual deferral ratio for the family group
(which shall be treated as one Highly Compensated Participant) shall
be the greater of: (i) the ratio determined by aggregating Employer
Elective Contributions and "414(s) Compensation" of all eligible
Family Members who are Highly Compensated Participants without
regard to family aggregation; and (ii) the ratio determined by
aggregating Employer Elective Contributions and "414(s)
Compensation" of all eligible Family Members (including Highly
Compensated Participants). However, in applying the $200,000 limit
to "414(s) Compensation" for Plan Years beginning after December 31,
1988, Family Members shall include only the affected Employee's
spouse and any lineal descendants who have not attained age 19
before the close of the Plan Year.
(2) The Employer Elective Contributions and "414(s)
Compensation" of all Family Members shall be disregarded for
purposes of determining the "Actual Deferral Percentage" of the
Non-Highly Compensated Participant group except to the extent taken
into account in paragraph (1) above.
(3) If a Participant is required to be aggregated as a member of
more than one family group in a plan, all Participants who are
members of those family groups that include the Participant are
aggregated as one family group in accordance with paragraphs (1) and
(2) above.
(d) For the purposes of this Section and Code Sections 401(a)(4), 410(b)
and 401(k), if two or more plans which include cash or deferred
arrangements are considered one plan for the purposes of Code Section
401(a)(4) or 410(b) (other than Code Section 401(b)(2)(A)(ii) as in
effect for Plan Years beginning after December 31, 1988), the cash or
deferred arrangements included in such plans shall be treated as one
arrangement. In addition, two or more cash or deferred arrangements may
be considered as a single arrangement for purposes of determining whether
or not such arrangements satisfy Code Sections 401(a)(4), 410(b) and
401(k). In such a case, the cash or deferred arrangements included in
such plans and the plans including such arrangements shall be treated as
one arrangement and as one plan for purposes of this Section and Code
Sections 401(a)(4), 410(b) and 401(k). For plan years beginning after
December 31, 1989, plans may be aggregated under this paragraph (e) only
if they have the same plan year.
Notwithstanding the above, for Plan Years beginning after December 31,
1988, an employee stock ownership plan described in Code Section 4975(e)(7)
may not be combined with this Plan for purposes of determining whether the
employee stock ownership plan or this Plan satisfies this Section and Code
Sections 401(a)(4), 410(b) and 401(k).
(e) For the purposes of this Section, if a Highly Compensated
Participant is a Participant under two (2) or more cash or deferred
arrangements (other than a cash or deferred arrangement which is part of
an employee stock ownership plan as defined in Code Section 4975(e)(7)
for Plan Years beginning after December 31, 1988) of the Employer or an
Affiliated Employer, all such cash or deferred arrangements shall be
treated as one cash or deferred arrangement for the purpose of
determining the actual deferral ratio with respect to such Highly
Compensated Participant. However, for Plan Years beginning after December
31, 1988, if the cash or deferred arrangements have different Plan Years,
this paragraph shall be applied by treating all cash or deferred
arrangements ending with or within the same calendar year as a single
arrangement.
11.5 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS
In the event that the initial allocations of the Employer's Elective
Contributions and Qualified Non-Elective Contributions do not satisfy one of
the tests set forth in Section 11.4, for Plan Years beginning after December
31, 1986, the Administrator shall adjust Excess Contributions pursuant to the
options set forth below:
(a) On or before the fifteenth day of the third month following the end
of each Plan Year, the Highly Compensated Participant having the highest
actual deferral ratio shall have his portion of Excess Contributions
distributed to him and/or at his election recharacterized as a voluntary
Employee contribution pursuant to Section 4.7 until one of the tests set
forth in Section 11.4 is satisfied, or until his actual deferral ratio
equals the actual deferral ratio of the Highly Compensated Participant
having the second highest actual deferral ratio. This process shall
continue until one of the tests set forth in Section 11.4 is satisfied.
For each Highly Compensated participant, the amount of
<PAGE>
Excess Contributions is equal to the Elective Contributions and
Qualified Non-Elective Contributions made on behalf of such Highly
Compensated Participant (determined prior to the application of this
paragraph) minus the amount determined by multiplying the Highly
Compensated Participant's actual deferral ratio (determined after
application of this paragraph) by his "414(s) Compensation". However,
in determining the amount of Excess Contributions to be distributed
and/or recharacterized with respect to an affected Highly Compensated
Participant as determined herein, such amount shall be reduced by any
Excess Deferred Compensation previously distributed to such affected
Highly Compensated Participant for his taxable year ending with or
within such Plan Year. Any distribution and/or recharacterization of
Excess Contributions shall be made in accordance with the following:
(1) With respect to the distribution of Excess Contributions
pursuant to (a) above, such distribution:
(i) may be postponed but not later than the close of the Plan
Year following the Plan Year to which they are allocable;
(ii) shall be made first from unmatched Deferred Compensation
and, thereafter, simultaneously from Deferred Compensation which
is matched and matching contributions which relate to such
Deferred Compensation. However, any such matching contributions
which are not Vested shall be forfeited in lieu of being
distributed;
(iii) shall be made from Qualified Non-Elective Contributions
only to the extent that Excess Contributions exceed the balance
in the Participant's Elective Account attributable to Deferred
Compensation and Employer matching contributions.
(iv) shall be adjusted for Income; and
(v) shall be designated by the Employer as a distribution of
Excess Contributions (and Income).
(2) With respect to the recharacterization of Excess
Contributions pursuant to (a) above, such recharacterized amounts:
(i) shall be deemed to have occurred on the date on which the
last of those Highly Compensated Participants with Excess
Contributions to be recharacterized is notified of the
recharacterization and the tax consequences of such
recharacterization;
(ii) for Plan Years ending on or before August 8, 1988, may be
postponed but not later than October 24, 1988;
(iii) shall not exceed the amount of Deferred Compensation on
behalf of any Highly Compensated Participant for any Plan Year;
(iv) shall be treated as voluntary Employee contributions for
purposes of Code Section 401(a)(4) and Regulation 1.401(k)-l(b).
However, for purposes of Sections 2.2 and 4.3(f), recharacterized
Excess Contributions continue to be treated as Employer
contributions that are Deferred Compensation. For Plan Years
beginning after December 31, 1988, Excess Contributions
recharacterized as voluntary Employee contributions shall
continue to be nonforfeitable and subject to the same
distribution rules provided for in Section 11.2(c);
(v) which relate to Plan Years ending on or before October 24,
1988, may be treated as either Employer contributions or
<PAGE>
voluntary Employee contributions and therefore shall not be
subject to the restrictions of Section 11.2(c);
(vi) are not permitted if the amount recharacterized plus
voluntary Employee contributions actually made by such Highly
Compensated Participant, exceed the maximum amount of voluntary
Employee contributions (determined prior to application of
Section 11.6) that such Highly Compensated participant is
permitted to make under the Plan in the absence of
recharacterization;
(vii) shall be adjusted for Income.
(3) Any distribution and/or recharacterization of less than the
entire amount of Excess Contributions shall be treated as a pro rata
distribution and/or recharacterization of Excess Contributions and
Income.
(4) The determination and correction of Excess Contributions of
a Highly Compensated Participant whose actual deferral ratio is
determined under the family aggregation rules shall be accomplished
as follows:
(i) If the actual deferral ratio for the Highly Compensated
Participant is determined in accordance with Section
11.4(c)(l)(ii), then the actual deferral ratio shall be reduced
as required herein and the Excess Contributions for the family
unit shall be allocated among the Family Members in proportion to
the Elective Contributions of each Family Member that were
combined to determine the group actual deferral ratio.
(ii) If the actual deferral ratio for the Highly Compensated
Participant is determined under Section 11.4(c)(l)(i), then the
actual deferral ratio shall first be reduced as required herein,
but not below the actual deferral ratio of the group of Family
Members who are not Highly Compensated Participants without
regard to family aggregation. The Excess Contributions resulting
from this initial reduction shall be allocated (in proportion to
elective Contributions) among the Highly Compensated participants
whose Elective Contributions were combined to determine the
actual deferral ratio. If further reduction is Still required,
then Excess Contributions resulting from this further reduction
shall be determined by taking into account the contributions of
all Family Members and shall be allocated among them in
proportion to their respective Elective Contributions.
(b) Within twelve (12) months after the end of the Plan Year, the
Employer shall make a special Qualified Non-Elective Contribution on
behalf of Non-Highly Compensated Participants in an amount sufficient to
satisfy one of the tests set forth in Section 11.4(a). Such contribution
shall be allocated to the Participant's Qualified Non-Elective Account of
each Non-Highly Compensated Participant in the same proportion that each
Non-Highly Compensated Participant's Compensation for the year bears to
the total Compensation of all Non-Highly Compensated Participants.
(c) For purposes of this Section, "Income" means the income or loss
allocable to Excess Contributions which shall equal the sum of the
allocable gain or loss for the Plan Year and the allocable gain or loss
for the period between the end of the Plan Year and the date of
distribution ("gap period"). The income or loss allocable to Excess
Contributions for the Plan Year and the "gap period" is calculated
separately and is determined by multiplying the income or loss for the
Plan Year or the "gap period" by a fraction. The numerator of the
fraction is the Excess Contributions for the Plan Year. The denominator
of the fraction is the total of the Participant's Elective Account
attributable to Elective Contributions and the Participant's Qualified
Non-Elective Account
<PAGE>
as of the end of the Plan Year or the "gap period", reduced by the gain
allocable to such total amount for the Plan Year or the "gap period"
and increased by the loss allocable to such total amount for the Plan
Year or the "gap period".
In lieu of the "fractional method" described above, a "safe harbor
method" may be used to calculate the allocable Income for the "gap period".
Under such "safe harbor method", allocable Income for the "gap period" shall
be deemed to equal ten percent (10%) of the Income allocable to Excess
Contributions for the Plan Year of the Participant multiplied by the number
of calendar months in the "gap period". For purposes of determining the
number of calendar months in the "gap period", a distribution occurring on or
before the fifteenth day of the month shall be treated as having been made on
the last day of the preceding month and a distribution occurring after such
fifteenth day shall be treated as having been made on the first day of the
next subsequent month.
Notwithstanding the above, for any distribution under this Section
which is made after August 15, 1991, such distribution shall not include any
income for the "gap period". Further provided, for any distribution under
this Section which is made after August 15, 1991, the amount of Income may be
computed using a reasonable method that is consistent with Section 4.3(c),
provided such method is used consistently for all Participants and for all
such distributions for the Plan Year.
Notwithstanding the above, for Plan Years which began in 1987, Income
during the "gap period" shall not be taken into account.
(d) Any amounts not distributed or recharacterized within 2 1/2 months
after the end of the Plan Year shall be subject to the 10% Employer
excise tax imposed by Code Section 49?9.
11.6 ACTUAL CONTRIBUTION PERCENTAGE TESTS
(a) The "Actual Contribution Percentage", for Plan Years beginning after
the later of the Effective Date of this Plan or December 31, 1986, for
the Highly Compensated Participant group shall not exceed the greater of:
(1) 125 percent of such percentage for the Non-Highly
Compensated Participant group; or
(2) the lesser of 200 percent of such percentage for the
Non-Highly Compensated Participant group, or such percentage for the
Non-Highly Compensated Participant group plus 2 percentage points.
However, for Plan Years beginning later December 31, 1988, to
prevent the multiple use of the alternative method described in this
paragraph and Code Section 401(m)(9)(A), any Highly Compensated
Participant eligible to make elective deferrals pursuant to Section
11.2 or any other cash or deferred arrangement maintained by the
Employer or an Affiliated Employer and to make Employee
contributions or to receive matching contributions under any plan
maintained by the Employer or an Affiliated Employer shall have his
actual contribution ratio reduced pursuant to Regulation 1.401(m)-2.
The provisions of Code Section 401(m) and Regulations 1.401(m)-l(b)
and 1.401(m)-2 are incorporated herein by reference.
(b) For the purposes of this Section and Section 11.7, "Actual
Contribution Percentage" for a Plan Year means, with respect to the
Highly Compensated Participant group and Non-Highly Compensated
Participant group, the average of the ratios (calculated separately for
each Participant in each group) of:
(1) the sum of Employer matching contributions made pursuant to
Section 11.l(b) (to the extent such matching contributions are not
used to satisfy the tests set forth in Section 11.4), voluntary
Employee contributions made pursuant to Section 4.7 and Excess
Contributions recharacterized as voluntary Employee contributions
pursuant to Section 11.5 on behalf of each such Participant for such
Plan Year; to
(2) the Participant's "414(s) Compensation" for such Plan Year.
(c) For purposes of determining the "Actual Contribution Percentage" and
the amount of Excess Aggregate Contributions pursuant to Section 11.7(d),
only Employer matching contributions (excluding matching contributions
forfeited or distributed pursuant to Section 11.2(f), 11.5(a), or
11.7(a)) contributed to the Plan prior to the end of the succeeding Plan
Year shall be considered. In addition, the Administrator may elect to
take into account, with respect to Employees eligible to have Employer
matching contributions made pursuant to Section 11.1(b) or voluntary
Employee contributions made pursuant to Section 4.7 allocated to their
accounts, elective deferrals (as defined in Regulation 1.402(g)-l(b)) and
qualified
<PAGE>
non-elective contributions (as defined in Code Section 401(m)(4)(C))
contributed to any plan maintained by the Employer. Such elective
deferrals and qualified non-elective contributions shall be treated as
Employer matching contributions subject to Regulation 1.401(m)-l(b)(2)
which is incorporated herein by reference. However, for Plan Years
beginning after December 31, 1988, the Plan Year must be the same as
the plan year of the plan to which the elective deferrals and the
qualified non-elective contributions are made.
(d) For the purpose of determining the actual contribution ratio of a
Highly Compensated Employee who is subject to the Family Member
aggregation rules of Code Section 414(q)(6) because such Employee is
either a "five percent owner" of the Employer or one of the ten (10)
Highly Compensated Employees paid the greatest "415 Compensation" during
the year, the following shall apply:
(1) The combined actual contribution ratio for the family group
(which shall be treated as one Highly Compensated Participant) shall
be the greater of: (i) the ratio determined by aggregating Employer
matching contributions made pursuant to Section 11.l(b) (to the
extent such matching contributions are not used to satisfy the tests
set forth in Section 11.4), voluntary Employee contributions made
pursuant to Section 4.7, Excess Contributions recharacterized as
voluntary Employee contributions pursuant to Section 11.5 and
"414(s) Compensation" of all eligible Family Members who are Highly
Compensated Participants without regard to family aggregation; and
(ii) the ratio determined by aggregating Employer matching
contributions made pursuant to Section 11.l(b) (to the extent such
matching contributions are not used to satisfy the tests set forth
in Section 11.4), voluntary Employee contributions made pursuant to
Section 4.7, Excess Contributions recharacterized as voluntary
Employee contributions pursuant to Section 11.5 and "414(s)
Compensation" of all eligible Family Members (including Highly
Compensated Participants). However, in applying the $200,000 limit
to "414(s) Compensation" for Plan Years beginning after December 31,
1988, Family Members shall include only the affected Employee's
spouse and any lineal descendants who have not attained age 19
before the close of the Plan Year.
(2) The Employer matching contributions made pursuant to Section
11.l(b) (to the extent such matching contributions are not used to
satisfy the tests set forth in Section 11.4), voluntary Employee
contributions made pursuant to Section 4.7, Excess Contributions
recharacterized as voluntary Employee contributions pursuant to
Section 11.5 and "414(s) Compensation" of all Family Members shall
be disregarded for purposes of determining the "Actual Contribution
Percentage" of the Non-Highly Compensated Participant group except
to the extent taken into account in paragraph (1) above.
(3) If a Participant is required to be aggregated as a member of
more than one family group in a plan, all Participants who are
members of those family groups that include the Participant are
aggregated as one family group in accordance with paragraphs (1) and
(2) above.
(e) For purposes of this Section and Code Sections 401(a)(4), 410(b) and
401(m), if two or more plans of the Employer to which matching
contributions, Employee contributions, or both, are made are treated as
one plan for purposes of Code Sections 401(a)(4) or 410(b) (other than
the average benefits test under Code Section 410(b)(2)(A)(ii) as in
effect for Plan Years beginning after December 31, 1988), such plans
shall be treated as one plan. In addition, two or more plans of the
Employer to which matching contributions, Employee contributions, or
both, are made may be considered as a single plan for purposes of
determining whether or not such plans satisfy Code Sections 401(a)(4),
410(b) and 401(m). In such a case, the aggregated plans must satisfy this
Section and Code Sections 401(a)(4), 410(b) and 401(m) as though such
aggregated plans were a single plan. For plan years beginning after
December 31, 1989, plans may be aggregated under this paragraph only if
they have the same plan year.
Notwithstanding the above, for Plan Years beginning after December 31,
1988, an employee stock ownership plan described in Code Section 4975(e)(7) may
not be aggregated with this Plan for purposes of determining whether the
employee stock
<PAGE>
ownership plan or this Plan satisfies this Section and Code
Sections 401(a)(4), 410(b) and 401(m).
(f) If a Highly Compensated Participant is a Participant under two or
more plans (other than an employee stock ownership plan as defined in
Code Section 4975(e)(7) for Plan Years beginning after December 31, 1988)
which are maintained by the Employer or an Affiliated Employer to which
matching contributions, Employee contributions, or both, are made, all
such contributions on behalf of such Highly Compensated Participant shall
be aggregated for purposes of determining such Highly Compensated
Participant's actual contribution ratio. However, for Plan Years
beginning after December 31, 1988, if the plans have different plan
years, this paragraph shall be applied by treating all plans ending with
or within the same calendar year as a single plan.
(g) For purposes of Section 11.6(a) and 11.7, a Highly Compensated
Participant and a Non-Highly Compensated Participant shall include any
Employee eligible to have matching contributions made pursuant to Section
11.l(b) (whether or not a deferred election was made or suspended
pursuant to Section 11.2(e)) allocated to his account for the Plan Year
or to make salary deferrals pursuant to Section 11.2 (if the Employer
uses salary deferrals to satisfy the provisions of this Section) or
voluntary Employee contributions pursuant to Section 4.7 (whether or not
voluntary Employee contributions are made) allocated to his account for
the Plan Year.
(h) For purposes of this Section, "Matching Contribution" shall mean an
Employee contribution made to the Plan, or to a contract described in
Code Section 403(b), on behalf of a Participant on account of an Employee
contribution made by such Participant, or on account of a participant's
deferred compensation, under a plan maintained by the Employer.
11.7 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS
(a) In the event that for Plan Years beginning after December 31,
1986, the "Actual Contribution Percentage" for the Highly Compensated
Participant group exceeds the "Actual Contribution Percentage" for the
Non-Highly Compensated Participant group pursuant to Section 11.6(a),
the Administrator (on or before the fifteenth day of the third month
following the end of the Plan Year, but in no event later than the
close of the following Plan Year) shall direct the Trustee to
distribute to the Highly Compensated Participant having the highest
actual contribution ratio, his portion of Excess Aggregate
Contributions (and Income allocable to such contributions) or, if
forfeitable, forfeit such non-Vested Excess Aggregate Contributions
attributable to Employer matching contributions (and Income allocable
to such Forfeitures) until either one of the tests set forth in Section
11.6(a) is satisfied, or until his actual contribution ratio equals the
actual contribution ratio of the Highly Compensated Participant having
the second highest actual contribution ratio. This process shall
continue until one of the tests set forth in Section 11.6(a) is
satisfied. The distribution and/or Forfeiture of Excess Aggregate
Contributions shall be made in the following order:
(1) Employer matching contributions distributed and/or forfeited
pursuant to Section 11.5(a)(1);
(2) Voluntary Employee contributions including Excess
Contributions recharacterized as voluntary Employee contributions
pursuant to Section 11.5(a)(2);
(3) Remaining Employer matching contributions.
(b) Any distribution or Forfeiture of less than the entire amount of
Excess Aggregate Contributions (and Income) shall be treated as a pro
rata distribution of Excess Aggregate Contributions and Income.
Distribution of Excess Aggregate Contributions shall be designated by the
Employer as a distribution of Excess Aggregate Contributions (and
Income). Forfeitures of Excess Aggregate Contributions shall be treated
in accordance with Section 4.3. However, no such Forfeiture may be
allocated to a Highly Compensated Participant whose contributions are
reduced pursuant to this Section.
(c) Excess Aggregate Contributions attributable to amounts other than
voluntary Employee contributions, including forfeited matching
contributions, shall be treated as Employer contributions for purposes of
Code Sections 404 and 415 even if distributed from the Plan.
(d) For the purposes of this Section and Section 11.6, "Excess Aggregate
Contributions" means, with respect to any Plan Year, the excess of:
(1) the aggregate amount of Employer matching contributions made
pursuant to Section 11.l(a)
<PAGE>
(to the extent such contributions are taken into account pursuant
to Section 11.6(a)), voluntary Employee contributions made
pursuant to Section 4.7, Excess Contributions recharacterized as
voluntary Employee contributions pursuant to Section 11.5 and any
Qualified Non-Elective Contributions or elective deferrals taken
into account pursuant to Section 11.6(c) actually made on behalf
of the Highly Compensated Participant group for such Plan Year,
over
(2) the maximum amount of such contributions permitted under the
limitations of Section 11.6(a).
(e) For each Highly Compensated Participant, the amount of Excess
Aggregate Contributions is equal to the total Employer matching
contributions made pursuant to Section 11.l(b) (to the extent taken into
account pursuant to Section 11.6(a)), voluntary Employee contributions
made pursuant to Section 4.7, Excess Contributions recharacterized as
voluntary Employee contributions pursuant to Section 11.5 and any
Qualified Non-Elective Contributions or elective deferrals taken into
account pursuant to Section 11.6(c) on behalf of the Highly Compensated
Participant (determined prior to the application of this paragraph) minus
the amount determined by multiplying the Highly Compensated Participant's
actual contribution ratio (determined after application of this
paragraph) by his "414(s) Compensation". The actual contribution ratio
must be rounded to the nearest one-hundredth of one percent for Plan
Years beginning after December 31, 1988. In no case shall the amount of
Excess Aggregate Contribution with respect to any Highly Compensated
Participant exceed the amount of Employer matching contributions made
pursuant to Section 11.l(b) (to the extent taken into account pursuant to
Section 11.6(a)), voluntary Employee contributions made pursuant to
Section 4.7, Excess Contributions recharacterized as voluntary Employee
contributions pursuant to Section 11.5 and any Qualified Non-Elective
Contributions or elective deferrals taken into account pursuant to
Section 11.6(c) on behalf of such Highly Compensated participant for such
Plan Year.
(f) The determination of the amount of Excess Aggregate Contributions
with respect to any Plan Year shall be made after first determining the
Excess Contributions, if any, to be treated as voluntary Employee
contributions due to recharacterization for the plan year of any other
qualified cash or deferred arrangement (as defined in Code Section
401(k)) maintained by the Employer that ends with or within the Plan Year
or which are treated as voluntary Employee contributions due to
recharacterization pursuant to Section 11.5.
(g) The determination and correction of Excess Aggregate Contributions
of a Highly Compensated Participant whose actual contribution ratio is
determined under the family aggregation rules shall be accomplished as
follows:
(1) If the actual contribution ratio for the Highly Compensated
Participant is determined in accordance with Section 11.6(d)(1),
then the actual contribution ratio shall be reduced and the Excess
Aggregate Contributions for the family unit shall be allocated among
the Family Members in proportion to the sum of Employer matching
contributions made pursuant to Section 11.l(b) (to the extent taken
into account pursuant to Section 11.6(a)), voluntary Employee
contributions made pursuant to Section 4.7, Excess Contributions
recharacterized as voluntary Employee contributions pursuant to
Section 11.5 and any Qualified Non-Elective Contributions or
elective deferrals taken into account pursuant to Section 11.6(c) of
each Family Member that were combined to determine the group actual
contribution ratio.
(2) If the actual contribution ratio for the Highly Compensated
Participant is determined under Section 11.6(d)(2), then the actual
contribution ratio shall first be reduced, as required herein, but
not below the actual contribution ratio of the group of Family
Members who are not Highly Compensated Participants without regard
to family aggregation. The Excess Aggregate Contributions resulting
from this initial reduction shall be allocated among the Highly
Compensated Participants whose Employer matching contributions made
pursuant to Section 11.1(b) (to the extent taken into account
pursuant to Section 11.6(a)), voluntary Employee contributions made
pursuant to Section 4.7, Excess Contributions recharacterized as
voluntary Employee contributions pursuant to Section 11.5 and any
Qualified
<PAGE>
Non-Elective Contributions or elective deferrals taken into
account pursuant to Section 11.6(c) were combined to determine the
actual contribution ratio. If further reduction is still required,
then Excess Aggregate Contributions resulting from this further
reduction shall be determined by taking into account the
contributions of all Family Members and shall be allocated among
them in proportion to their respective Employer matching
contributions made pursuant to Section 11.l(b) (to the extent
taken into account pursuant to Section 11.6(a)), voluntary
Employee contributions made pursuant to Section 4.7, Excess
Contributions recharacterized as voluntary Employee contributions
pursuant to Section 11.5 and any Qualified Non-Elective
Contributions or elective deferrals taken into account pursuant to
Section 11.6(c).
(h) Notwithstanding the above, within twelve (12) months after the end
of the Plan year, the Employer may make a special Qualified Non-Elective
Contribution on behalf of Non-Highly Compensated participants in an
amount sufficient to satisfy one of the tests set forth in Section 11.6.
Such contribution shall be allocated to the Participant's Qualified
Non-Elective Account of each Non-Highly Compensated Participant in the
same proportion that each Non-Highly Compensated Participant's
Compensation for the year bears to the total Compensation of all
Non-Highly Compensated Participants. A separate accounting shall be
maintained for the purpose of excluding such contributions from the
"Actual Deferral Percentage" tests pursuant to Section 11.4.
(i) For purposes of this Section, "Income" means the income or loss
allocable to Excess Aggregate Contributions which shall equal the sum of
the allocable gain or loss for the Plan Year and the allocable gain or
loss for the period between the end of the Plan Year and the date of
distribution ("gap period"). The income or loss allocable to Excess
Aggregate Contributions for the Plan Year and the "gap period" is
calculated separately and is determined by multiplying the income or loss
for the Plan Year or the "gap period" by a fraction. The numerator of the
fraction is the Excess Aggregate Contributions for the Plan Year. The
denominator of the fraction is the total participant's Account and
Voluntary Contribution Account attributable to Employer matching
contributions subject to Section 11.6, voluntary Employee contributions
made pursuant to Section 4.7, and any Qualified Non-Elective
Contributions and elective deferrals taken into account pursuant to
Section 11.6(c) as of the end of the Plan Year or the "gap period",
reduced by the gain allocable to such total amount for the Plan Year or
the "gap period" and increased by the loss allocable to such total amount
for the Plan Year or the "gap period".
In lieu of the "fractional method" described above, a "safe harbor
method" may be used to calculate the allocable Income for the "gap period".
Under such "safe harbor method", allocable Income for the "gap period" shall
be deemed to equal ten percent (10%) of the Income allocable to Excess
Aggregate Contributions for the Plan Year of the Participant multiplied by
the number of calendar months in the "gap period". For purposes of
determining the number of calendar months in the "gap period", a distribution
occurring on or before the fifteenth day of the month shall be treated as
having been made on the last day of the preceding month and a distribution
occurring after such fifteenth day shall be treated as having been made on
the first day of the next subsequent month.
The Income allocable to Excess Aggregate Contributions resulting from
recharacterization of Elective Contributions shall be determined and
distributed as if such recharacterized Elective Contributions had been
distributed as Excess Contributions.
Notwithstanding the above, for any distribution under this Section
which is made after August 15, 1991, such distribution shall not include any
Income for the "gap period". Further provided, for any distribution under
this Section which is made after August 15, 1991, the amount of Income may be
computed using a reasonable method that is consistent with Section 4.3(c),
provided such method is used consistently for all Participants and for all
such distributions for the Plan Year.
Notwithstanding the above, for Plan Years which began in 1987, Income
during the "gap period" shall not be taken into account.
11.8 ADVANCE DISTRIBUTION FOR HARDSHIP
(a) The Administrator, at the election of the Participant, shall direct
the Trustee to distribute to any Participant in any one Plan Year up to
the lesser of (1) 100% of his accounts as specified in the Adoption
Agreement valued as of the last Anniversary Date or other valuation date
or (2) the amount necessary to satisfy the immediate and heavy financial
need of the Participant. Any distribution made pursuant to this Section
shall be deemed to be made as of the first day of the Plan Year or, if
later, the valuation date immediately preceding the
<PAGE>
date of distribution, and the account from which the distribution is
made shall be reduced accordingly. Withdrawal under this Section shall
be authorized only if the distribution is on account of one of the
following or any other items permitted by the Internal Revenue Service:
(1) Medical expenses described in Code Section 213(d) incurred
by the Participant, his spouse, or any of his dependents (as defined
in Code Section 152) or expenses necessary for these persons to
obtain medical care;
(2) The purchase (excluding mortgage payments) of a principal
residence for the Participant;
(3) Payment of tuition and related educational fees for the next
12 months of post-secondary education for the Participant, his
spouse, children, or dependents; or
(4) The need to prevent the eviction of the Participant from his
principal residence or foreclosure on the mortgage of the
Participant's principal residence.
(b) No such distribution shall be made from the Participant's Account
until such Account has become fully Vested.
(c) No distribution shall be made pursuant to this Section unless the
Administrator, based upon the Participant's representation and such other
facts as are known to the Administrator, determines that all of the
following conditions are satisfied:
(1) The distribution is not in excess of the amount of the
immediate and heavy financial need of the Participant. The amount
of the immediate and heavy financial need may include any amounts
necessary to pay any federal, state or local income taxes or
penalties reasonably anticipated to result from the distribution.
(2) The Participant has obtained all distributions, other than
hardship distributions, and all nontaxable loans currently available
under all plans maintained by the Employer;
(3) The Plan, and all other plans maintained by the Employer,
provide that the Participant's elective deferrals and voluntary
Employee contributions will be suspended for at least twelve (12)
months after receipt of the hardship distribution; and
(4) The Plan, and all other plans maintained by the Employer,
provide that the Participant may not make elective deferrals for the
Participant's taxable year immediately following the taxable year of
the hardship distribution in excess of the applicable limit under
Code Section 402(g) for such next taxable year less the amount of
such Participant's elective deferrals for the taxable year of the
hardship distribution.
(d) Notwithstanding the above, distributions from the Participant's
Elective Account and Qualified Non-Elective Account pursuant to this
Section shall be limited solely to the Participant's Deferred
Compensation and any income attributable thereto credited to the
Participant's Elective Account as of December 31, 1988.
(e) Any distribution made pursuant to this Section shall be made in a
manner which is consistent with and satisfies the provisions of Section
6.5, including, but not limited to, all notice and consent requirements
of Code Sections 411(a)(11) and 417 and the Regulations thereunder.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Taitron Components Incorporated:
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 33-94102) of Taitron Components Incorporated of our report dated
February 11, 1998, relating to the balance sheets of Taitron Components
Incorporated as of December 31, 1997 and 1996 and the related consolidated
statements of operations, cash flows and stockholders' equity 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 Taitron Components
Incorporated.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
March 30, 1998
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<PERIOD-TYPE> YEAR
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<PERIOD-START> JAN-01-1995
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<COMMON> 7
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<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,424
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