-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oi8zpmhMdg93u3UwzMG+d0RU6ZSlcyHRrXyxE+OxSZGCql1xFjLPa2tOxmylpPd1 lfEQBWgcZkf5bPsBrEQFHw== 0000950129-00-001319.txt : 20000323 0000950129-00-001319.hdr.sgml : 20000323 ACCESSION NUMBER: 0000950129-00-001319 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROWN TOM INC /DE CENTRAL INDEX KEY: 0000014803 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 951949781 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-03880 FILM NUMBER: 575588 BUSINESS ADDRESS: STREET 1: 508 W WALL STREET 2: STE 500 CITY: MIDLAND STATE: TX ZIP: 79701 BUSINESS PHONE: 9156829715 FORMER COMPANY: FORMER CONFORMED NAME: BROWN TOM DRILLING CO INC DATE OF NAME CHANGE: 19710915 10-K 1 TOM BROWN, INC. - DATED 12/31/99 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ---------------------- (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-3880 TOM BROWN, INC. (Exact name of registrant as specified in its charter) ---------------------- DELAWARE 95-1949781 (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization) 555 SEVENTEENTH STREET SUITE 1850 DENVER, COLORADO 80202 (Address of principal executive offices) (Zip Code)
---------------------- 303-260-5000 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.10 par Value Convertible Preferred Stock, $.10 par Value (Title of 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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [ ] No [ ] The aggregate market value of the Registrant's Common Stock held by non-affiliates (based upon the last sale price of $16.125 per share as quoted on the NASDAQ National Market System) on March 17, 2000 was approximately $569,604,725. As of March 17, 2000, there were 35,324,324 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement for the 2000 Annual Meeting of Stockholders to be held on May 18, 2000 are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TOM BROWN, INC. FORM 10-K CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 9 Item 3. Legal Proceedings........................................... 12 Item 4. Submission of Matters to a Vote of Security Holders......... 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 13 Item 6. Selected Financial Data..................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 20 Item 8. Financial Statements and Supplementary Data................. 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 49 PART III Item 10. Directors and Executive Officers of the Registrant.......... 49 Item 11. Executive Compensation...................................... 49 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 49 Item 13. Certain Relationships and Related Transactions.............. 49 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 50 Signatures.................................................. 53
2 3 PART I ITEM 1. BUSINESS GENERAL Tom Brown, Inc. (the "Company") was organized in 1955 as a privately-owned drilling company known as Scarber-Brown Drilling Company and in 1959 as Tom Brown Drilling Company, Inc. In 1968, the Company merged into Gold Metals Consolidated Mining Company, a publicly-traded Nevada corporation. The name of the Company after the merger was changed to Tom Brown Drilling Company, Inc. and to Tom Brown, Inc. in 1971. In February 1987, the Company changed its state of incorporation from Nevada to Delaware. In 1999, the Company relocated its headquarters and executive offices to 555 Seventeenth Street, Suite 1850, Denver Colorado 80202 and its telephone number at that address is (303) 260-5000. Unless the context otherwise requires, all references to the "Company" include Tom Brown, Inc. and its subsidiaries. The Company is engaged primarily in the domestic exploration for, and the acquisition, development, production, marketing, and sale of, natural gas and crude oil. The Company's activities are conducted principally in the Wind River and Green River Basins of Wyoming, the Piceance Basin of Colorado, the Paradox Basin of Utah and Colorado, the Val Verde Basin of west Texas, the Permian Basin of west Texas and southeastern New Mexico, and the East Texas Basin. The Company also, to a lesser extent, conducts exploration and development activities in other areas of the continental United States and Canada. The Company's industry segments are (i) the exploration for, and the acquisition, development and production of, natural gas and crude oil, (ii) the marketing, gathering, processing and sale of natural gas and (iii) the drilling of gas and oil wells. Except for its gas and oil leases with domestic governmental entities and other third parties who enter into gas and oil leases or assignments with the Company in the regular course of its business and options to purchase gas and oil leases with the Eastern Shoshone and Northern Arapaho Tribes, the Company has no material patents, licenses, franchises or concessions which it considers significant to its gas and oil operations. The nature of the Company's business is such that it does not maintain or require a substantial amount of products, customer orders or inventory. The Company's gas and oil operations are not subject to renegotiations of profits or termination of contracts at the election of the federal government. The Company has not been a party to any bankruptcy, receivership, reorganization or similar proceeding, except in connection with its participation as a joint proponent of a plan of reorganization for Presidio Oil Company in 1996. BUSINESS STRATEGY The Company's business strategy is to increase shareholder value through the discovery, acquisition and development of long-lived gas and oil reserves in areas where the Company has industry knowledge and operations expertise. The Company's principal investments have been in natural gas prone basins, which the Company believes will continue to provide the opportunity to accumulate significant long-lived gas and oil reserves at attractive prices. The Company's year-end acreage position was approximately 3,054,000 gross (2,031,000 net) acres (including options) located primarily in the Wind River and Green River Basins of Wyoming, the Piceance Basin of Colorado, the Paradox Basin of Colorado and Utah, and the Permian, Val Verde and East Texas Basins of Texas where the Company can utilize its geological and technical expertise and its control of operations for the further development and expansion of these areas. Approximately 89% of the net acreage is undeveloped, giving the Company development drilling leverage to the extent that gas prices increase. Additionally, by staying focused in its core basins, the Company continues to develop more effective drilling and completion techniques which can improve overall economic efficiency. The Company increased its reserves in 1999 over 1998 by 29%, due primarily to an acquisition in the Paradox Basin in July, 1999 and due to continued drilling success in its core areas. Year-end proved reserves 3 4 were 524 billion cubic feet equivalent ("Bcfe"), compared to year-end 1998 reserves of 406 Bcfe. Since December 31, 1995, the Company has increased proved reserves at a compounded annual growth rate of 23%, or from 188 Bcfe to 524 Bcfe. Reserve replacement for 1999 was 340% from all sources and 123% from additions and revisions only. Finding cost was $0.70 per Mcfe for the year from all sources and $0.79 per Mcfe from additions and revisions. The Company's reserve to production ratio increased to 10.6 years at year-end 1999 from 9.7 years at year-end 1998. In addition to increasing reserves, the Company also increased its production 17% from 42.0 Bcfe in 1998 to 49.2 Bcfe in 1999. The Company markets a portion of its operated gas production and third party gas in the Rocky Mountains through Retex, Inc. ("Retex"), the Company's wholly-owned marketing subsidiary. Wildhorse Energy Partners, LLC ("Wildhorse") conducts gas gathering and processing activities in the Rocky Mountains. Wildhorse is owned 55% by Kinder Morgan, Inc. ("KM") and 45% by the Company. The Company plans to continue to selectively pursue acquisitions of gas and oil properties in its core areas of activity and, in connection therewith, the Company from time to time will be involved in evaluations of, or discussions with, potential acquisition candidates. The consideration for any such acquisition might involve the payment of cash and/or the issuance of equity or debt securities. Notwithstanding the Company's historical ability to implement the above strategy, there can be no assurance that the Company will be able to successfully implement its strategy in the future. AREAS OF ACTIVITY The following discussion focuses on areas the Company considers to be its core areas of operations and those that offer the Company the greatest opportunities for further exploration and development activities. Wind River, Green River, Paradox, and Piceance Basins The Wind River and Green River Basins of Wyoming, the Piceance Basin of Colorado, and the Paradox Basin of Colorado and Utah account for a major portion of the Company's current and anticipated exploration and development activities with approximately 78% of the Company's proved reserves at December 31, 1999. The Company owns interests in 913 producing wells in these basins that averaged net daily production of 82 Mmcfe for 1999. The Company has approximately 2,064,000 gross (1,622,000 net) developed and undeveloped acres in these basins, including option acreage of approximately 939,000 gross (767,000 net) undeveloped acres in the Wind River Basin. The Company's interest in the leases and options to lease are subject to the Company performing certain 3-D seismic operations and drilling certain exploratory wells. Although the Wind River Basin experienced limited natural gas transportation capacity in the past, pipeline expansions and conversions have worked to correct this capacity constraint. The TransColorado pipeline (which runs from the northern Piceance Basin to the San Juan Basin) is now in service and has the capability to add 300 Mmcfpd in incremental capacity out of the Rocky Mountain region. Additionally, the Enron-Burlington Lost Creek Pipeline should be operational by the third quarter of 2000 which will also help to alleviate Wind River Basin constraints. Permian and Val Verde Basins The Permian and Val Verde Basins accounted for approximately 12% of the Company's proved reserves at December 31, 1999. The Company's share of production from these basins averaged 32 Mmcfepd of natural gas for 1999. The Company holds a 50% working interest in approximately 36,000 gross acres and 45 producing wells in the Val Verde Basin. The Permian Basin contains significant oil reserves for the Company, located primarily in the Spraberry Field. The Company owns interests in 425 wells and has approximately 32,000 net developed and undeveloped acres in this basin. 4 5 East Texas Basin Together with Marathon Oil Corporation, the Company began a seven well developmental drilling program in the Mimms Creek Field in Freestone County, Texas with the successful drilling of a Bossier Sand well in late 1999. The Company owns working interests ranging from 50% to 62.5% in the drilling program. The Company has acquired approximately 16,000 net acres in the James Lime (horizontal) Trend of the East Texas Basin, and is currently evaluating its acreage position for potential drilling activity. BUSINESS DEVELOPMENTS Current Developments in the Gas and Oil Business ACQUISITION OF THE ASSETS OF UNOCAL CORPORATION In July 1999, the Company completed an acquisition of substantially all of the Rocky Mountain oil and gas assets of Unocal Corporation ("Unocal") for 5.8 million shares of common stock and $5 million in cash for a total purchase price of $68.5 million ($60.9 million after deducting normal purchase price adjustments.) The Unocal oil and gas assets are primarily located in the Paradox Basin of southwestern Colorado and southeastern Utah. These assets and properties will compliment the Company's 163,000 net undeveloped acres in the Paradox Basin. Additionally, the discretionary cash flow provided by the Unocal assets and properties was accretive to the Company in 1999. Included in the acquisition is the Lisbon Plant, a modern sophisticated cyrogenic (60 million cubic feet per day capacity) natural gas processing plant that extracts natural gas liquids and merchantable helium; and separates carbon dioxide, hydrogen sulfide and nitrogen from the raw gas stream. The average net sales from the Unocal properties in 1998 was approximately 18 million cubic feet per day of natural gas, 290 barrels of oil per day and 92,000 gallons of gas plant liquids per day, or approximately 33 million cubic feet equivalent per day (assuming gas plant liquids and oil converted at 6:1). The net proved reserves of these Unocal properties were estimated to be 93.2 billion cubic feet equivalent of gas as of the closing date of July 1, 1999. Approximately 65,000 net undeveloped acres were also acquired. ACQUISITION OF ROCKY MOUNTAIN ASSETS In September 1999, the Company purchased certain Rocky Mountain assets from an undisclosed seller for approximately $7.7 million in cash. Included in the acquisition was approximately 9.7 Bcfe of proved reserves and 34,000 net acres in the Greater Green River Basin of Wyoming. ACQUISITION OF THE ASSETS OF GENESIS GAS AND OIL, L.L.C. On October 21, 1997, the Company completed the acquisition of the assets of Genesis Gas and Oil, L.L.C ("Genesis"). The Genesis assets are located primarily in the Piceance Basin of western Colorado and are principally operated by the Company. The acquisition increased the Company's acreage position in the Piceance Basin by approximately 32,000 net developed and 48,000 net undeveloped acres. The Company's working interest doubled from 23% to 46% in 238 producing wells and from 34% to 68% in 500 potential development locations. The purchase price for these assets was approximately $35.5 million. Current Developments in the Marketing, Gathering and Processing Business In September 1999, KM became the operator of, and 55% partner in, Wildhorse as a result of a merger with KN Energy, Inc. ("KNE"). Wildhorse was formed in connection with the Company's 1996 acquisition of KN Production Company, the wholly-owned oil and gas production subsidiary of KNE. Wildhorse was created to provide services related to natural gas, natural gas liquids and other natural gas products, including gathering, processing and storage services and field services. The Company has owned 45% of Wildhorse since its inception. The business and affairs of Wildhorse are managed by KM under the direction of an operating team consisting of two representatives appointed by the Company and two representatives appointed by KM. 5 6 Effective September 1, 1999, Wildhorse assigned 100% of its marketing operations to Retex, the Company's wholly-owned marketing subsidiary. Additionally, firm transportation contracts were assigned 55% to KM and 45% remained in Retex. Current Developments in the Drilling Business ACQUISITION OF ASSETS OF W. E. SAUER COMPANIES, LLC On January 7, 1998, the Company completed the acquisition of all of the drilling assets of W. E. Sauer Companies L.L.C. of Casper, Wyoming for approximately $8.1 million. The assets include five drilling rigs, tubular goods, a yard and related assets. In 1999, Sauer acquired an additional drilling rig for approximately $1.1 million. The Company operates the assets in its subsidiary, Sauer Drilling Company ("Sauer"), and will continue to serve the drilling needs of operators in the central Rocky Mountain region in addition to drilling for the Company. MARKETS The Company's gas production has historically been sold under month-to-month contracts with marketing companies. During 1999, there was a significant amount of volatility in the prices received for natural gas. Monthly closing gas prices as measured on the New York Mercantile Exchange ("NYMEX") varied from a high of $3.09 per million British thermal unit ("Mmbtu") in November 1999 to a low of $1.67 per Mmbtu in March 1999. Additionally, the Company produced approximately 65% of its gas production in the Rocky Mountain area where the price of gas varied as compared to NYMEX prices from $.41 per Mmbtu below NYMEX prices in August 1999 to virtually no basis differential in January 1999. The Company markets most of its oil production with independent third-party resellers and refiners at market ("posted") prices. These posted prices generally reflect the prices determined by the trading of West Texas Intermediate ("WTI") oil futures contracts on the NYMEX, with adjustments due to basis differential and for the quality of oil produced. NYMEX prices for both gas and oil are influenced by seasonal demand, levels of storage, production levels and a variety of political and economic factors over which the Company has no control. PRODUCTION VOLUMES, UNIT PRICES AND COSTS The following table sets forth certain information regarding the Company's volumes of production sold and average prices received associated with its production and sales of natural gas, crude oil and natural gas liquids for each of the years ended December 31, 1999, 1998 and 1997.
YEARS ENDED DECEMBER 31, ---------------------------- 1999 1998 1997 -------- ------- ------- Production Volumes: Natural Gas (MMcf)........................................ 40,514 35,887 31,842 Crude Oil (MBbls)(1)...................................... 1,444 1,027 1,159 Net Average Daily Production Volumes: Natural Gas (Mcf)......................................... 110,997 98,321 87,238 Crude Oil (Bbls)(1)....................................... 3,956 2,814 3,175 Average Sales Prices: Natural Gas (per Mcf)..................................... $ 2.04 $ 1.85 $ 2.18 Crude Oil (per Bbl)(1).................................... $ 15.20 $ 11.37 $ 18.02 Average Production Cost (per Mcfe)(2)....................... $ .58 $ .52 $ .56
- --------------- (1) Oil volumes include natural gas liquids, which were 535,000 barrels for 1999. For years prior to 1999, natural gas liquids were insignificant. (2) Includes production costs and taxes on production. (Mcfe means one thousand cubic feet of natural gas equivalent, calculated on the basis of six barrels of oil and natural gas liquids to one Mcf of gas.) 6 7 COMPETITION The Company encounters strong competition from major oil companies and independent operators in acquiring properties and leases for the exploration for, and the development and production of, natural gas and crude oil. Competition is particularly intense with respect to the acquisition of desirable undeveloped gas and oil leases. The principal competitive factors in the acquisition of undeveloped gas and oil leases include the availability and quality of staff and data necessary to identify, investigate and purchase such leases, and the financial resources necessary to acquire and develop such leases. Many of the Company's competitors have financial resources, staffs and facilities substantially greater than those of the Company. In addition, the producing, processing and marketing of natural gas and crude oil is affected by a number of factors which are beyond the control of the Company, the effect of which cannot be accurately predicted. The principal raw materials and resources necessary for the exploration and development of natural gas and crude oil are leasehold prospects under which gas and oil reserves may be discovered, drilling rigs and related equipment to drill for and produce such reserves and knowledgeable personnel to conduct all phases of gas and oil operations. The Company must compete for such raw materials and resources with both major oil companies and independent operators. Retex encounters competition from other natural gas transportation and marketing entities in the marketing of gas. Such competition may materially affect the volumes and margins that Retex may derive. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company on March 17, 2000 were as follows:
NAME AGE POSITION WITH COMPANY SINCE - ---- --- --------------------- ----- Donald L. Evans...................... 53 Chairman of the Board and Chief Executive 1976 Officer James D. Lightner.................... 47 President and Director 1999 Thomas W. Dyk........................ 46 Executive Vice President and Chief 1998 Operating Officer Peter R. Scherer..................... 43 Executive Vice President 1986 Daniel G. Blanchard.................. 39 Vice President and Chief Financial Officer 1999 Hilary G. Dussing.................... 42 Vice President -- Exploration 1999 Rodney G. Mellot..................... 42 Vice President -- Land and Business 1999 Development Bruce R. DeBoer...................... 47 Vice President, General Counsel and 1997 Secretary Jack F. Harper....................... 28 Vice President-Investor Relations and 1999 Treasurer R. Kim Harris........................ 43 Vice President-Finance and Controller 1986 B. Jack Reed......................... 50 Vice President-Human Resources 1990
Each executive officer is elected annually by the Company's Board of Directors to serve at the Board's discretion. EMPLOYEES At December 31, 1999, the Company had 230 employees. None of the Company's employees are represented by labor unions or covered by any collective bargaining agreement. The Company considers its relations with its employees to be satisfactory. REGULATION Regulation of Gas and Oil Production Gas and oil operations are subject to various types of regulation by state and federal agencies. Legislation affecting the gas and oil industry is under constant review for amendment or expansion. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations 7 8 binding on the gas and oil industry and its individual members, some of which carry substantial penalties for failure to comply. The regulatory burden on the gas and oil industry increases the Company's cost of doing business and, consequently, affects its profitability. Gas Price Controls Prior to January 1993, certain natural gas sold by the Company was subject to regulation by the Federal Energy Regulatory Commission ("FERC") under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978 ("NGPA"). The NGPA prescribed maximum lawful prices for natural gas sales effective December 1, 1978. Effective January 1, 1993, natural gas prices were completely deregulated and sales of the Company's natural gas are now made at market prices. The majority of the Company's gas sales contracts either contain decontrolled price provisions or already provide for market prices. In April 1992, FERC issued Order 636, a rule designed to restructure the interstate natural gas transportation and marketing system to remove various barriers and practices that have historically limited non-pipeline gas sellers, including producers, from effectively competing with pipelines. The restructuring process was implemented on a pipeline-by-pipeline basis through negotiations in individual pipeline proceedings. Since the issuance of Order 636, FERC has issued several orders making minor modifications to Order 636. Because the restructuring requirements that emerge from the lengthy administrative and judicial review process may be significantly different from those currently in effect, and because implementation of the restructuring may vary by pipeline, it is not possible to predict what, if any, effect the restructuring resulting from Order 636 will have on the Company. Oil Price Controls Sales of crude oil, condensate and gas liquids by the Company are not regulated and are made at market prices. State Regulation of Gas and Oil Production States in which the Company conducts its gas and oil activities regulate the production and sale of natural gas and crude oil, including requirements for obtaining drilling permits, the method of developing new fields, the spacing and operation of wells and the prevention of waste of gas and oil resources. In addition, most states regulate the rate of production and may establish maximum daily production allowables for wells on a market demand or conservation basis. Environmental Regulation The Company's activities are subject to federal and state laws and regulations governing environmental quality and pollution control. The existence of such regulations has a material effect on the Company's operations but the cost of such compliance has not been material to date. However, the Company believes that the gas and oil industry may experience increasing liabilities and risks under the Comprehensive Environmental Response, Compensation and Liability Act, as well as other federal, state and local environmental laws, as a result of increased enforcement of environmental laws by various regulatory agencies. As an "owner" or "operator" of property where hazardous materials may exist or be present, the Company, like all others in the petroleum industry, could be liable for fines and/or "clean-up" costs, regardless of whether the Company was responsible for the release of any hazardous substances. Rocno Corporation ("Rocno"), a wholly-owned subsidiary of the Company, is a party to a trust agreement in connection with the environmental clean-up plan for the Sheridan Superfund Site in Waller County, Texas. See Item 3, Legal Proceedings. Indian Lands The Company's Muddy Ridge and Pavillion Fields are located on the Wind River Indian Reservation. The Eastern Shoshone and Northern Arapaho Tribes regulate certain aspects of the production and sale of 8 9 natural gas and crude oil, and the drilling of wells and levy taxes on the production of hydrocarbons. The Bureau of Indian Affairs and the Minerals Management Service of the United States Department of the Interior perform certain regulatory functions relating to operation of Indian gas and oil leases. The Company owns interests in three leases in the Pavillion Field which were issued pursuant to the provisions of the Act of August 21, 1916, for initial terms of 20 years each, with a preferential right by the lessee to renew the leases for subsequent ten-year terms. The leases were renewed for an additional ten-year term in 1992, effective as of June 23, 1993. These leases have been amended to provide for incremental extensions of this lease term of up to an additional twelve years by drilling and completing additional wells on each lease prior to June 2003. ITEM 2. PROPERTIES GAS AND OIL PROPERTIES The principal properties of the Company consist of developed and undeveloped gas and oil leases. Generally, the terms of developed gas and oil leaseholds are continuing and such leases remain in force by virtue of, and so long as, production from lands under lease is maintained. Undeveloped gas and oil leaseholds are generally for a primary term, such as five or ten years, subject to maintenance with the payment of specified minimum delay rentals or extension by production. The Company also has options to purchase undeveloped gas and oil leaseholds on Eastern Shoshone and Northern Arapaho Tribal lands. Once acreage on these lands is purchased, the undeveloped leaseholds are maintained by the drilling of wells, minimum delay rentals or production. The leases must be renewed after twenty years and the Company has a preferential right to negotiate with the Tribes for such renewal. TITLE TO PROPERTIES As is customary in the gas and oil industry, the Company makes only a cursory review of title to undeveloped gas and oil leases at the time they are acquired by the Company. However, before drilling commences, the Company causes a thorough title search to be conducted, and any material defects in title are remedied prior to the time actual drilling of a well on the lease begins. The Company believes that it has good title to its gas and oil properties, some of which are subject to immaterial encumbrances, easements and restrictions. The gas and oil properties owned by the Company are also typically subject to royalty and other similar non-cost bearing interests customary in the industry. The Company does not believe that any of these encumbrances or burdens materially affects the Company's ownership or use of its properties. 9 10 ACREAGE The following table sets forth the gross and net acres of developed and undeveloped gas and oil leases held by the Company at December 31, 1999. Excluded from the table are approximately 939,000 gross (767,000 net) acres in Wyoming under gas and oil option agreements acquired from certain Indian tribes.
DEVELOPED UNDEVELOPED ----------------- --------------------- GROSS NET GROSS NET ------- ------- --------- --------- Colorado.................................... 108,400 85,718 435,673 379,675 Kansas...................................... 1,961 1,563 1,802 1,614 Louisiana................................... 11,994 4,060 7,753 2,073 Michigan.................................... -- -- 303 121 Mississippi................................. 756 362 4,375 470 Montana..................................... 4,678 718 175,464 37,467 Nebraska.................................... -- -- 32,895 32,146 New Mexico.................................. 15,577 3,981 2,440 2,036 North Dakota................................ 600 -- 7,119 513 Oklahoma.................................... 33,940 11,354 6,676 3,187 Texas....................................... 110,254 39,064 58,632 29,564 Utah........................................ 5,402 4,581 24,854 20,524 West Virginia............................... 3,673 1,095 157,131 81,018 Wyoming..................................... 143,954 60,875 758,521 459,908 Other....................................... 360 58 10 2 ------- ------- --------- --------- Total............................. 441,549 213,429 1,673,648 1,050,318 ======= ======= ========= =========
"Gross" acres refer to the number of acres in which the Company owns a working interest. "Net" acres refer to the sum of the fractional working interests owned by the Company in gross acres. GAS AND OIL RESERVES Estimates of the Company's gas and oil reserves, including future net revenues and the present value of future net cash flows, were made by Ryder Scott at December 31, 1999 and 1998, and by Ryder Scott and Williamson Petroleum Consultants, Inc. at December 31, 1997, (both are independent petroleum consultants), in accordance with guidelines established by the Securities and Exchange Commission (the "SEC"). Estimates of gas and oil reserves and their estimated values require numerous engineering assumptions as to the productive capacity and production rates of existing geological formations and require the use of certain SEC guidelines as to assumptions regarding costs to be incurred in developing and producing reserves and prices to be realized from the sale of future production. Accordingly, estimates of reserves and their value are inherently imprecise and are subject to constant revision and change and should not be construed as representing the actual quantities of future production or cash flows to be realized from the Company's gas and oil properties or the fair market value of such properties. Certain additional unaudited information regarding the Company's reserves, including the present value of future net cash flows, is set forth in Note 14 of the Notes to Consolidated Financial Statements included herein. The Company has no gas and oil reserves or production subject to long-term supply or similar agreements with foreign governments or authorities. Estimates of the Company's total proved gas and oil reserves have not been filed with or included in reports to any federal authority or agency other than the SEC. 10 11 PRODUCTIVE WELLS The following table sets forth the gross and net productive gas and oil wells in which the Company owned an interest at December 31, 1999.
PRODUCTIVE WELLS ----------------------------- GROSS NET ----------- --------------- GAS OIL GAS OIL ----- --- ------ ------ Colorado.............................................. 451 42 215.56 17.79 Louisiana............................................. 48 36 11.59 13.67 New Mexico............................................ 34 28 7.27 12.15 North Dakota.......................................... 6 5 2.13 3.49 Oklahoma.............................................. 127 34 30.37 9.38 Utah.................................................. 8 22 7.1 21.17 Texas................................................. 116 292 50.38 98.77 West Virginia......................................... 56 -- 18.39 -- Wyoming............................................... 488 151 172.19 42.59 Other................................................. 17 13 4.65 .74 ----- --- ------ ------ Total....................................... 1,351 623 519.63 219.75 ===== === ====== ======
A "gross" well is a well in which the Company owns a working interest. "Net" wells refer to the sum of the fractional working interests owned by the Company in gross wells. GAS AND OIL DRILLING ACTIVITY The following table sets forth the Company's gross and net interests in exploratory and development wells drilled during the periods indicated.
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- TYPE OF WELL GROSS NET NET% GROSS NET NET% GROSS NET NET% - ------------ ----- ---- ---- ----- ---- ---- ----- ---- ---- Exploratory Gas............................. 2 .8 20 8 3.0 46 -- -- -- Oil............................. -- -- -- -- -- -- -- -- -- Dry............................. 4 3.2 80 7 4.5 54 7 3.7 100 -- ---- --- -- ---- --- -- ---- --- 6 4.0 100 15 7.5 100 7 3.7 100 Development Gas............................. 37 16.3 99 52 31.4 78 72 27.7 89 Oil............................. 1 0.2 1 16 4.2 11 7 2.2 7 Dry............................. -- -- -- 6 4.2 11 3 1.1 4 -- ---- --- -- ---- --- -- ---- --- 38 16.5 100 74 39.8 100 82 31.0 100 Total............................. 44 20.5 89 47.3 89 34.7 == ==== == ==== == ====
At December 31, 1999, 18 gross (6.1 net) development wells and 1 gross (.9 net) exploration well were in various stages of drilling and completion in Texas and Wyoming. OTHER PROPERTIES The Company leases its home office facilities in Denver, Colorado. The lease covers approximately 56,500 square feet and expires January 31, 2004. Of this amount, the Company subleases 7,246 square feet under an agreement that expires January 31, 2004. The Company also leases office facilities in Midland, Texas. The lease covers approximately 33,150 square feet for a term of five years and expires December 31, 2003. 11 12 The Company owns a 3,200 square foot office building located on a 2.94 acre tract in Midland, Texas. The facility is used primarily for storage of pipe and oilfield equipment. The Company subleased approximately 41,000 square feet of leased office space, which was obtained through the Presidio acquisition. Both the lease and sublease expired on March 31, 1999. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in several routine legal proceedings incidental to its business, which the Company believes will not have a significant effect on its consolidated financial position, results of operations or cash flows. In addition to routine legal proceedings incidental to the Company's business, Rocno was a defendant in a complaint filed by the United States of America which, among other things, alleged that Rocno and approximately 117 other companies arranged for the disposal of "hazardous materials" (within the meaning of the Comprehensive Environmental Response, Compensation and Liability Act) in Waller County, Texas (the "Sheridan Superfund Site"). Effective August 31, 1989, Rocno and thirty-six other defendants executed the Sheridan Site Trust Agreement (the "Trust") for the purpose of creating a trust to perform agreed upon remedial action at the Sheridan Superfund Site. In connection with the establishment of the Trust, the parties to the Trust have agreed to the terms of a Consent Decree entered December 3, 1991 in the United States District Court, Southern District of Texas, Houston Division, Civil Action No. H-91-3529, pursuant to which the defendants joining the Consent Decree will carry out the clean-up plan prescribed by the Consent Decree. The estimate of the total clean-up cost is approximately $30 million. Under terms of the Trust, each party is allocated a percentage of costs necessary to fund the Trust for clean-up costs. Rocno's proportionate share of the estimated clean-up costs is 0.33% or $99,000, of which $16,000 has been paid, and the remainder was accrued in the Company's consolidated financial statements at December 31, 1999. If the clean-up costs exceed the projected amount, Rocno will be required to pay its pro rata share of the excess clean-up costs. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's stockholders in the fourth quarter of the year ended December 31, 1999. 12 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded in the over-the-counter market and appears on the NASDAQ National Market System under the symbol "TMBR". The following table sets forth the range of high and low closing quotations for each quarterly period during the past two fiscal years as reported by NASDAQ National Market System. The quotations are inter-dealer prices without retail mark-ups, mark-downs or commissions and may not represent actual transactions.
CLOSING SALE PRICE ----------------------------- QUARTER ENDED HIGH LOW - ------------- ----------- ----------- March 31, 1998.............................................. 22 3/8 15 3/4 June 30, 1998............................................... 22 3/4 14 7/8 September 30, 1998.......................................... 19 11 1/16 December 31, 1998........................................... 16 5/16 9 7/16 March 31, 1999.............................................. 14 1/16 8 1/4 June 30, 1999............................................... 15 9/16 11 15/16 September 30, 1999.......................................... 18 5/8 12 15/16 December 31, 1999........................................... 16 5/8 11 11/16
On March 17, 2000 the last sale price of the Company's Common Stock, as reported by the NASDAQ National Market System, was $16.125 per share. The transfer agent for the Company's Common Stock is Boston EquiServe, L.P., Canton, Massachusetts. On December 31, 1999, the outstanding shares of the Company's Common Stock (35,308,489 shares) were held by approximately 2,149 holders of record. The Company has never declared or paid any cash dividends to the holders of Common Stock and has no present intention to pay cash dividends to the holders of Common Stock in the future. Under the terms of the Company's Credit Agreement, the Company is prohibited from paying cash dividends to the holders of Common Stock without the written consent of the bank lenders. Additionally, the Company's ability to declare and pay dividends on its Common Stock is further restricted by the rights of the holder of the Series A Preferred Stock. In July 1999, the Company completed an acquisition of substantially all of the Rocky Mountain oil and gas assets of Unocal Corporation for 5.8 million shares of common stock and $5 million in cash. On March 1, 1991, the Board of Directors adopted a Rights Plan designed to help assure that all stockholders receive fair and equal treatment in the event of a hostile attempt to take over the Company, and to help guard against abusive takeover tactics. The Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock. The dividend was distributed on March 15, 1991 to the shareholders of record on that date. Each Right entitles the registered holder to purchase, for the $20 per share exercise price, shares of Common Stock or other securities of the Company (or, under certain circumstances, of the acquiring person) worth twice the per share exercise price of the Right. The Rights will be exercisable only if a person or group acquires 20% or more of the Company's Common Stock or announces a tender offer which would result in ownership by a person or group of 20% or more of the Common Stock. The date on which the above occurs is to be known as the ("Distribution Date"). The Rights will expire on March 15, 2001, unless extended or redeemed earlier by the Company. At the time the Rights dividend was declared, the Board of Directors further authorized the issuance of one Right with respect to each share of the Company's Common Stock that shall become outstanding between March 15, 1991 and the earlier of the Distribution Date or the expiration or redemption of the Rights. Until the Distribution Date occurs, the certificates representing shares of the Company's Common Stock also evidence the Rights. Following the Distribution Date, the Rights will be evidenced by separate certificates. 13 14 The provisions described above may tend to deter any potential unsolicited tender offers or other efforts to obtain control of the Company that are not approved by the Board of Directors and thereby deprive the stockholders of opportunities to sell shares of the Company's Common Stock at prices higher than the prevailing market price. On the other hand, these provisions will tend to assure continuity of management and corporate policies and to induce any person seeking control of the Company or a business combination with the Company to negotiate on terms acceptable to the then elected Board of Directors. ITEM 6. SELECTED FINANCIAL DATA The following tables set forth selected financial information for the Company for each of the years shown. The Company's historical results of operations have been materially affected by the substantial increase in the Company's size as a result of the Unocal Acquisition in July 1999, the Genesis Acquisition in October 1997, the Presidio Acquisition in December 1996, and the KNPC Acquisition in January 1996. (See Note 3 to Notes to Consolidated Financial Statements of the Company included elsewhere herein.)
YEARS ENDED DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- --------- ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues(1).............................. $214,850 $131,330 $ 126,375 $ 65,915 $ 40,536 ======== ======== ========= ========== ========= Net income (loss) attributable to common stock.................................. 5,007 (45,233) 6,860 6,263 5,785 ======== ======== ========= ========== ========= Weighted average number of common shares outstanding Basic.................................. 32,228 29,251 25,110 21,116 16,292 ======== ======== ========= ========== ========= Diluted................................ 32,466 29,251 26,407 22,525 16,887 ======== ======== ========= ========== ========= Net income (loss) per common share Basic.................................. .16 (1.55) .27 .30 .36 ======== ======== ========= ========== ========= Diluted................................ .15 (1.55) .26 .28 .34 ======== ======== ========= ========== ========= Total assets............................. 536,299 441,882 450,926 406,374 164,174 ======== ======== ========= ========== ========= Long-term debt, net of current maturities............................. 81,000 55,000 23,000 119,000 -- ======== ======== ========= ========== ========= Other Financial Data: EBITDAX(2)............................. 74,438 49,348 69,716 33,173 18,183 Net cash provided by operating activities before changes in working capital(2).......................... 66,710 43,544 59,652 31,902 12,235 Net cash provided by operating activities.......................... 45,746 69,240 47,600 29,114 10,127 Net cash used in investing activities.......................... (61,889) (98,774) (86,672) (131,434) (72,200) Net cash provided by financing activities.......................... 25,983 25,667 25,105 117,842 47,908
- --------------- (1) Certain reclasses have been made to amounts reported in previous years to conform to the 1999 presentation. (2) EBITDAX reflects income before income taxes, plus interest expense, depreciation, depletion and amortization expense, exploration costs and impairments of leasehold costs. EBITDAX and cash flows from operating activities before changes in working capital are not measures determined pursuant to generally accepted accounting principles ("GAAP") and are not intended to be used in lieu of GAAP presentations of net income or cash flows from operating activities. EBITDAX for 1998 and 1995 exclude $51.3 million and $8.4 million, respectively, for impairment of gas and oil properties, which were non-cash charges. 14 15 The following tables set forth selected information for the Company's gas and oil sales volumes and proved reserves for each of the years shown.
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- Volumes sold: Gas (Mmcf)................................. 40,514 35,887 31,842 16,762 10,585 Oil (MBbls)(1)............................. 1,444 1,027 1,159 545 387 Proved reserves at period end: Gas (Mmcf)................................. 445,943 372,022 347,104 359,167 163,303 Oil (MBbls)(1)............................. 13,001 5,682 7,227 12,306 4,068
- --------------- (1) Oil volumes include natural gas liquids ("NGL") for the periods shown. For 1999, there were 535,000 barrels of NGL production and 6,266,000 barrels of NGL reserves. NGL volumes in years prior to 1999 were insignificant. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company's results of operations were favorably impacted in 1999 due to a mid-year acquisition of properties and a cyrogenic natural gas processing plant from Unocal and due to successful drilling results. Revenues During 1999, revenues from gas, oil and natural gas liquids production increased 34% to $104.4 million, as compared to $78.1 million in 1998. Such increase was the result of an increase in (i) average gas prices received by the Company from $1.85 per Mcf in 1998 to $2.04 per Mcf in 1999, which increased revenues $6.8 million, (ii) average oil and natural gas liquids prices received from $11.37 to $15.20 which increased revenues $3.9 million, (iii) gas sales volumes of 13% to 40.5 Bcf which increased revenues by $9.4 million due primarily to the Unocal Acquisition and to successful drilling results, and (iv) oil and natural gas liquids sales volumes of 41% to 1.4 million barrels, which increased revenues by $6.2 million due primarily to the Unocal Acquisition. During 1998, revenues from gas and oil production decreased 13% to $78.1 million as compared to $90.2 million in 1997. Such decrease in gas and oil revenues was the result of a decrease in (i) average gas prices received by the Company from $2.18 per Mcf to $1.85 per Mcf which decreased revenues by approximately $10.4 million, (ii) average oil prices received from $18.02 per barrel to $11.37 per barrel which decreased revenues by approximately $7.7 million and, (iii) oil sales volumes of 11% which decreased revenues by approximately $1.5 million. Gas sales volumes increased 13% to 35.9 Bcf which increased revenues by approximately $7.5 million. The increase in gas production levels was primarily due to the Genesis acquisition and successful drilling results primarily in the Wind River Basin of Wyoming. 15 16 The following table reflects the Company's revenues, average prices received for gas and oil, and amount of gas and oil production in each of the years shown:
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Revenues: Natural gas sales.................................. $ 82,479 $ 66,392 $ 69,332 Crude oil sales(1)................................. 21,952 11,680 20,887 Marketing, gathering and processing................ 102,621 47,981 34,998 Drilling........................................... 5,645 4,561 -- Interest income and other.......................... 2,153 716 1,158 -------- -------- -------- Total revenues..................................... $214,850 $131,330 $126,375 ======== ======== ======== Net income (loss) attributable to common stock....... $ 5,007 $(45,233) $ 6,860 ======== ======== ========
YEARS ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ------- ------- ------- Natural gas production sold (Mmcf)...................... 40,514 35,887 31,842 Crude oil production (Mbbls)(1)......................... 1,444 1,027 1,159 Average natural gas sales price ($/Mcf)................. $ 2.04 $ 1.85 $ 2.18 Average crude oil sales price ($/Bbl)................... $ 15.20 $ 11.37 $ 18.02
- --------------- (1) Crude oil includes natural gas liquids ("NGL") for all years presented. For 1999, NGL volumes were 535,000 barrels and NGL sales were $6,509,000, resulting from a mid-year property acquisition from Unocal. For years prior to 1999, NGL volumes and sales were insignificant. Marketing, gathering and processing revenues in 1998 and 1997 reflect the Company's 45% share of such revenues generated by Wildhorse in those years. Effective September 1, 1999 Wildhorse assigned 100% of its marketing operations to Retex. As such, marketing, gathering and processing revenues in 1999 reflect the Company's 45% share of such revenues generated by Wildhorse in 1999 along with marketing revenues generated by Retex for the period September 1, 1999 through December 31, 1999. The 114% increase in marketing, gathering and processing revenues in 1999 compared to 1998 is composed of a 136% increase in marketing revenues and a 30% increase in gathering and processing revenues. The increase in marketing revenues is due primarily to 1) additional revenues recognized as a result of the assignment of Wildhorse's marketing operations to Retex as discussed above and 2) an increase in the volume of gas marketed for third parties. The increase in gathering and processing revenues is due primarily to helium sales resulting from the Unocal Acquisition. The 37% increase in marketing, gathering and processing revenues in 1998 compared to 1997 is composed of a 36% increase in marketing revenues and a 43% increase in gathering and processing revenues. The increase in marketing revenues is due primarily to 1) additional volumes of gas marketed as a result of an increase in the Company's production and 2) marketing of additional third party gas in 1998. The increase in gathering and processing revenues is due primarily to Wildhorse's acquisition of Interenergy Corporation (see Note 3 to the Consolidated Financial Statements). In 1999 the Company sold its interest in certain properties in Colorado for $2.0 million and recorded a gain of $1.2 million on the sale. In 1997 the Company sold the majority of its properties located in North Dakota for $11.0 million. No gain or loss was recorded for the sale. The Company had no significant property sales during 1998. 16 17 Costs and Expenses Expenses related to gas and oil production and production taxes increased 29% from 1998 to 1999 due primarily to the acquisition of gas and oil properties and a cyrogenic natural gas processing plant in July 1999 from Unocal. On an Mcfe basis, gas and oil production costs increased to $.38 in 1999 from $.35 in 1998, due to the cost of operating the plant. From 1997 to 1998, these expenses remained virtually unchanged. In 1997, gas and oil production cost was $.37. Taxes on gas and oil production increased 32% from 1998 to 1999 as a result of the higher gas and oil sales but remained constant as a percentage of sales. Production taxes in 1998 increased slightly from 1997, but as a percentage of sales, increased from 8.2% to 9.6%. This change reflects an increase in gas sales in the Wind River Basin beginning in 1998 where the Company experiences higher production taxes as compared to its other areas of operations. The Company's depletion, depreciation and amortization rates per Mcfe were $.90, $1.06 and $.93 for years 1999, 1998 and 1997, respectively. The decrease from 1998 to 1999 was primarily due to (i) lower finding and development costs associated with 1999 reserve additions and (ii) the impairment of properties in 1998. The increase from 1997 to 1998 was primarily caused by the adverse effect on reserves of oil prices at the end of 1998, and accordingly, the Company recorded a charge in 1998 of $51.3 million for the impairment of gas and oil properties. (See Note 2 to the Notes to Consolidated Financial Statements of the Company.) Cost of gas sold has increased substantially each year from 1997 to 1999 consistent with the increases in related revenues. Profit margins were $5.3 million in 1999 compared to a loss of $0.5 million in 1998 and a profit of $5.3 million in 1997. Lower transportation rates in 1999 and the addition of helium sales in connection with the plant acquired from Unocal accounted for the increase from 1998 to 1999. The decrease in profit margin from 1997 to 1998 was due to lower gathering margins in 1998 and an increase in transportation costs relative to market differentials. Expenses associated with the Company's exploration activities were $10.0 million, $17.3 million and $13.2 million for the years 1999, 1998 and 1997, respectively. In 1998, the Company increased its exploration program to more fully explore the Wind River Basin of Wyoming. In 1999, the Company's exploration expenditures decreased in comparison to 1998 due to an overall reduction in capital spending levels for drilling and completion activity. Impairments of leasehold costs increased to $3.6 million in 1999 from $3.2 million and $1.4 million in 1998 and 1997, respectively. The year-over-year increases reflect amounts of leasehold expirations from year to year. General and administrative expenses have increased from year to year as a result of the Company's higher level of operations. On an Mcfe basis, general and administrative expenses were $.19, $.17, and $.13 for the years 1999, 1998 and 1997, respectively reflecting added personnel each year, and in 1999, costs incurred in the Company's decision to relocate its corporate headquarters to Denver, Colorado. Such amount in 1999 was $2.1 million, or $.04 per Mcfe. (See Note 2 to the Notes to Consolidated Financial Statements of the Company.) Interest expense increased $1.3 million in 1999 to $5.6 million compared to $4.3 million in 1998 due to increased debt levels during the year. Interest expense was lower in 1998 by $1.6 million from 1997 due to the Company's Common Stock offering in October, 1997 and subsequent repayment of debt. The Company recorded income tax provisions of $4.3 million and $4.4 million in 1999 and 1997, respectively, and income tax benefit of $27.9 million in 1998, resulting in effective tax rates of 38.9%, 39.0% and 33.7%, respectively. At December 31, 1999 the Company has a net operating loss carryforward of approximately $73.2 million available to offset future taxable income. The Company believes it will generate sufficient taxable income in 2000 to utilize the $17.6 million net operating loss carryforward that will expire at the ended of 2000. If the Company is unable to generate sufficient taxable income in 2000 to utilize the $17.6 million net operating loss carryforward, it will enact such other tax planning strategies necessary to 17 18 utilize such benefit (such as the advance gas sale utilized in 1998 - see Note 6 to the Notes to Consolidated Financial Statements). The Company's net deferred tax asset was $28.6 million at December 31, 1999. A valuation allowance of approximately $2.0 million at December 31, 1999 was provided against the Company's net deferred tax assets based on management's estimate of the recoverability of future tax benefits. The Company evaluated all appropriate factors to determine the proper valuation allowance for carryforwards, including any limitations concerning their use, the year the carryforwards expire, the levels of taxable income necessary for utilization, and tax planning strategies. In this regard, full valuation allowances were provided for investment tax credit carryforwards and option plan compensation. Based on its recent operating results and its expected levels of future earnings, the Company believes it will, more likely than not, generate sufficient taxable income and other deferred tax assets to realize the benefit attributable to the net operating loss carryforwards for which valuation allowances were not provided. CAPITAL RESOURCES AND LIQUIDITY Growth and Acquisitions The Company continues to pursue opportunities which will add value by increasing its reserve base and presence in significant natural gas areas, and further developing the Company's ability to control and market the production of natural gas. As the Company continues to evaluate potential acquisitions and property development opportunities, it will benefit from its financing flexibility and the leverage potential of the Company's overall capital structure. Capital and Exploration Expenditures The Company's capital and exploration expenditures and sources of financing for the years ended December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 ------ ----- ------ (IN MILLIONS) CAPITAL AND EXPLORATION EXPENDITURES: ACQUISITIONS: Genesis................................................... $ -- $ -- $ 35.5 Interenergy............................................... -- -- 10.5 Sauer Drilling Company.................................... 1.4 8.1 -- Unocal.................................................... 60.9 -- -- Other Rocky Mountain Assets............................... 8.2 -- -- Other..................................................... 2.5 -- -- Exploration costs........................................... 12.0 22.8 16.0 Development costs........................................... 33.2 49.3 33.8 Acreage..................................................... 2.5 3.3 6.1 Gas gathering and processing................................ 2.7 8.6 6.7 Other....................................................... 1.7 1.2 3.5 ------ ----- ------ $125.1 $93.3 $112.1 ====== ===== ====== FINANCING SOURCES: Common stock issued......................................... $ 65.2 $ .6 $123.8 Net long term bank debt..................................... 26.0 32.0 (96.0) Advances from gas purchasers................................ (24.3) 24.3 -- Proceeds from sale of assets................................ 2.6 1.9 12.6 Cash flow from operations before changes in working capital................................................... 66.7 43.5 59.7 Working capital and other................................... (11.1) (9.0) 12.0 ------ ----- ------ $125.1 $93.3 $112.1 ====== ===== ======
The Company anticipates capital expenditures of approximately $86.0 million in 2000, $81.0 million allocated to exploration and development activity. The timing of most of the Company's capital expenditures is discretionary and there are no material long-term commitments associated with the Company's capital expenditure plans. Consequently, the Company is able to adjust the level of its capital expenditures as 18 19 circumstances warrant. The level of capital expenditures by the Company will vary in future periods depending on energy market conditions and other related economic factors. Historically, the Company has funded capital expenditures and working capital requirements with both internally generated cash, borrowings and stock transactions. Net cash flow provided by operating activities after changes in working capital was $45.7 million for 1999 as compared to $69.2 million and $47.6 million in 1998 and 1997, respectively. The decrease in 1999 and the increase in 1998 was due primarily to the receipt of $24.3 million from gas purchasers as advances in 1998. In July 1999, the Company completed an acquisition of substantially all of the Rocky Mountain oil and gas assets of Unocal Corporation for 5.8 million shares of common stock and $5 million in cash. Advance From Gas Purchasers The Company sold 35 Mmbtu per day of gas for 1999 delivery, but was paid $24.3 million for the gas in the fourth quarter of 1998 as described in Note 6 of the financial statements. The proceeds from the sale were used to repay bank debt. Bank Credit Facility The Company's Credit Facility provides for a $100 million revolving line of credit with a current borrowing base of $190 million. The amount of the borrowing base may be redetermined as of December 31 and June 30 of each calendar year at the sole discretion of the lender. A redetermination as of December 31, 1999 has not yet been made. At December 31, 1999, the aggregate outstanding balance under the Credit Facility was $81 million, bearing interest at 6.9% per annum. The amount available for borrowing under the Credit Facility at December 31, 1999 was $19 million. The Credit Facility contains certain financial covenants which require the Company to maintain a minimum consolidated tangible net worth as well as certain financial ratios. The Company was in compliance with all covenants contained in the Credit Facility at December 31, 1999. Borrowings under the Credit Facility are unsecured and bear interest, at the election of the Company, at (i) the greater of the agent bank's prime rate or the federal funds effective rate, plus an applicable margin or (ii) the agent bank's Eurodollar rate, plus an applicable margin. (See Note 4 to Notes to Consolidated Financial Statements of the Company.) Public Offering In October 1997, the Company sold 5,035,800 shares of its Common Stock in a public offering. Net proceeds from the offering were approximately $121 million which were used to repay a majority of the Company's outstanding debt and to fund the acquisition of all of the assets of Genesis. Markets and Prices Wildhorse provides gathering, processing and storage to Rocky Mountain gas and oil producers. During 1999, the Company's share of Wildhorse's investments approximated $2.3 million for gas gathering and processing assets. The Company (45 percent) and KM (55 percent) jointly own Wildhorse. The Company dedicated significant amounts of its Rocky Mountain gas production to Wildhorse for gathering, and processing. The Company's revenues and associated cash flows are significantly impacted by changes in gas and oil prices. All of the Company's gas and oil production is currently market sensitive as no amounts of the Company's future gas and oil production have been sold at contractually specified prices. During 1999, the average prices received for gas and oil by the Company were $2.04 per Mcf and $15.20 per barrel, respectively, as compared to $1.85 Mcf and $11.37 per barrel in 1998 and $2.18 per Mcf and $18.02 per barrel in 1997. 19 20 Year 2000 The Company previously performed a review of its internal informational systems for year 2000 ("Y2K") automation compliance through a Company-wide effort to address Y2K system issues. Such review included verification of Y2K readiness of the Company's key vendors and purchasers. The Company has not encountered any material Y2K compliance problems regarding the above. Costs incurred to become Y2K compliant were minimal. Forward-Looking Statements and Risk Certain statements in this report, including statements of the future plans, objectives, and expected performance of the Company, are forward-looking statements that are dependent on certain events, risks and uncertainties that may be outside the Company's control which could cause actual results to differ materially from those anticipated. Some of these include, but are not limited to, economic and competitive conditions, inflation rates, legislative and regulatory changes, financial market conditions, political and economic uncertainties, future business decisions, and other uncertainties, all of which are difficult to predict. There are numerous uncertainties inherent in estimating quantities of proven oil and gas reserves and in projecting future rates of production and timing of development expenditures. The total amount or timing of actual future production may vary significantly from reserves and production estimates. The drilling of exploratory wells can involve significant risks including those related to timing, success rates and cost overruns. Lease and rig availability, complex geology and other factors can affect these risks. Future oil and gas prices also could affect results of operations and cash flows. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 and cannot be applied retroactively. SFAS No. 133 must be applied to derivative instruments that were issued, acquired, or substantially modified after December 31, 1997. The Company is evaluating SFAS No. 133 and has not yet quantified the impact adopting the Statement will have on its financial statements. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The SOP provides guidance with respect to accounting for the various types of costs incurred for computer software developed or obtained for the Company's use. The Company adopted SOP 98-1 in the first quarter of fiscal 1999 and adoption did not have a significant effect on its consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company utilizes various financial instruments which inherently have some degree of market risk. The primary sources of market risk include fluctuations in commodity prices and interest rate fluctuations. Price Fluctuations The Company's results of operations are highly dependent upon the prices received for oil and natural gas production. Accordingly, in order to increase the financial flexibility and to protect the Company against commodity price fluctuations, the Company may, from time to time in the ordinary course of business, enter into non-speculative hedge arrangements, commodity swap agreements, forward sale contracts, commodity futures, options and other similar agreements relating to natural gas and crude oil. 20 21 In connection with an advance payment for future natural gas deliveries, the Company entered into three gas price swap contracts with third parties under which the Company became a fixed price payor for 35,000 Mmbtu per day for a twelve month period commencing January 1999 at a weighted average price of $2.02 per Mmbtu. Interest Rate Risk At December 31, 1999, the Company had $81 million outstanding under its credit facility at an average interest rate of 6.9%. Borrowings under the Company's credit facility bear interest, at the election of the Company, at (i) the greater of the agent bank's prime rate or the federal funds effective rate, plus an applicable margin or (ii) the agent bank's Eurodollar rate, plus an applicable margin. As a result, the Company's annual interest cost in 1999 will fluctuate based on short-term interest rates. Assuming no change in the amount outstanding during 2000, the impact on interest expense of a ten percent change in the average interest rate would be approximately $560,000. As the interest rate is variable and is reflective of current market conditions, the carrying value approximates the fair value. 21 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................... 28 Consolidated Balance Sheets, December 31, 1999 and 1998..... 29 Consolidated Statements of Operations, Years ended December 31, 1999, 1998 and 1997................................... 31 Consolidated Statements of Changes in Stockholders' Equity, Years ended December 31, 1999, 1998 and 1997.............. 32 Consolidated Statements of Cash Flows, Years ended December 31, 1999, 1998 and 1997................................... 33 Notes to Consolidated Financial Statements.................. 35
22 23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Tom Brown, Inc.: We have audited the accompanying consolidated balance sheets of Tom Brown, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tom Brown, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Houston, Texas February 25, 2000 23 24 TOM BROWN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, -------------------- 1999 1998 -------- --------- (IN THOUSANDS) CURRENT ASSETS: Cash and cash equivalents................................. $ 12,510 $ 2,670 Accounts receivable....................................... 53,646 32,390 Inventories............................................... 828 532 Deferred income taxes..................................... -- 8,585 Other..................................................... 1,625 260 -------- --------- Total current assets.............................. 68,609 44,437 -------- --------- PROPERTY AND EQUIPMENT, AT COST: Gas and oil properties, successful efforts method of accounting............................................. 470,461 387,336 Gas gathering and processing and other plant.............. 71,657 51,561 Other..................................................... 23,027 20,340 -------- --------- Total property and equipment...................... 565,145 459,237 Less: Accumulated depreciation, depletion and amortization........................................... 133,342 92,232 -------- --------- Net property and equipment........................ 431,803 367,005 -------- --------- OTHER ASSETS: Deferred income taxes, net................................ 28,625 23,429 Other assets.............................................. 7,262 7,011 -------- --------- Total other assets................................ 35,887 30,440 -------- --------- $536,299 $ 441,882 ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 39,489 $ 23,124 Accrued expenses.......................................... 9,763 4,754 Advances from gas purchasers.............................. -- 24,529 -------- --------- Total current liabilities......................... 49,252 52,407 -------- --------- BANK DEBT................................................... 81,000 55,000 -------- --------- OTHER NON-CURRENT LIABILITIES............................... 3,950 2,725 -------- --------- COMMITMENTS AND CONTINGENCIES (Note 12) STOCKHOLDERS' EQUITY: Convertible preferred stock, $.10 par value Authorized 2,500,000 shares; Outstanding 1,000,000 shares with a liquidation preference of $25,000,000............................. 100 100 Common Stock, $.10 par value Authorized 55,000,000 shares; Outstanding 35,308,489 shares and 29,259,989 shares, respectively.......................................... 3,531 2,926 Additional paid-in capital................................ 495,817 431,082 Accumulated deficit....................................... (97,351) (102,358) -------- --------- Total stockholders' equity........................ 402,097 331,750 -------- --------- $536,299 $ 441,882 ======== =========
See accompanying notes to consolidated financial statements. 24 25 TOM BROWN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ---------------------------------------- 1999 1998 1997 ---------- ------------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) REVENUES: Gas, oil and natural gas liquids sales.................. $104,431 $ 78,072 $90,219 Marketing, gathering and processing..................... 102,621 47,981 34,998 Drilling................................................ 5,645 4,561 -- Interest income and other............................... 2,153 716 1,158 -------- ----------- ------- Total revenues.................................. 214,850 131,330 126,375 -------- ----------- ------- COSTS AND EXPENSES: Gas and oil production.................................. 18,446 14,522 14,336 Taxes on gas and oil production......................... 9,934 7,512 7,437 Cost of gas sold........................................ 97,292 48,442 29,734 Drilling operations..................................... 5,237 4,367 -- Exploration costs....................................... 10,013 17,274 13,222 Impairments of leasehold costs.......................... 3,600 3,215 1,350 General and administrative.............................. 9,503 7,139 5,152 Depreciation, depletion and amortization................ 44,215 44,575 36,230 Impairment of gas and oil properties.................... -- 51,344 -- Interest expense........................................ 5,560 4,301 5,920 -------- ----------- ------- Total costs and expenses........................ 203,800 202,691 113,381 -------- ----------- ------- Income (loss) before income taxes............... 11,050 (71,361) 12,994 Income tax benefit (provision) Current................................................. (903) (1,611) (1,026) Deferred................................................ (3,390) 29,489 (3,358) -------- ----------- ------- Net income (loss)......................................... 6,757 (43,483) 8,610 Preferred stock dividends................................. (1,750) (1,750) (1,750) -------- ----------- ------- Net income (loss) attributable to common stock............ $ 5,007 $ (45,233) $ 6,860 ======== =========== ======= Weighted average number of common shares outstanding: Basic................................................... 32,228 29,251 25,110 ======== =========== ======= Diluted................................................. 32,466 29,251 26,407 ======== =========== ======= Net income (loss) per common share: Basic................................................... $ .16 $ (1.55) $ .27 ======== =========== ======= Diluted................................................. $ .15 $ (1.55) $ .26 ======== =========== =======
See accompanying notes to consolidated financial statements. 25 26 TOM BROWN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL --------------- --------------- PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY ------ ------ ------ ------ ---------- ----------- ------------- (IN THOUSANDS) BALANCE AS OF DECEMBER 31, 1996......................... 1,000 $100 23,898 $2,390 $307,631 $ (63,985) $246,136 Stock options exercised........ -- -- 244 24 1,558 -- 1,582 Common stock issuance.......... -- -- 5,068 507 121,705 -- 122,212 Stock issuance costs........... -- -- -- -- (392) -- (392) Net income..................... -- -- -- -- -- 8,610 8,610 Preferred stock dividends...... -- -- -- -- -- (1,750) (1,750) ----- ---- ------ ------ -------- --------- -------- BALANCE AS OF DECEMBER 31, 1997......................... 1,000 100 29,210 2,921 430,502 (57,125) 376,398 Stock options exercised........ -- -- 50 5 580 -- 585 Net loss....................... -- -- -- -- -- (43,483) (43,483) Preferred stock dividends...... -- -- -- -- -- (1,750) (1,750) ----- ---- ------ ------ -------- --------- -------- BALANCE AS OF DECEMBER 31, 1998......................... 1,000 100 29,260 2,926 431,082 (102,358) 331,750 Stock options exercised........ -- -- 248 25 1,707 -- 1,732 Common stock issuance.......... -- -- 5,800 580 62,935 -- 63,515 Unrealized gain on marketable securities................... -- -- -- -- 93 -- 93 Net income..................... -- -- -- -- -- 6,757 6,757 Preferred stock dividends...... -- -- -- -- -- (1,750) (1,750) ----- ---- ------ ------ -------- --------- -------- BALANCE AS OF DECEMBER 31, 1999......................... 1,000 $100 35,308 $3,531 $495,817 $ (97,351) $402,097 ===== ==== ====== ====== ======== ========= ========
See accompanying notes to consolidated financial statements. 26 27 TOM BROWN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 -------- -------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 6,757 $(43,483) $ 8,610 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization................ 44,215 44,575 36,230 (Gain) loss on sales of assets.......................... (1,265) 27 (19) Impairment of gas and oil properties.................... -- 51,344 -- Deferred tax provision (benefit)........................ 3,390 (29,408) 259 Exploration costs....................................... 10,013 17,274 13,222 Impairments of leasehold costs.......................... 3,600 3,215 1,350 -------- -------- --------- 66,710 43,544 59,652 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable........... (19,140) 8,559 (7,869) (Increase) in inventories............................ (296) (167) (63) (Increase) decrease in other current assets.......... (616) 11 618 Increase (decrease) in accounts payable and accrued expenses........................................... 22,644 (4,451) (2,847) (Increase) decrease in other assets, net............. 973 (2,785) (1,891) Advances from gas purchasers......................... (24,529) 24,529 -- -------- -------- --------- Net cash provided by operating activities................... $ 45,746 $ 69,240 $ 47,600 -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of assets............................. $ 2,573 $ 1,870 $ 12,635 Capital and exploration expenditures...................... (63,072) (93,274) (106,805) Changes in accounts payable and accrued expenses for capital expenditures.................................... (1,389) (7,370) 7,498 -------- -------- --------- Net cash used in investing activities....................... (61,888) (98,774) (86,672) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock.................... -- -- 121,665 Borrowings of long-term bank debt......................... 26,000 106,000 27,000 Repayments of long-term bank debt......................... -- (74,000) (123,000) Repayments of note payable, current....................... -- (5,168) -- Preferred stock dividends................................. (1,750) (1,750) (1,750) Proceeds from exercise of stock options................... 1,732 585 1,582 Stock issuance costs...................................... -- -- (392) -------- -------- --------- Net cash provided by financing activities................... 25,982 25,667 25,105 -------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 9,840 (3,867) (13,967) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 2,670 6,537 20,504 -------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 12,510 $ 2,670 $ 6,537 ======== ======== ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest.................................................. $ 4,051 $ 3,985 $ 6,027 Income taxes.............................................. -- 308 429 Supplemental schedule of noncash investing and financing activities: (see Notes 2 and 3) Common stock issued as consideration in connection with Unocal Acquisition...................................... $ 63,516 $ -- $ -- Common stock received for outstanding receivable.......... 700 -- -- Debt assumed in connection with acquisition of Interenergy Corporation............................................. -- -- 5,200
See accompanying notes to consolidated financial statements. 27 28 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (1) NATURE OF OPERATIONS Tom Brown, Inc. and its wholly-owned subsidiaries (the "Company") is an independent energy company engaged in the domestic exploration for, and the acquisition, development, marketing, production and sale of, natural gas and crude oil. The Company's industry segments are (i) the exploration for, and the acquisition, development, production, and sale of, natural gas and crude oil, (ii) the marketing, gathering and processing of natural gas, primarily through Retex, Inc. ("Retex") and Wildhorse Energy Partners, L. L. C. ("Wildhorse") and (iii) drilling gas and oil wells, primarily through Sauer Drilling Company ("Sauer"). The Company's operations are conducted in the United States and Canada. The Company's operations are presently focused in the Wind River and Green River Basins of Wyoming, the Piceance Basin of Colorado, the Paradox Basin of eastern Utah and western Colorado, the Val Verde Basin of west Texas, the Permian Basin of west Texas and southeastern New Mexico, and east Texas. The Company also, to a lesser extent, conducts exploration and development activities in other areas of the continental United States and Canada. Wildhorse, which is owned fifty-five percent (55%) by Kinder Morgan Inc. ("KM") and forty-five percent (45%) by the Company, was formed by KN Energy, Inc. ("KNE") (KNE was subsequently acquired by KM) and the Company in January 1996. The business and affairs of Wildhorse are managed by KM under the direction of an operating team consisting of two representatives appointed by the Company and two representatives appointed by KM. The Company dedicated a significant amount of its Rocky Mountain gas reserves to Wildhorse and KNE contributed substantial gas marketing contracts. The Company also acquired a natural gas storage facility in western Colorado that was simultaneously transferred to Wildhorse. The principal purpose of Wildhorse is to provide services related to natural gas, natural gas liquids and other natural gas products, including gathering, processing and storage services. In September 1999, Wildhorse assigned 100% of its marketing operations to Retex. Additionally, firm transportation contracts were assigned 55% to KM and 45% remained in Retex. Substantially all of the Company's production is sold under market-sensitive contracts. The Company's revenue, profitability and future rate of growth are substantially dependent upon the price of, and demand for, oil, natural gas and natural gas liquids. Prices for natural gas, crude oil and natural gas liquids are subject to wide fluctuation in response to relatively minor changes in their supply and demand as well as market uncertainty and a variety of additional factors that are beyond the control of the Company. These factors include the level of consumer product demand, weather conditions, domestic and foreign governmental regulations, the price and availability of alternative fuels, political conditions in foreign countries, the foreign supply of natural gas and oil and the price of foreign imports and overall economic conditions. The Company is affected more by fluctuations in natural gas prices than oil prices because a majority of its production (82 percent in 1999 on a volumetric equivalent basis) is natural gas. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company. The Company's proportionate share of assets, liabilities, revenues and expenses associated with certain interests in a gas and oil partnership and the Company's 45% ownership in Wildhorse are consolidated within the accompanying financial statements. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to amounts reported in previous years to conform to the 1999 presentation. 28 29 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Inventories Inventories consist of pipe and other production equipment. Inventories are stated at the lower of cost (principally first-in, first-out) or estimated net realizable value. Property and Equipment The Company accounts for its natural gas and crude oil exploration and development activities under the successful efforts method of accounting. Under such method, costs of productive exploratory wells, development dry holes and productive wells and undeveloped leases are capitalized. Gas and oil lease acquisition costs are also capitalized. Exploration costs, including personnel, certain geological and geophysical expenses and delay rentals for gas and oil leases, are charged to expense as incurred. Exploratory drilling costs are initially capitalized, but charged to expense if and when the well is determined not to have found reserves in commercial quantities. Maintenance and repairs are charged to expense; renewals and betterments are capitalized to the appropriate property and equipment accounts. Upon retirement or disposition of assets, the costs and related accumulated depreciation are removed from the accounts with the resulting gains or losses, if any, reflected in results of operations. Unproved properties with significant acquisition costs are assessed quarterly on a property-by-property basis and any impairment in value is charged to expense. Unproved properties whose acquisition costs are not individually significant are aggregated, and the portion of such costs estimated to be nonproductive, based on historical experience, is amortized over the average holding period. If the unproved properties are determined to be productive, the related costs are transferred to proved gas and oil properties. The Company reviews its gas and oil properties for impairment whenever events and circumstances indicate a decline in the recoverability of their carrying value. In the fourth quarter of 1998, due to the decline in oil and natural gas prices, the Company estimated the expected future cash flows of its gas and oil properties and compared such future cash flows to the carrying amount of the gas and oil properties to determine if the carrying amount was recoverable. For certain gas and oil properties, the carrying amount exceeded the estimated undiscounted future cash flows; thus, the Company adjusted the carrying amount of the respective oil and gas properties to their fair value. The factors used to determine fair value included, but were not limited to, estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and a discount rate commensurate with the Company's internal rate of return on its gas and oil properties. As a result, the Company recognized a noncash pretax charge of $51.3 million related to the impairment of gas and oil properties in the fourth quarter of 1998. There were no impairments of gas and oil properties in 1999 or 1997. The provision for depreciation, depletion and amortization of oil and gas properties is calculated on a basin-by-basin basis using the unit-of-production method. Included in such calculations are estimated future dismantlement, restoration and abandonment costs, net of estimated salvage values. Other property and equipment is recorded at cost and depreciated using the straight-line method based on estimated useful lives. Natural Gas Revenues The Company utilizes the accrual method of accounting for natural gas revenues whereby revenues are recognized as the Company's entitlement share of gas is produced based on its working interests in the properties. The Company records a receivable (payable) to the extent it receives less (more) than its proportionate share of gas revenues. Using year end prices, the Company had net gas balancing liabilities of 29 30 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximately $1.9 million and $1.4 million associated with approximately 1.3 billion and 1.4 billion cubic feet ("Bcf") of gas at December 31, 1999 and 1998, respectively. Derivative Financial Instruments In order to increase financial flexibility and to protect the Company against commodity price fluctuations, the Company may, from time to time in the ordinary course of business, enter into non-speculative hedge arrangements, commodity swap agreements, forward sale contracts, commodity futures, options and other similar agreements relating to natural gas and crude oil. Financial instruments designated as hedges are accounted for on the accrual basis with gains and losses being recognized based on the type of contract and exposure being hedged. Gains and losses on natural gas and crude oil swaps designated as hedges of anticipated transactions, including accrued gains or losses upon maturity or termination of the contract, are deferred and recognized in income when the associated hedged commodities are produced. In order for natural gas and crude oil swaps to qualify as a hedge of an anticipated transaction, the derivative contract must identify the expected date of the transaction, the commodity involved, and the expected quantity to be purchased or sold among other requirements. In the event that a hedged transaction does not occur, future gains and losses, including termination gains or losses, are included in the income statement when incurred. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. It also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has not yet quantified the impacts of adopting SFAS 133 on its financial statements and has not determined the timing of, or method of, adoption of SFAS 133. However, SFAS 133 could increase volatility in earnings and other comprehensive income. Income Taxes The Company provides for income taxes using the liability method under which deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax laws or tax rates is recognized in income in the period such changes are enacted. Stock-Based Compensation The Company accounts for employee stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Reference is made to Note 8, "Benefit Plans" for a summary of the pro forma effect of SFAS No. 123, "Accounting for Stock Based Compensation," on the Company's results of operations for 1999, 1998 and 1997. 30 31 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve volumes and the related present value of estimated future net revenues to be received therefrom (see Note 14), as well as the valuation allowance for deferred taxes (see Note 5). Net Income Per Common Share Basic earnings per share ("EPS") is calculated by dividing net income attributable to common stock by the weighted average number of common shares outstanding during the period including the weighted average impact of the shares of common stock issued during the year from the date of issuance. Diluted EPS calculations also give effect to all dilutive potential common shares outstanding during the period. The following is a reconciliation of the numerators and denominators used in the calculation of basic and diluted EPS for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 --------------------------- ----------------------------- --------------------------- NET PER SHARE NET PER SHARE NET PER SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT ------ ------ --------- -------- ------ --------- ------ ------ --------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Basic EPS: Net Income (loss) Attributable to Common Stock and Share Amounts... $5,007 32,228 $.16 $(45,233) 29,251 $(1.55) $6,860 25,110 $.27 Dilutive Securities: Stock Options............... -- 238 -- -- -- -- -- 1,297 -- ------ ------ ---- -------- ------ ------ ------ ------ ---- Diluted EPS: Net Income (loss) Attributable to Common Stock and Assumed Share Amounts................... $5,007 32,466 $.15 $(45,233) 29,251 $(1.55) $6,860 26,407 $.26 ====== ====== ==== ======== ====== ====== ====== ====== ====
Options to purchase 1,447,000 and 90,000 shares of common stock in 1999 and 1997, respectively, were excluded in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the Company's common stock. Shares of common stock issuable upon conversion of preferred stock were excluded in the computation of diluted earnings per share in any year because their assumed conversion would be antidilutive. All options to purchase common stock were excluded in the computation of diluted earnings per share in 1998 because they were antidilutive as a result of the Company's net loss in that year. Consolidated Statements of Cash Flows The Company considers investments with an original maturity of three months or less when purchased to be cash equivalents. In connection with the acquisition of Interenergy Corporation ("Interenergy") in December 1997, Wildhorse assumed $11.5 million in debt, $5.2 million net to the Company. (See Notes 3 and 4.) In July 1999, the Company issued 5.8 million shares of common stock valued at $63.5 million to Unocal Corporation as partial consideration for the acquisition of gas and oil assets (see Note 3). Additionally in June 1999 the Company received shares of stock valued at approximately $700,000 in settlement of an outstanding receivable from a working interest owner. 31 32 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Comprehensive Income Comprehensive income represents all non-shareholder related changes in equity of an entity during the reporting period, including net income and charges directly to equity which are excluded from net income. The only reconciling item between net income as reflected in the statement of operations and comprehensive income for the year ended December 31, 1999 was an unrealized gain on marketable securities of $93,000. There were no such reconciling items for the years ended December 31, 1998 and 1997. Exit Costs In connection with the Company's decision in 1999 to relocate its corporate headquarters to Denver, Colorado, the Company recognized costs of $2.1 million as part of general and administrative expenses in 1999. Included in the costs were actual severance payments made in 1999 of $1.0 million and an accrual for $.8 million of severance and transition bonus payments to be made in 2000. An additional accrual of $.3 million was made for future rental obligations for years 2000 through 2003. The $1.1 million accrual is included in accrued expenses in the December 31, 1999 consolidated balance sheet. (3) ACQUISITIONS AND DIVESTITURES Acquisition of Certain Unocal Rocky Mountain Assets In July 1999, the Company completed an acquisition of substantially all of the Rocky Mountain gas and oil assets of Unocal Corporation ("Unocal") for 5.8 million shares of common stock and $5 million in cash for a total purchase price of $68.5 million ($60.9 million after normal purchase adjustments) ("Unocal Acquisition"). The Unocal gas and oil assets are primarily located in the Paradox Basin of southwestern Colorado and southeastern Utah. The purchase price was allocated as follows:
(IN MILLIONS) ------------- Gas and oil properties...................................... $37.6 Unproved properties......................................... 2.7 Gas processing plant........................................ 19.9 Oil pipeline................................................ .8 ----- $60.9 =====
Included in the acquisition is the Lisbon Plant, a modern sophisticated cyrogenic (60 million cubic feet per day capacity) natural gas processing plant that extracts natural gas liquids and merchantable helium, and separates carbon dioxide, hydrogen sulfide and nitrogen from the raw gas stream. The average net production from the Unocal properties in 1998 was approximately 18 million cubic feet per day of natural gas, 290 barrels of oil per day and 92,000 gallons of gas plant liquids per day, or approximately 33 million cubic feet equivalent per day (assuming gas plant liquids and oil converted at 6:1). The net proved reserves of these Unocal properties were estimated to be 93.2 billion cubic feet equivalent of gas as of the closing date of July 1, 1999. Approximately 65,000 net undeveloped acres were also acquired. 32 33 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pro Forma Information (Unaudited) The following table presents the unaudited pro forma revenues, net income and net income per share of the Company for the years ended December 31, 1999 and 1998, assuming that the Unocal Acquisition occurred on January 1, 1998.
YEARS ENDED DECEMBER 31, ------------------------- 1999 1998 ----------- ----------- (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Revenues.................................................... $226,141 $153,832 ======== ======== Net income (loss)........................................... $ 9,341 $(40,243) ======== ======== Net income (loss) attributable to common stock.............. $ 7,591 $(41,993) ======== ======== Net income (loss) per common share Basic..................................................... $ .22 $ (1.20) ======== ======== Diluted................................................... $ .21 $ (1.20) ======== ========
Acquisition of Other Rocky Mountain Assets In September 1999, the Company purchased certain Rocky Mountain assets from an undisclosed seller for approximately $7.7 million in cash. Included in the acquisition was approximately 9.7 Bcfe of proved reserves and 34,000 net acres in the Greater Green River Basin of Wyoming. Acquisition of Assets of W. E. Sauer Companies, LLC In January 1998, the Company completed the acquisition of the drilling assets of W. E. Sauer Companies L.L.C. of Casper, Wyoming for approximately $8.1 million. The assets include five drilling rigs, tubular goods, a yard and related assets. The Company operates the assets in its subsidiary, Sauer, and serves the drilling needs of operators in the central Rocky Mountain region, in addition to drilling for the Company. Acquisition of Gathering and Processing Assets by Wildhorse In December 1997, KNE, completed the acquisition of all of the assets of Interenergy. The assets consist of gas gathering and processing facilities located in Wyoming, Montana, North Dakota and South Dakota, as well as a marketing division. KNE retained the marketing assets and Wildhorse acquired the gathering and processing assets valued at $23.4 million. The Company's share of this purchase was approximately $10.5 million. These assets consist of over 300 miles of pipeline and a processing plant. Acquisition of the Assets of Genesis Gas and Oil, L.L.C. In October 1997, the Company completed the acquisition of the assets of Genesis Gas and Oil, L.L.C. ("Genesis"). The Genesis assets are located primarily in the Piceance Basin of western Colorado and the Green River Basin of Wyoming and are principally operated by the Company. The acquisition increased the Company's acreage position in the Piceance Basin by approximately 32,000 net developed and 48,000 net undeveloped acres. The Company's working interest doubled from 23% to 46% in 238 producing wells and from 34% to 68% in 500 potential development locations. The purchase price for these assets was approximately $35.5 million. 33 34 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Sale of DJ Basin Properties In June and October 1999, the Company sold its interest in the DJ Basin of Colorado for $2.3 million. The properties had a net book value of $1.1 million and, accordingly, a gain of $1.2 million was recorded on the sale. Proceeds from the sale of these properties was used to repay a portion of the Company's outstanding indebtedness under its credit facility existing at such time. Sale of North Dakota Properties In May 1997, the Company sold the majority of its properties located in North Dakota for $11.0 million. The properties had a net book value of $11.0 million and, accordingly, no gain was recorded on the sale. Proceeds from the sale of these properties were used to repay a portion of the Company's outstanding indebtedness under its credit facility existing at such time. (4) DEBT In April 1998, the Company repaid and cancelled its $125 million revolving credit facility and entered into a new $75 million credit facility (the "Credit Facility") that matures in April 2001. In October 1998, the Company amended the Credit Facility by increasing the total borrowing amount to $100 million. The borrowing base increased from $130 million to $190 million in October, 1999, as a result of the regular June 30 review. The increase was primarily due to the Unocal Acquisition. The amount of the borrowing base may be redetermined as of December 31 and June 30 of each calendar year at the sole discretion of the lender. A redetermination as of December 31, 1999 has not yet been made. As of December 31, 1999, $19 million was available for borrowing under the Credit Facility. Borrowings under the Credit Facility are unsecured and bear interest, at the election of the Company, at a rate equal to (i) the greater of the agent bank's prime rate or the federal funds effective rate plus an applicable margin or (ii) the agent bank's Eurodollar rate plus an applicable margin. Interest on amounts outstanding under the Credit Facility is due on the last day of each month in the case of loans bearing interest at the prime rate or federal funds rate and, in the case of loans bearing interest at the Eurodollar rate, interest payments are due on the last day of each applicable interest period of one, two, three or six months, as selected by the Company at the time of borrowing. At December 31, 1999, the outstanding balance was $81 million at an average interest rate of 6.9%. The Credit Facility contains certain financial covenants and other restrictions including a limitation on the Company's ability to pay dividends to other than the Company's Preferred Stockholders (see Note 7). Financial covenants of the Credit Facility require the Company to maintain a minimum consolidated tangible net worth of not less than $300 million. The Company is also required to maintain a ratio of (i) earnings before interest expense, state and federal taxes and depreciation, depletion and amortization expense to (ii) consolidated fixed charges, as defined in the Credit Facility, of not less than 2.5:1. Additionally, the Company is required to maintain a ratio of consolidated debt to consolidated total capitalization of less than 0.45:1. (5) TAXES The Company has not paid Federal income taxes due to its net operating loss carryforward, but is required to pay alternative minimum tax ("AMT"). This tax can be partially offset by an AMT net operating loss carryforward. A U.S. Federal statutory rate applied to the Company's income (loss) before income taxes 34 35 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of 35% in 1999, 1998 and 1997 was used in the following reconciliation of the Company's effective income tax benefit (provision):
YEARS ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ------- ------- ------- (IN THOUSANDS) Federal income tax benefit (provision) at statutory rate.................................................. $(3,868) $24,976 $(4,548) Revisions of previous tax estimates..................... 9 2,130 1,111 Adjustment to valuation allowance....................... 622 2,980 474 Other................................................... (153) (597) (395) ------- ------- ------- (3,390) 29,489 (3,358) AMT provisions.......................................... -- (380) (403) State income and franchise taxes........................ (903) (1,231) (623) ------- ------- ------- Income tax expense benefit (provision).................. $(4,293) $27,878 $(4,384) ======= ======= =======
The significant components, which give rise to the Company's deferred tax assets (liabilities), are as follows:
DECEMBER 31, ----------------- 1999 1998 ------- ------- (IN THOUSANDS) Net operating loss carryforward............................. $25,607 $10,950 Gas and oil acquisition, exploration and development costs deducted for tax purposes under (over) book............... (3,662) 6,254 Advances from gas purchasers................................ -- 8,585 AMT Credit Carryforwards.................................... 4,499 4,119 Investment tax credit carryforward.......................... 195 857 Option plan compensation.................................... 1,559 1,559 Other....................................................... 2,380 2,265 ------- ------- Net deferred tax asset...................................... 30,578 34,589 Valuation allowance......................................... (1,953) (2,575) ------- ------- Recognized net deferred tax asset........................... $28,625 $32,014 ======= =======
Net deferred tax assets are comprised of the following:
DECEMBER 31, ----------------- 1999 1998 ------- ------- (IN THOUSANDS) Current..................................................... $ -- $ 8,585 Long-term................................................... 28,625 23,429 ------- ------- $28,625 $32,014 ======= =======
A valuation allowance of approximately $2.0 million and $2.6 million at December 31, 1999 and 1998, respectively, has been provided against the Company's net deferred tax assets based on management's estimate of the recoverability of future tax benefits. The Company evaluated all appropriate factors to determine the proper valuation allowance for carryforwards, including any limitations concerning their use, the year the carryforward expires, the levels of taxable income necessary for utilization and tax planning. In this regard, full valuation allowances were provided for investment tax credit carryforwards and option plan compensation. Based on its recent operating results and its expected levels of future earnings, the Company 35 36 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) believes it will, more likely than not, generate sufficient taxable income to realize the benefit attributable to the net operating loss carryforward and other deferred tax assets for which valuation allowances were not provided. At December 31, 1999, the Company had investment tax credit carryforwards of approximately $0.2 million and a net operating loss carryforward of approximately $73.2 million. The Company has no current liability for Federal income taxes because of these net operating loss and investment tax credit carryforwards. Realization of the benefits of these carryforwards is dependent upon the Company's ability to generate taxable earnings in future periods. In addition, the availability of these carryforwards is subject to various limitations. The net operating loss carryforwards expire as follows: $17.6 million in 2000, $7.8 million in 2001, $.7 million in 2002, $2.9 million in 2003, $2.3 million in 2004 and $41.9 million in 2019. The Company believes it will generate sufficient taxable income in 2000 to utilize the benefit of the $17.6 million net carryforward that will expire at the end of 2000, and, if not, will enact such other tax planning strategies necessary to utilize such benefit. Additionally, the Company has approximately $6.2 million of statutory depletion carryforwards and $4.5 million of AMT credit carryforwards that may be carried forward until utilized. (6) ADVANCES FROM GAS PURCHASERS In 1998, the Company received $24.3 million from purchasers as advance payments for future natural gas deliveries of 35,000 MMBtu per day for a twelve month period commencing January 1999. In connection with the advances, the Company entered into gas price swap contracts with third parties under which the Company became a fixed price payor for identical volumes at a weighted average price of $2.02 per MMBtu. The net result of these transactions is that gas delivered to the purchaser is reported as revenue at a rate that approximates the prevailing spot price. The advance payments were classified as advances on the balance sheet and were reduced as gas was delivered to the purchasers under the terms of the contracts. Gas volumes delivered to the purchaser were reported as revenue at prices used to calculate the amount advanced, before imputed interest, minus or plus amounts paid or received by the Company applicable to the price swap agreements. Interest expense was recorded based on an average rate of 9.7% on the advances. (7) STOCKHOLDERS' EQUITY Common Stock The Company's Common Stock is $.10 par value per share. There were 55,000,000 authorized shares of Common Stock at December 31, 1999, of which 35,308,489 shares and 29,259,989 shares were outstanding at December 31, 1999 and 1998, respectively. In July 1999, the Company issued 5.8 million shares of common stock to Unocal as partial consideration in connection with the Unocal Acquisition (see Note 3). In October 1997, the Company sold 5,035,800 shares of Common Stock in a public offering. The net proceeds of such offering were approximately $121.0 million and were used to repay a majority of the Company's outstanding long-term debt and to fund the acquisition of all of the assets of Genesis Gas and Oil, L.L.C. (see Note 3). Rights Plan On March 1, 1991, the Board of Directors adopted a Rights Plan designed to help assure that all stockholders receive fair and equal treatment in the event of a hostile attempt to take over the Company, and to help guard against abusive takeover tactics. The Board of Directors declared a dividend of one preferred 36 37 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) share purchase right (a "Right") for each outstanding share of Common Stock. The dividend was distributed on March 15, 1991 to the shareholders of record on that date. Each Right entitles the registered holder to purchase, for the $20 per share exercise price, shares of Common Stock or other securities of the Company (or, under certain circumstances, of the acquiring person) worth twice the per share exercise price of the Right. The Rights will be exercisable only if a person or group acquires 20% or more of the Company's Common Stock or announces a tender offer which would result in ownership by a person or group of 20% or more of the Common Stock. The date on which the above occurs is to be known as the ("Distribution Date"). The Rights will expire on March 15, 2001, unless extended or redeemed earlier by the Company. At the time the Rights dividend was declared, the Board of Directors further authorized the issuance of one Right with respect to each share of the Company's Common Stock that shall become outstanding between March 15, 1991 and the earlier of the Distribution Date or the expiration or redemption of the Rights. Until the Distribution Date occurs, the certificates representing shares of the Company's Common Stock also evidence the Rights. Following the Distribution Date, the Rights will be evidenced by separate certificates. The provisions described above may tend to deter any potential unsolicited tender offers or other efforts to obtain control of the Company that are not approved by the Board of Directors and thereby deprive the stockholders of opportunities to sell shares of the Company's Common Stock at prices higher than the prevailing market price. On the other hand, these provisions will tend to assure continuity of management and corporate policies and to induce any person seeking control of the Company or a business combination with the Company to negotiate on terms acceptable to the then elected Board of Directors. Preferred Stock In January 1996, in connection with the KNPC Acquisition the Company issued 1,000,000 shares of its $1.75 Convertible Preferred Stock, Series A (the "Preferred Stock") to the seller. There are 2,500,000 shares of Preferred Stock authorized. The holder of the Preferred Stock is entitled to receive cumulative dividends at the annual rate of $1.75 per share, payable in cash quarterly on the fifteenth day of March, June, September and December in each year. If full cumulative dividends on the Preferred Stock have not been declared and paid or set apart for payment, the Company may not declare or pay or set apart for payment any dividends or make any other distributions on, or make any payment on account of the purchase, redemption or retirement of, the Company's Common Stock, or any other stock of the Company ranking junior to the Preferred Stock as to payment of dividends or distribution of assets on liquidation, dissolution or winding up of the Company (other than, in the case of dividends or distributions, dividends or distributions paid in shares of Common Stock or such other junior ranking stock). The Company has the option, at any time beginning on or after March 15, 2001, to redeem all or any part of the outstanding shares of Preferred Stock at the redemption price of $25.00 per share, plus an amount equal to all accrued and unpaid dividends on such shares of Preferred Stock to the date of redemption. Upon the occurrence of a change of control of the Company, the holder of the Preferred Stock has the right to cause the Preferred Stock to be redeemed by the Company, in whole or in part, at the redemption price of $25.50 per share, plus all accrued and unpaid dividends. Generally, for purposes of the Preferred Stock, a change of control is any situation in which a majority of the Board of Directors of the Company changes within a period of twelve months or a new person or group of persons gains control of the Company, within the meaning of rules of the Securities and Exchange Commission. Each share of the Preferred Stock is convertible at the option of the holder thereof, at any time and from time to time prior to the redemption of such share, into fully paid and nonassessable shares of Common Stock 37 38 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of the Company at the initial conversion rate of 1.666 shares of Common Stock for each share of Preferred Stock, subject to customary adjustments. The Preferred Stock is exchangeable, in whole or in part, at the option of the Company on any dividend payment date at any time on or after March 15, 1999, and prior to March 15, 2001, for shares of Common Stock at the exchange rate of 1.666 shares of Common Stock for each share of Preferred Stock; provided that (i) on or prior to the date of exchange, the Company shall have declared and paid or set apart for payment to the holders of Preferred Stock all accumulated and unpaid dividends to the date of exchange, and (ii) the current market price of the Common Stock is above $18.375 (the "Threshold Price"). The exchange rate is subject to adjustment in the same manner and under the same circumstances as the conversion rate is subject to adjustment, and the Threshold Price is also subject to adjustment in the same manner and under the same circumstances. Upon the dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of the Preferred Stock are entitled to receive out of the assets of the Company available for distribution to stockholders, the amount of $25.00 per share plus an amount equal to all dividends on such shares (whether or not earned or declared) accrued and unpaid thereon to the date of final distribution, before any payment or distribution may be made on the Common Stock or on any class of stock ranking junior to the Preferred Stock with respect to distributions upon dissolution, liquidation or winding up. If at any time dividends payable on the Preferred Stock are in arrears and unpaid in an amount equal to or exceeding the amount of dividends payable thereon for four quarterly dividend periods, the total number of Directors on the Company's Board of Directors will be limited to a maximum of nine and the holders of the outstanding Preferred Stock will have the exclusive right, voting separately as a class without regard to series, to designate a special class of two Directors of the Company (the "Special Directors") at the next annual or special meeting of stockholders of the Company irrespective of whether such meeting otherwise would involve the election of directors, and the membership of the Board of Directors of the Company shall be increased by the number of the Special Directors so designated. Such right of the holders of Preferred Stock to designate Special Directors continues until all dividends accumulated and payable on the Preferred Stock have been paid in full, at which time such right to designate Special Directors terminates, subject to re-vesting in the event of a subsequent dividend payment arrearage. In exercising the right to designate Special Directors or when otherwise granted voting rights by operation of law, each share of Preferred Stock shall be entitled to one vote, except as described below. The holders of the Preferred Stock are entitled to vote on all matters upon which holders of the Company's Common Stock have the right to vote. In such voting, each share of Preferred Stock is entitled to a number of votes per share equivalent to the number of shares of Common Stock issuable upon conversion of the Preferred Stock and shall vote together with the holders of the outstanding shares of the Company's Common Stock as if a part of that class. (8) BENEFIT PLANS 1989 Plan The Company's 1989 Stock Option Plan expired in December 1999. Options to purchase 163,000 shares of the Company's common stock, which would have expired in December 1999, were exercised in 1999 at an average price of $4.76. As of December 31, 1999, options to purchase 1,550,000 shares of the Company's common stock were outstanding under the 1989 Plan. 38 39 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1993 Plan In February 1993, the Board of Directors adopted the Company's 1993 Stock Option Plan (the "1993 Plan"). The 1993 Plan provides for issuance of options to certain employees and directors to purchase shares of Common Stock. In November 1999, the aggregate number of shares of Common Stock that may be issued under the 1993 Plan was increased from 2,700,000 shares to 3,200,000 shares. The exercise price, vesting and duration of the options may vary and will be determined at the time of issuance. 1999 Plan The 1999 Long Term Incentive Plan (the "1999 Plan") was adopted by the Board of Directors on February 17, 1999, and approved by the shareholders on May 20, 1999. The 1999 Plan provides for the grant of stock options, restricted stock awards, performance awards and incentive awards. There were no grants made in 1999 under the 1999 Plan. The aggregate number of shares of common stock, which may be issued under the 1999 Plan, may not exceed 2,000,000 shares. The maximum value of any performance award granted to any one individual during any calendar year may not exceed $500,000. The exercise price, vesting and duration of any grants may vary and will be determined at the time of issuance. A summary of the status of the plans described above, as of the dates indicated, and the changes during the years then ended, is presented in the table and narrative below:
DECEMBER 31, --------------------------------------------------- 1999 1998 1997 --------------- --------------- --------------- WTD. WTD. WTD. SHARES AVG. SHARES AVG. SHARES AVG. UNDER EXER. UNDER EXER. UNDER EXER. OPTION PRICE OPTION PRICE OPTION PRICE ------ ------ ------ ------ ------ ------ (SHARES IN THOUSANDS) Outstanding, beginning of year.............. 3,402 $13.22 2,173 $12.84 2,110 $11.06 Granted..................................... 1,178 13.91 2,127 16.04 307 19.12 Exercised................................... (248) 6.98 (50) 11.80 (244) 5.54 Cancellations............................... (193) 13.56 (848) 19.43 -- -- ----- ----- ----- Outstanding, end of year.................... 4,139 13.77 3,402 13.22 2,173 12.84 ===== ===== ===== Exercisable, end of year.................... 2,226 13.10 1,919 11.64 1,501 10.77 ===== ===== ===== Available for grant, end of year............ 2,392 945 741 ===== ===== =====
The weighted average fair value of options granted during the years ended December 31, 1999, 1998, and 1997 was $9.72, $9.01, and $10.35, respectively. The following table summarizes information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------- ------------------------ NO. OF SHS. WTD. AVG. NO. OF SHS. UNDER REMAINING WTD. AVG. UNDER WTD. AVG. RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE - --------------- ----------- ----------- --------- ------------ --------- (SHARES IN THOUSANDS) $ 3.81 to 13.00........................ 918 5.24 $ 9.36 774 $ 8.83 $13.32 to 15.25........................ 1,608 6.87 14.28 666 15.00 $15.69 to 18.38........................ 1,613 8.08 15.76 786 15.68 ----- ----- 4,139 6.98 13.77 2,226 13.10 ===== =====
39 40 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company accounts for its stock-based compensation using the intrinsic value method prescribed by APB Opinion No. 25 and related interpretations, under which no compensation cost has been recognized for the stock option plans. Alternatively, if compensation costs for these plans had been determined in accordance with SFAS No. 123, the Company's net income (loss) and net income (loss) per common share would approximate the following pro forma amounts:
YEARS ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ------ -------- ------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Income (loss) As Reported............................................... $5,007 $(45,233) $6,860 Pro Forma................................................. 451 (48,645) 4,708 Basic Net Income (loss) per Common Share: As Reported............................................... $ .16 $ (1.55) $ 0.27 Pro Forma................................................. $ .01 $ (1.66) $ 0.19 Diluted Net Income (loss) per Common Share: As Reported............................................... $ .15 $ (1.55) $ 0.26 Pro Forma................................................. $ .01 $ (1.66) $ 0.18
The fair value of each option is estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999, 1998, and 1997, respectively: (i) risk-free interest rates of 6.20, 5.54, and 6.20 percent; (ii) expected lives of 7.0, 7.3 and 7.3 years, (iii) expected volatility of 47.6, 44.3, and 40.9 percent , and (iv) no dividend yields. The pro forma amounts shown above may not be representative of future results because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995. Profit Sharing, ESOP and KSOP Plans Effective April 1, 1985, the Company adopted a profit sharing plan (the "Profit Sharing Plan") for the benefit of all employees. Under the Profit Sharing Plan, the Company could contribute to a trust either stock or cash in such amounts as the Company deemed advisable. Effective April 1, 1986, the Company adopted an employee stock ownership plan (the "ESOP") for the benefit of all employees. Under the ESOP, the Company could contribute cash or the Company's Common Stock to a trust in such amounts as the Company deemed advisable. Effective April 1, 1990, the Profit Sharing Plan was amended to provide for voluntary employee contributions under Section 401(k) of the Internal Revenue Code of 1986, as amended. The Profit Sharing Plan was further amended to provide employees with the ability to give direct investment instructions to the Profit Sharing Trustee for amounts held for their benefit. Effective January 1, 1996 the Company adopted the KSOP which is a merger of the ESOP and the Profit Sharing Plan which contains 401(k) profit sharing plan and employer stock ownership plan provisions for the benefit of those persons who qualify as participants. The Company has, at its discretion, a policy to match employee contributions to the plan. As of December 31, 1999, the Company's policy was to match two-thirds of the employee contribution up to a total match of four percent of the employee's salary. The match for the years ended December 31, 1999, 1998 and 1997, was approximately $422,000, $329,000 and $266,000, respectively. The Company contributed an additional $100,000 to the KSOP for 1997. 40 41 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of financial instruments. The carrying values of trade receivables and trade payables approximated market value. The carrying amounts of cash and cash equivalents approximated fair value due to the short maturity of these instruments. The carrying value of debt approximated fair value because the interest rate is variable and is reflective of current market conditions. As discussed in Note 6, as of December 31, 1998, in connection with advance payments for future natural gas deliveries, the Company had three gas price swap contracts outstanding whereby the Company became a fixed price payor for a total of 35,000 Mmbtu per day at a weighted average price of $2.02. The swap contracts were completely settled as of December 31, 1999. (10) RELATED PARTIES AND SIGNIFICANT CUSTOMERS Related Parties Certain of the Company's officers and directors participate (either individually or indirectly through various entities) with the Company and other unrelated investors in the drilling, development and operation of gas and oil properties. Related party transactions are non-interest bearing and are settled in the normal course of business with terms which, in management's opinion, are similar to those with other joint owners. The Company has engaged from time to time two law firms, one of whose partner serves as a director and one of whose partner serves as an officer. The amounts paid to each of these firms for the years ended December 31, 1999, 1998 and 1997, were approximately $97,000 and $91,000; $100,000 and $35,000; and $189,000 and $110,000, respectively. The Company also paid approximately $38,000, $35,000 and $32,000 during the years ended December 31, 1999, 1998 and 1997, respectively, to a consulting firm that has a partner who serves as a director of the Company. The Company participates in exploration activity with a partnership, one of whose partner is a director of the Company. During the years ended December 31, 1999, 1998, and 1997, the Company billed $579,000, $508,000 and $960,000, respectively, to such partnership for their share of certain leasehold and drilling costs. In addition, certain officers and directors of the Company are directors of a former subsidiary. The Company and the former subsidiary have made available to each other certain personnel, office services and records with each party being reimbursed for costs and expenses incurred in connection therewith. During the years ended December 31, 1999, 1998 and 1997, the Company charged the former subsidiary approximately $67,000, $86,000 and $80,000, respectively, for such services. The former subsidiary performs drilling services on certain wells operated by the Company and charged approximately $1,860,000, $1,643,000, and $11,000 for such services during the years ended December 31, 1999, 1998 and 1997, respectively. In management's opinion, the above described transactions and services were provided on the same terms as could be obtained from non-related sources. Significant Customers Gas and oil sales to Conoco, Inc. accounted for 12%, 24% and 28% of gas and oil sales and marketing, gathering and processing revenues for the years ended December 31, 1999, 1998 and 1997, respectively. Because there are numerous other parties available to purchase the Company's production, the Company believes the loss of this purchaser would not materially affect its ability to sell natural gas or crude oil. 41 42 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Concentration of Credit Risk The Company's revenues are derived principally from uncollateralized sales to customers in the gas and oil industry. The concentration of credit risk in a single industry affects the Company's overall exposure to credit risk because customers may be similarly affected by changes in economic and other conditions. The Company has not experienced significant credit losses on such receivables. (11) SEGMENT INFORMATION The Company operates in three reportable segments: (i) gas and oil exploration and development, (ii) marketing, gathering and processing and (iii) drilling. The long-term financial performance of each of the reportable segments is affected by similar economic conditions. The Company's gas and oil exploration and development segment operates primarily in the Wind River and Green River Basins of Wyoming, the Piceance Basin of Colorado, the Paradox Basin of Utah and Colorado, the Val Verde of west Texas, the Permian Basin of west Texas and southwestern New Mexico, and east Texas. The marketing, gathering and processing activities of the Company are conducted through Retex and Wildhorse, primarily in the Rocky Mountain region. The drilling segment operates under the name of Sauer Drilling Company and serves the drilling needs of operators in the central Rocky Mountain region in addition to drilling for the Company. The accounting policies of the segments are the same as those described in Note 2 of Notes to Consolidated Financial Statements. The Company evaluates performance based on profit or loss from operations before income taxes, accounting changes, nonrecurring items and interest income and expense. The Company accounts for intersegment sales transfers as if the sales or transfers were to third parties, that is, at current prices. The following tables present information related to the Company's reportable segments:
DECEMBER 31, 1999 ---------------------------------------------- GAS & OIL MARKETING, EXPLORATION GATHERING & & TOTAL DEVELOPMENT PROCESSING DRILLING SEGMENTS ----------- ---------- -------- -------- Revenues from external purchasers.................. $ 85,138 $116,687 $5,643 $207,468 Intersegment revenues.............................. 21,365 -- 4,348 25,713 Depreciation, depletion and amortization........... 40,532 3,107 1,324 44,963 Segment profit..................................... 15,976 1,026 149 17,151 Assets............................................. 467,561 90,262 9,333 567,156 Capital and exploration expenditures............... 120,146 4,080 1,416 125,642
42 43 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 ---------------------------------------------- GAS & OIL MARKETING, EXPLORATION GATHERING & & TOTAL DEVELOPMENT PROCESSING DRILLING SEGMENTS ----------- ---------- -------- -------- Revenues from external purchasers.................. $ 63,262 $ 55,037 $4,558 $122,857 Intersegment revenues.............................. 15,406 -- 5,117 20,523 Depreciation, depletion and amortization........... 42,399 1,846 1,008 45,253 Impairment of gas and oil properties............... 51,344 -- -- 51,344 Segment profit (loss).............................. (62,989) (3,808) 283 (66,514) Assets............................................. 360,347 74,785 9,094 444,226 Capital and exploration expenditures............... 75,447 8,630 9,197 93,274
DECEMBER 31, 1997 ---------------------------------------------- GAS & OIL MARKETING, EXPLORATION GATHERING & & TOTAL DEVELOPMENT PROCESSING DRILLING SEGMENTS ----------- ---------- -------- -------- Revenues from external purchasers................... $ 76,172 $ 41,853 -- $118,025 Intersegment revenues............................... 15,182 -- -- 15,182 Depreciation, depletion and amortization............ 35,229 1,001 -- 36,230 Segment profit...................................... 15,623 3,291 -- 18,914 Assets.............................................. 394,762 57,628 -- 452,390 Capital and exploration expenditures................ 94,902 17,213 -- 112,115
The following tables reconcile segment information to consolidated totals:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Revenues Revenue from external purchasers.......................... $207,468 $122,857 $118,025 Intersegment revenues..................................... 25,713 20,523 15,182 Intercompany eliminations................................. (18,331) (12,050) (6,832) -------- -------- -------- Total consolidated revenues....................... $214,850 $131,330 $126,375 ======== ======== ======== Profit or (loss) Total reportable segment profit/loss...................... $ 17,151 $(66,514) $ 18,914 Interest expense.......................................... (5,560) (4,301) (5,920) Eliminations and other.................................... (541) (546) -- -------- -------- -------- Income (loss) before income taxes......................... $ 11,050 $(71,361) $ 12,994 ======== ======== ======== Depreciation, depletion and amortization Total reportable segment depreciation, depletion and amortization........................................... $ 44,963 $ 45,253 $ 36,230 Eliminations and other.................................... (748) (678) -- -------- -------- -------- $ 44,215 $ 44,575 $ 36,230 ======== ======== ======== Assets Total reportable segment assets........................... $567,156 $444,226 $452,390 Eliminations and other.................................... (30,857) (2,344) (1,464) -------- -------- -------- $536,299 $441,882 $450,926 ======== ======== ========
43 44 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (12) COMMITMENTS AND CONTINGENCIES The Company's operations are subject to numerous Federal and state government regulations that may give rise to claims against the Company. In addition, the Company is a defendant in various lawsuits generally incidental to its business. The Company does not believe that the ultimate resolution of such litigation will have a material adverse effect on the Company's financial position, results of operations or cash flows. Lease Commitments At December 31, 1999, the Company had long-term leases covering certain of its facilities and equipment. The minimum rental commitments under non-cancelable operating leases with lease terms in excess of one year are as follows:
YEARS ENDING COMMITMENT DECEMBER 31, AMOUNT ------------ -------------- (IN THOUSANDS) 2000.................................................... $1,233 2001.................................................... 1,220 2002.................................................... 1,192 2003.................................................... 1,080 2004.................................................... 71 Thereafter.............................................. -- ------ $4,796 ======
Total rental expense incurred for the years ended December 31, 1999, 1998 and 1997, was approximately $1,139,000, $1,043,000, and $741,000, respectively, all of which represented minimum rentals under non-cancelable operating leases. Firm Transportation Commitments As of December 31, 1999, Wildhorse had entered into several contracts for firm transportation on interstate pipelines. On January 23, 1998, the owner of one interstate pipeline filed for an interim rate increase on a regulated pipeline effective August 1, 1998 to increase the rate from approximately $.45 per Mcf to $.76 per Mcf. Wildhorse began paying the higher rate of $.76 per Mcf in August 1998. In August 1999 Wildhorse learned that it was likely that the rate increase would be limited to $.62 per Mcf. As such, Wildhorse recorded a receivable of approximately $2.3 million (approximately $1.0 million net to the Company) representing estimated recoupment of overpayments made at the higher rate of $.76 per Mcf. In September 1999 the rate on this pipeline was further reduced to $.47. On September 1, 1999, the Company took assignment of firm transportation commitments within Wildhorse based upon its 45% interest in Wildhorse. 44 45 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Based upon current rates, the Company's obligation for such firm transportation on that pipeline and others for the next five years and thereafter is as follows:
YEARS ENDING COMMITMENT DECEMBER 31, AMOUNT ------------ -------------- (IN THOUSANDS) 2000.................................................... $ 3,997 2001.................................................... 3,997 2002.................................................... 3,257 2003.................................................... 2,641 2004.................................................... 2,208 Thereafter.............................................. 2,438 ------- $18,538 =======
Environmental Matters Rocno Corporation, a wholly-owned subsidiary of the Company, is a party to a trust agreement in connection with the environmental clean-up plan for the Sheridan Superfund Site in Waller County, Texas. Rocno's share of the estimated cleanup costs was accrued in the consolidated financial statements at December 31, 1999. Based on the amount of remediation costs estimated for this site and the Company's de minimis contribution, if any, the Company believes that the outcome of this proceeding will not have a material adverse effect on its financial position or results of operations. (13) QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year ended December 31, 1999 Revenues................................... $31,513 $36,398 $57,121 $ 89,818 $214,850 Gross profit(1)............................ 12,394 15,022 23,854 30,110 $ 81,380 Net income (loss) attributable to common stock.................................... (2,971) (996) 3,161 5,813 $ 5,007 Net income (loss) per common share(2) Basic.................................... (.10) (.03) .09 .17 $ .16 Diluted.................................. (.10) (.03) .09 .16 $ .15 Year ended December 31, 1998 Revenues................................... $31,960 $32,644 $31,395 $ 35,331 $131,330 Gross profit(1)............................ 14,631 15,952 12,425 12,569 $ 55,577 Net loss attributable to common stock...... (2,032) (2,201) (5,222) (35,778) $(45,233) Net loss per common share(2) Basic.................................... (.07) (.08) (.18) (1.22) $ (1.55) Diluted.................................. (.07) (.08) (.18) (1.22) $ (1.55)
- --------------- (1) Gross Profit is computed as the excess of gas and oil and marketing, gathering and processing revenues over operating expenses. Operating expenses are those associated directly with gas and oil and marketing, gathering and processing revenues and include lease operations, gas and oil related taxes and cost of gas sold. (2) The sum of the individual quarterly net income (loss) per share may not agree with year-to-date net income (loss) per share as each period's computation is based on the weighted average number of common shares outstanding during the period. 45 46 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (14) SUPPLEMENTAL INFORMATION RELATED TO GAS AND OIL ACTIVITIES (UNAUDITED) The following tables set forth certain historical costs and operating information related to the Company's gas and oil producing activities: Capitalized Costs and Costs Incurred
DECEMBER 31, -------------------------------- 1999 1998 1997 --------- -------- --------- (IN THOUSANDS) Capitalized costs Proved gas and oil properties...................... $ 427,676 $344,766 $ 456,093 Unproved gas and oil properties.................... 42,785 42,570 44,468 --------- -------- --------- Total gas and oil properties....................... 470,461 387,336 500,561 Less: Accumulated depreciation, depletion and amortization.................................. (116,403) (78,161) (151,544) --------- -------- --------- Net capitalized costs.............................. $ 354,058 $309,175 $ 349,017 ========= ======== =========
YEARS ENDED DECEMBER 31, ---------------------------- 1999 1998 1997 -------- ------- ------- (IN THOUSANDS) Costs incurred Proved property acquisition costs(1)................... $ 65,753 $ -- $35,540 Unproved property acquisition costs.................... 6,945 3,283 6,128 Exploration costs...................................... 12,016 22,844 16,036 Development costs...................................... 33,232 49,262 33,731 -------- ------- ------- Total........................................ $117,946 $75,389 $91,435 ======== ======= =======
- --------------- (1) For 1999 proved property acquisition costs includes $19.9 million for a gas processing plant in connection with the Unocal Acquisition (see Note 3). Gas and Oil Reserve Information (Unaudited) The following summarizes the policies used by the Company in preparing the accompanying gas and oil reserve disclosures, Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Gas and Oil Reserves and reconciliation of such standardized measure between years. Estimates of proved and proved developed reserves at December 31, 1999, 1998 and 1997, were principally prepared by independent petroleum consultants. Proved reserves are estimated quantities of natural gas and crude oil which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves that can be recovered through existing wells with existing equipment and operating methods. All of the Company's gas and oil reserves are located in the United States. The standardized measure of discounted future net cash flows from production of proved reserves was developed as follows: 1. Estimates are made of quantities of proved reserves and the future periods during which they are expected to be produced based on year end economic conditions. 2. The estimated future cash flows from proved reserves were determined based on year-end prices, except in those instances where fixed and determinable price escalations are included in existing contracts. 46 47 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. The future cash flows are reduced by estimated production costs and costs to develop and produce the proved reserves, all based on year end economic conditions and by the estimated effect of future income taxes based on the then-enacted tax law, the Company's tax basis in its proved gas and oil properties and the effect of net operating loss, investment tax credit and other carryforwards. The standardized measure of discounted future net cash flows does not purport to present, nor should it be interpreted to present, the fair value of the Company's gas and oil reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs and a discount factor more representative of the time value of money and the risks inherent in reserve estimates. Quantities of Gas and Oil Reserves (Unaudited) The following table presents estimates of the Company's net proved and proved developed natural gas and oil reserves (including natural gas liquids).
RESERVE QUANTITIES ------------------ GAS OIL(1) (MMCF) (MBLS) -------- ------- Proved reserves: Estimated reserves at December 31, 1996..................... 359,167 12,306 Revisions of previous estimates........................... (41,299) (2,763) Purchase of minerals in place............................. 23,341 268 Extensions and discoveries................................ 38,487 189 Sales of minerals in place................................ (750) (1,614) Production................................................ (31,842) (1,159) ------- ------ Estimated reserves at December 31, 1997..................... 347,104 7,227 Revisions of previous estimates........................... (7,021) (1,211) Extensions and discoveries................................ 67,921 711 Sales of minerals in place................................ (95) (18) Production................................................ (35,887) (1,027) ------- ------ Estimated reserves at December 31, 1998..................... 372,022 5,682 Revisions of previous estimates........................... (8,571) 1,505 Purchases of minerals in place............................ 65,982 6,989 Extensions and discoveries................................ 58,032 292 Sales of minerals in place................................ (1,018) (22) Production................................................ (40,514) (1,445) ------- ------ Estimated reserves at December 31, 1999..................... 445,933 13,001 ======= ====== Proved developed reserves: December 31, 1996......................................... 257,241 8,994 December 31, 1997......................................... 258,756 5,749 December 31, 1998......................................... 263,747 4,029 December 31, 1999......................................... 333,858 11,398
- --------------- (1) Oil volumes include natural gas liquids which are insignificant for all years shown except 1999. For 1999, purchases of minerals in place and production include 6.0 million and 0.5 million barrels of natural gas liquids. Proved developed reserves at December 31, 1999 include 6.0 million barrels of natural gas liquids related to the 1999 Unocal Acquisition. 47 48 TOM BROWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Gas and Oil Reserves (Unaudited)
DECEMBER 31, ---------------------------------- 1999 1998 1997 ---------- --------- --------- (IN THOUSANDS) Future cash flows......................................... $1,107,515 $ 764,974 $ 805,645 Future production costs................................... (320,397) (217,632) (225,488) Future development costs.................................. (85,712) (74,371) (50,839) ---------- --------- --------- Future net cash flows before tax.......................... 701,406 472,971 529,318 Future income taxes....................................... (119,950) (71,960) (77,277) ---------- --------- --------- Future net cash flows after tax........................... 581,456 401,011 452,041 Annual discount at 10%.................................... (247,897) (179,294) (186,867) ---------- --------- --------- Standardized measure of discounted future net cash flows................................................... $ 333,559 $ 221,717 $ 265,174 ========== ========= ========= Discounted future net cash flows before income taxes...... $ 393,423 $ 254,020 $ 300,814 ========== ========= =========
Natural gas and oil prices have increased since December 31, 1999. Accordingly, the discounted future net cash flows shown above could be different if the standardized measure were calculated using current prices. Changes in Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
YEARS ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 -------- -------- --------- (IN THOUSANDS) Gas and oil sales, net of production costs.................. $(76,052) $(56,032) $ (68,446) Net changes in anticipated prices and production cost....... 32,745 (36,581) (267,369) Extensions and discoveries, less related costs.............. 31,796 33,651 28,816 Changes in estimated future development costs............... 21,246 (2,652) 21,347 Previously estimated development costs incurred............. 1,435 8,690 315 Net change in income taxes.................................. (27,561) 3,336 106,893 Purchase of minerals in place............................... 98,419 -- 16,059 Sales of minerals in place.................................. (1,207) (151) (11,534) Accretion of discount....................................... 25,402 30,081 60,875 Revision of quantity estimates.............................. 369 (10,716) (49,263) Changes in production rates and other....................... 5,250 (13,083) (38,732) -------- -------- --------- Change in Standardized Measure.............................. $111,842 $(43,457) $(201,039) ======== ======== =========
48 49 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information regarding Directors of the Company will be included in the Company's definitive proxy statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year covered by this Form 10-K and such information is incorporated by reference to the Company's definitive proxy statement. Information concerning the Executive Officers of the Company appears under Item I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Certain information regarding compensation of executive officers of the Company will be included in the Company's definitive proxy statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year covered by this Form 10-K and such information is incorporated by reference to the Company's definitive proxy statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Certain information regarding security ownership of certain beneficial owners and management will be included in the Company's definitive proxy statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year covered by this Form 10-K and such information is incorporated by reference to the Company's definitive proxy statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain information regarding transactions with management and other related parties will be included in the Company's definitive proxy statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year covered by this Form 10-K and such information is incorporated by reference to the Company's definitive proxy statement. 49 50 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (1) See Index to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K. (2) None (3) Exhibits: 2.1 -- Purchase and Sale Agreement, dated June 8, 1999, between Union Oil Company of California and the Registrant (Incorporated by reference to Exhibit 10.1 in the Registrant's Form 8-K Report dated July 19, 1999 and filed with the Securities and Exchange Commission on July 19, 1999) 3.1 -- Certificate of Incorporation, as amended, of the Registrant (Incorporated by reference to Exhibit No. 4 in the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1996, and filed with the Securities and Exchange Commission on August 15, 1996) 3.2* -- Certificate of Amendment, dated May 25, 1999, to Certificate of Incorporation of Registrant 3.3 -- Bylaws of the Registrant (Incorporated by reference to Exhibit No. 3.2 in the Registrant's Form 8-B Registration Statement dated July 15, 1987, and filed with the Securities and Exchange Commission on July 17, 1987) 4.1 -- Rights Agreement dated as of March 5, 1991, between the Registrant and The First National Bank of Boston, successor in interest to American Stock Transfer & Trust Company (Incorporated by reference to Exhibit No. 4(a) in the Registrant's Form 8-K Report dated March 12, 1991, and filed with the Securities and Exchange Commission on March 15, 1991) 10.1 -- Limited Liability Company Agreement, dated January 31, 1996, of Wildhorse Energy Partners, LLC, between the Registrant and KN Energy, Inc. (Incorporated by reference to Exhibit No. 10.2 in the Registrant's Form 8-K Report dated January 31, 1996, and filed with the Securities and Exchange Commission on February 15, 1996) 10.2 -- Registration Rights Agreement, dated January 31, 1996, between the Registrant and KN Energy, Inc. (Incorporated by reference to Exhibit No. 10.4 in the Registrant's Form 8-K Report dated January 31, 1996, and filed with the Securities and Exchange Commission on February 15, 1996) 10.3 -- Stock Ownership and Registration Rights Agreement dated June 29, 1999 between Union Oil Company of California and the Registrant (Incorporated by reference to Exhibit 10.2 in the Registrant's Form 8-K Report dated July 19, 1999, and filed with the Securities and Exchange Commission on July 19, 1999) 10.4 -- Credit Agreement, dated as of April 17, 1998, among the Registrant, The Chase Manhattan Bank and the other lenders parties thereto (Incorporated by reference to Exhibit 10.1 in the Registrant's Form 10-Q for the quarterly period ended March 31, 1998, and filed with the Securities and Exchange Commission on May 14, 1998) 10.5 -- First Amendment, dated October 19, 1998, to the Credit Agreement, dated April 17, 1998 (Incorporated by reference to Exhibit 10.1 in the Registrant's Form 10-Q Report for the quarterly period ended September 30, 1998, and filed with the Securities and Exchange Commission on November 13, 1998)
50 51 10.6 -- Second Amendment and Waiver, dated March 15, 1999, to the Credit Agreement, dated April 17, 1998 (Incorporated by reference to Exhibit 10.7 in the Registrant's Form 10-K Report for the fiscal year ended December 31, 1998, and filed with the Securities and Exchange Commission on March 19, 1999) 10.7 -- Third Amendment dated June 25, 1999 to the Credit Agreement dated April 17, 1998 (Incorporated by reference to Exhibit 10.1 in the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1999, and filed with the Securities and Exchange Commission on August 13, 1999) 10.8 -- Purchase and Sale Agreement between Genesis Gas and Oil, L.L.C. and TBI Production Company, dated October 1, 1997. (Incorporated by reference to Exhibit 10.6 in the Registrants' Form 10-K Report for the fiscal year ended December 31, 1998, and filed with the Securities and Exchange Commission on March 19, 1999) Executive Compensation Plans and Arrangements (Exhibits 10.9 through 10.15): 10.9 -- 1989 Stock Option Plan (Incorporated by reference to Exhibit 10.17 in the Registrant's Form S-1 Registration Statement dated February 14, 1990, and filed with the Securities and Exchange Commission on February 13, 1990) 10.10 -- Amended and Restated 1993 Stock Option Plan (Incorporated by reference to Exhibit 10.4 in the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1999, and filed with the Securities and Exchange Commission on August 13, 1999) 10.11* -- 1999 Long Term Incentive Plan effective as of February 17, 1999. 10.12 -- Tom Brown, Inc. KSOP Plan (Incorporated by reference to Exhibit 10.19 in the Registrant's Form 10-K Report for the fiscal year ended December 31, 1996, and filed with the Securities and Exchange Commission on March 27, 1997) 10.13* -- Tom Brown, Inc. 401(k) Retirement Plan effective as of January 1, 2000. 10.14* -- Sauer Drilling Company Adoption Agreement and Prototype 401(k) Retirement Plan effective as of January 1, 1999. 10.15 -- Second Amendment and Restated Employment Agreement dated January 1, 1997, between the Registrant and Donald L. Evans (Incorporated by reference to Exhibit 10.15 in the Registrant's Form 10-K Report for the fiscal year ended December 31, 1996, and filed with the Securities and Exchange Commission on March 27, 1997) 10.16 -- First Amendment to Employment Agreement dated as of July 1, 1998, between the Registrant and Donald L. Evans (Incorporated by reference to Exhibit 10.3 in the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1998, and filed with the Securities and Exchange Commission on August 10, 1998) 10.17 -- Employment Agreement dated May 3, 1999 between the Registrant and James D. Lightner (Incorporated by reference to Exhibit 10.3 in the Registrant's Form 8-K Report dated July 19, 1999, and filed with the Securities and Exchange Commission on July 19, 1999) 10.18 -- Severance Agreement dated as of July 1, 1998, together with a schedule identifying officers of the Registrant who are parties thereto and the multiple of earnings payable to each officer upon termination resulting from certain change in control events. (Incorporated by reference to Exhibit 10.1 in the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1998, and filed with the Securities and Exchange Commission on August 12, 1998)
51 52
10.19* -- Amended Schedule to Severance Agreement filed as Exhibit No. 10.1 to the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1998, and filed with the Securities and Exchange Commission on August 12, 1998 identifying officers and executives of the Registrant who are parties thereto and the multiple of earnings payable to each officer or executive upon termination resulting from certain change in control events 10.20 -- The Registrant's Severance Plan dated as of July 1, 1998 (Incorporated by reference to Exhibit 10.2 in the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1998, and filed with the Securities and Exchange Commission on August 12, 1998) 21.1* -- Subsidiaries of the Registrant 23.1* -- Consent of Arthur Andersen LLP 23.2* -- Consent of Williamson Petroleum Consultants, Inc. 23.3* -- Consent of Ryder Scott Company 27.1* -- Financial Data Schedule
- --------------- * Filed herewith (4) Reports on Form 8-K: None 52 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TOM BROWN, INC. By /s/ DONALD L. EVANS ----------------------------------- Donald L. Evans Chairman of the Board of Directors and Chief Executive Officer Date: March 17, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DONALD L. EVANS Chairman of the Board and Chief March 17, 2000 - ----------------------------------------------------- Executive Officer Donald L. Evans /s/ JAMES D. LIGHTNER President and Director March 17, 2000 - ----------------------------------------------------- James D. Lightner /s/ DANIEL G. BLANCHARD Vice President and Chief Financial March 17, 2000 - ----------------------------------------------------- Officer Daniel G. Blanchard /s/ R. KIM HARRIS Vice President -- Finance and March 17, 2000 - ----------------------------------------------------- Controller R. Kim Harris /s/ THOMAS C. BROWN Director March 17, 2000 - ----------------------------------------------------- Thomas C. Brown /s/ DAVID M. CARMICHAEL Director March 17, 2000 - ----------------------------------------------------- David M. Carmichael /s/ HENRY GROPPE Director March 17, 2000 - ----------------------------------------------------- Henry Groppe /s/ EDWARD W. LEBARON, JR. Director March 17, 2000 - ----------------------------------------------------- Edward W. LeBaron, Jr. /s/ JAMES B. WALLACE Director March 17, 2000 - ----------------------------------------------------- James B. Wallace /s/ ROBERT H. WHILDEN, JR. Director March 17, 2000 - ----------------------------------------------------- Robert H. Whilden, Jr.
53 54 TOM BROWN, INC. EXHIBITS TO ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1999 55 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 -- Purchase and Sale Agreement, dated June 8, 1999, between Union Oil Company of California and the Registrant (Incorporated by reference to Exhibit 10.1 in the Registrant's Form 8-K Report dated July 19, 1999 and filed with the Securities and Exchange Commission on July 19, 1999) 3.1 -- Certificate of Incorporation, as amended, of the Registrant (Incorporated by reference to Exhibit No. 4 in the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1996, and filed with the Securities and Exchange Commission on August 15, 1996) 3.2* -- Certificate of Amendment, dated May 25, 1999, to Certificate of Incorporation of Registrant 3.3 -- Bylaws of the Registrant (Incorporated by reference to Exhibit No. 3.2 in the Registrant's Form 8-B Registration Statement dated July 15, 1987, and filed with the Securities and Exchange Commission on July 17, 1987) 4.1 -- Rights Agreement dated as of March 5, 1991, between the Registrant and The First National Bank of Boston, successor in interest to American Stock Transfer & Trust Company (Incorporated by reference to Exhibit No. 4(a) in the Registrant's Form 8-K Report dated March 12, 1991, and filed with the Securities and Exchange Commission on March 15, 1991) 10.1 -- Limited Liability Company Agreement, dated January 31, 1996, of Wildhorse Energy Partners, LLC, between the Registrant and KN Energy, Inc. (Incorporated by reference to Exhibit No. 10.2 in the Registrant's Form 8-K Report dated January 31, 1996, and filed with the Securities and Exchange Commission on February 15, 1996) 10.2 -- Registration Rights Agreement, dated January 31, 1996, between the Registrant and KN Energy, Inc. (Incorporated by reference to Exhibit No. 10.4 in the Registrant's Form 8-K Report dated January 31, 1996, and filed with the Securities and Exchange Commission on February 15, 1996) 10.3 -- Stock Ownership and Registration Rights Agreement dated June 29, 1999 between Union Oil Company of California and the Registrant (Incorporated by reference to Exhibit 10.2 in the Registrant's Form 8-K Report dated July 19, 1999, and filed with the Securities and Exchange Commission on July 19, 1999) 10.4 -- Credit Agreement, dated as of April 17, 1998, among the Registrant, The Chase Manhattan Bank and the other lenders parties thereto (Incorporated by reference to Exhibit 10.1 in the Registrant's Form 10-Q for the quarterly period ended March 31, 1998, and filed with the Securities and Exchange Commission on May 14, 1998) 10.5 -- First Amendment, dated October 19, 1998, to the Credit Agreement, dated April 17, 1998 (Incorporated by reference to Exhibit 10.1 in the Registrant's Form 10-Q Report for the quarterly period ended September 30, 1998, and filed with the Securities and Exchange Commission on November 13, 1998) 10.6 -- Second Amendment and Waiver, dated March 15, 1999, to the Credit Agreement, dated April 17, 1998 (Incorporated by reference to Exhibit 10.7 in the Registrant's Form 10-K Report for the fiscal year ended December 31, 1998, and filed with the Securities and Exchange Commission on March 19, 1999)
56
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.7 -- Third Amendment dated June 25, 1999 to the Credit Agreement dated April 17, 1998 (Incorporated by reference to Exhibit 10.1 in the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1999, and filed with the Securities and Exchange Commission on August 13, 1999) 10.8 -- Purchase and Sale Agreement between Genesis Gas and Oil, L.L.C. and TBI Production Company, dated October 1, 1997. (Incorporated by reference to Exhibit 10.6 in the Registrants' Form 10-K Report for the fiscal year ended December 31, 1998, and filed with the Securities and Exchange Commission on March 19, 1999) Executive Compensation Plans and Arrangements (Exhibits 10.9 through 10.15): 10.9 -- 1989 Stock Option Plan (Incorporated by reference to Exhibit 10.17 in the Registrant's Form S-1 Registration Statement dated February 14, 1990, and filed with the Securities and Exchange Commission on February 13, 1990) 10.10 -- Amended and Restated 1993 Stock Option Plan (Incorporated by reference to Exhibit 10.4 in the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1999, and filed with the Securities and Exchange Commission on August 13, 1999) 10.11* -- 1999 Long Term Incentive Plan effective as of February 17, 1999. 10.12 -- Tom Brown, Inc. KSOP Plan (Incorporated by reference to Exhibit 10.19 in the Registrant's Form 10-K Report for the fiscal year ended December 31, 1996, and filed with the Securities and Exchange Commission on March 27, 1997) 10.13* -- Tom Brown, Inc. 401(k) Retirement Plan effective as of January 1, 2000. 10.14* -- Sauer Drilling Company Adoption Agreement and Prototype 401(k) Retirement Plan effective as of January 1, 1999. 10.15 -- Second Amendment and Restated Employment Agreement dated January 1, 1997, between the Registrant and Donald L. Evans (Incorporated by reference to Exhibit 10.15 in the Registrant's Form 10-K Report for the fiscal year ended December 31, 1996, and filed with the Securities and Exchange Commission on March 27, 1997) 10.16 -- First Amendment to Employment Agreement dated as of July 1, 1998, between the Registrant and Donald L. Evans (Incorporated by reference to Exhibit 10.3 in the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1998, and filed with the Securities and Exchange Commission on August 10, 1998) 10.17 -- Employment Agreement dated May 3, 1999 between the Registrant and James D. Lightner (Incorporated by reference to Exhibit 10.3 in the Registrant's Form 8-K Report dated July 19, 1999, and filed with the Securities and Exchange Commission on July 19, 1999) 10.18 -- Severance Agreement dated as of July 1, 1998, together with a schedule identifying officers of the Registrant who are parties thereto and the multiple of earnings payable to each officer upon termination resulting from certain change in control events. (Incorporated by reference to Exhibit 10.1 in the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1998, and filed with the Securities and Exchange Commission on August 12, 1998)
57
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.19* -- Amended Schedule to Severance Agreement filed as Exhibit No. 10.1 to the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1998, and filed with the Securities and Exchange Commission on August 12, 1998 identifying officers and executives of the Registrant who are parties thereto and the multiple of earnings payable to each officer or executive upon termination resulting from certain change in control events 10.20 -- The Registrant's Severance Plan dated as of July 1, 1998 (Incorporated by reference to Exhibit 10.2 in the Registrant's Form 10-Q Report for the quarterly period ended June 30, 1998, and filed with the Securities and Exchange Commission on August 12, 1998) 21.1* -- Subsidiaries of the Registrant 23.1* -- Consent of Arthur Andersen LLP 23.2* -- Consent of Williamson Petroleum Consultants, Inc. 23.3* -- Consent of Ryder Scott Company 27.1* -- Financial Data Schedule
- --------------- * Filed herewith EX-3.2 2 CERT.OF AMENDMENT TO CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF TOM BROWN, INC. Tom Brown, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify as follows: Pursuant to the provisions of the Delaware General Corporation Law, the Board of Directors and the stockholders of the Corporation adopted an amendment to the Certificate of Incorporation of the Corporation, which is set forth in the following resolution in accordance with Section 242 of the Delaware General Corporation Law, the purpose of which amendment is to increase the number of authorized shares of Common Stock: "RESOLVED, That the Certificate of Incorporation of the Corporation be amended by changing the first sentence of Article Fourth thereof, so that as amended, the first sentence of Article Fourth shall read as follows: FOURTH: The total number of shares of all classes that the Corporation shall have authority to issue is 57,500,000, of which 2,500,000 shares shall be Preferred Stock, par value $.10 per share, and 55,000,000 shares shall be Common Stock, $.10 par value per share. Except as specifically amended hereby, all other provisions of Article Fourth shall remain in full force and effect. IN WITNESS WHEREOF, Tom Brown, Inc. has caused this Certificate of Amendment to be signed by Donald L. Evans, its Chairman of the Board of Directors, and attested by Bruce R. DeBoer, its Secretary, this 25th day of May, 1999. TOM BROWN, INC. By: /s/ Donald L. Evans ------------------------------- Donald L. Evans, Chairman of the Board of Directors ATTESTED: /s/ Bruce R. DeBoer - -------------------------- Bruce R. DeBoer, Secretary EX-10.11 3 1999 LONG-TERM INCENTIVE PLAN 1 EXHIBIT 10.11 TOM BROWN, INC. 1999 LONG TERM INCENTIVE PLAN I. PURPOSE The purpose of the TOM BROWN, INC. 1999 LONG TERM INCENTIVE PLAN (the "Plan") is to provide a means through which TOM BROWN, INC., a Delaware corporation (the "Company"), and its subsidiaries may attract able persons to serve as directors, consultants, or advisors or to enter the employ of the Company and its affiliates and to provide a means whereby those individuals upon whom the responsibilities of the successful administration and management of the Company and its affiliates rest, and whose present and potential contributions to the welfare of the Company and its affiliates are of importance, can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company and its affiliates. A further purpose of the Plan is to provide such individuals with additional incentive and reward opportunities designed to enhance the profitable growth of the Company and its affiliates. Accordingly, the Plan provides for granting Incentive Stock Options, options that do not constitute Incentive Stock Options, Restricted Stock Awards, Performance Awards, and Incentive Awards, or any combination of the foregoing, as is best suited to the circumstances of the particular Employee, consultant, advisor, or director as provided herein. II. DEFINITIONS The following definitions shall be applicable throughout the Plan unless specifically modified by any paragraph: (a) "AFFILIATE" means any corporation, partnership, limited liability company or partnership, association, trust or other organization which, directly or indirectly, controls, is controlled by, or is under common control with, the Company. For purposes of the preceding sentence, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any entity or organization, shall mean the possession, directly or indirectly, of the power (i) to vote more than 50% of the securities having ordinary voting power for the election of directors of the controlled entity or organization, or (ii) to direct or cause the direction of the management and policies of the controlled entity or organization, whether through the ownership of voting securities or by contract or otherwise. (b) "AWARD" means, individually or collectively, any Option, Restricted Stock Award, Performance Award or Incentive Award. (c) "BOARD" means the Board of Directors of the Company. (d) "CODE" means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. 2 (e) "COMMITTEE" means a committee of the Board that is selected by the Board as provided in Paragraph IV(a). (f) "COMMON STOCK" means the common stock, par value $0.10 per share, of the Company, or any security into which such Common Stock may be changed by reason of any transaction or event of the type described in Paragraph XI. (g) "COMPANY" means Tom Brown, Inc., a Delaware corporation. (h) "CONSULTANT" means any person who is not an Employee and who is providing advisory or consulting services to the Company or any Affiliate. (i) "DIRECTOR" means an individual elected to the Board by the stockholders of the Company or by the Board under applicable corporate law who is serving on the Board on the date the Plan is adopted by the Board or is elected to the Board after such date. (j) "EMPLOYEE" means any person (including a Director) in an employment relationship with the Company or any Affiliate. (k) "FAIR MARKET VALUE" means, as of any specified date, the mean of the high and low sales prices of the Common Stock reported on the stock exchange composite tape on that date, or, if no prices are reported on that date, on the last preceding date on which such prices of the Common Stock are so reported. In the event Common Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its fair market value shall be made by the Committee in such manner as it deems appropriate. (l) "HOLDER" means an Employee, Consultant, or Director who has been granted an Award. (m) "IMMEDIATE FAMILY" means, with respect to a Holder, the Holder's spouse, children, or grandchildren (including adopted and stepchildren and grandchildren). (n) "INCENTIVE AWARD" means an Award granted under Paragraph X of the Plan. (o) "INCENTIVE AWARD AGREEMENT" means a written agreement between the Company and a Holder with respect to a Incentive Award. (p) "INCENTIVE STOCK OPTION" means an incentive stock option within the meaning of section 422 of the Code. (q) "1934 ACT" means the Securities Exchange Act of 1934, as amended. (r) "OPTION" means an Award granted under Paragraph VII of the Plan and includes both Incentive Stock Options to purchase Common Stock and Options that do not constitute Incentive Stock Options to purchase Common Stock. (s) "OPTION AGREEMENT" means a written agreement between the Company and a Holder with respect to an Option. 2 3 (t) "PERFORMANCE AWARD" means an Award granted under Paragraph IX of the Plan. (u) "PERFORMANCE AWARD AGREEMENT" means a written agreement between the Company and a Holder with respect to a Performance Award. (v) "PLAN" means the Tom Brown, Inc. 1999 Long Term Incentive Plan, as amended from time to time. (w) "RESTRICTED STOCK AGREEMENT" means a written agreement between the Company and a Holder with respect to a Restricted Stock Award. (x) "RESTRICTED STOCK AWARD" means an Award granted under Paragraph VIII of the Plan. (y) "RULE 16B-3" means SEC Rule 16b-3 promulgated under the 1934 Act, as such may be amended from time to time, and any successor rule, regulation or statute fulfilling the same or a similar function. (z) "STOCK APPRECIATION RIGHT" shall have the meaning assigned to such term in Paragraph VII(d) of the Plan. III. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan shall become effective upon the date of its adoption by the Board, provided the Plan is approved by the stockholders of the Company within twelve months thereafter. Notwithstanding any provision in the Plan, no Option shall be exercisable and no Award shall vest or become satisfiable prior to such stockholder approval. No further Awards may be granted under the Plan after ten years from the date the Plan is adopted by the Board. The Plan shall remain in effect (at least for the purpose of governing outstanding Awards) until all Option Awards granted under the Plan have been exercised or expired, all Restricted Stock Awards granted under the Plan have vested or been forfeited, and all Performance Awards and Incentive Awards have been satisfied or have terminated. IV. ADMINISTRATION (a) COMPOSITION OF COMMITTEE. The Plan shall be administered by a committee of, and appointed by, the Board, and such committee shall be comprised solely of two or more outside Directors (within the meaning of the term "outside directors" as used in section 162(m) of the Code and applicable interpretive authority thereunder and within the meaning of "Non-Employee Director" as defined in Rule 16b-3). (b) POWERS. Subject to the express provisions of the Plan, the Committee shall have authority, in its sole discretion, to determine which Employees, Consultants, or Directors shall receive an Award, the time or times when such Award shall be made, whether an Incentive Stock Option or nonqualified Option shall be granted, and the number of shares to be subject to each Option or Restricted Stock Award, the number of shares subject to or the value of each Performance Award, and the value of each Incentive Award. In making such determinations, the Committee shall take into account the nature of the services rendered by the respective Employees, Consultants, or 3 4 Directors, their present and potential contribution to the Company's success and such other factors as the Committee in its sole discretion shall deem relevant. (c) ADDITIONAL POWERS. The Committee shall have such additional powers as are delegated to it by the other provisions of the Plan. Subject to the express provisions of the Plan, this shall include the power to construe the Plan and the respective agreements executed hereunder, to prescribe rules and regulations relating to the Plan, and to determine the terms, restrictions and provisions of the agreement relating to each Award, including such terms, restrictions and provisions as shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options, and to make all other determinations necessary or advisable for administering the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any agreement relating to an Award in the manner and to the extent it shall deem expedient to carry it into effect. The determinations of the Committee on the matters referred to in this Paragraph IV shall be conclusive. V. SHARES SUBJECT TO THE PLAN; GRANT OF OPTIONS; GRANT OF RESTRICTED STOCK AWARDS (a) SHARES SUBJECT TO THE PLAN AND AWARD LIMITS. Subject to adjustment in the same manner as provided in Paragraph XI with respect to shares of Common Stock subject to Options then outstanding, the aggregate number of shares of Common Stock that may be issued under the Plan shall not exceed 2,000,000 shares. Shares shall be deemed to have been issued under the Plan only to the extent actually issued and delivered pursuant to an Award. To the extent that an Award lapses, the rights of its Holder terminate, an Award is paid in cash or an Award is settled in a manner such that all or some of the shares of Common Stock covered by the Award are not issued to the Holder, any shares of Common Stock subject to such Award shall again be available for the grant of an Award under the Plan. Notwithstanding any provision in the Plan to the contrary, the maximum number of shares of Common Stock that may be subject to Awards granted to any one individual during the term of the Plan may not exceed 2,000,000 shares of Common Stock (subject to adjustment in the same manner as provided in Paragraph XI with respect to shares of Common Stock subject to Options then outstanding) and the maximum value of any Performance Award granted to any one individual during any calendar year may not exceed $500,000. The limitations set forth in the preceding sentence shall be applied in a manner which will permit compensation generated under the Plan to constitute "performance-based" compensation for purposes of section 162(m) of the Code, including, without limitation, counting against such maximum number of shares, to the extent required under section 162(m) of the Code and applicable interpretive authority thereunder, any shares subject to Options that are canceled or repriced. (b) GRANT OF AWARDS. The Committee may from time to time grant Awards to one or more Employees, Consultants, or Directors determined by it to be eligible for participation in the Plan in accordance with the terms of the Plan. (c) STOCK OFFERED. Subject to the limitations set forth in Paragraph V(a), the stock to be offered pursuant to the grant of an Award may be authorized but unissued Common Stock or Common Stock previously issued and outstanding and reacquired by the Company. Any of such shares which remain unissued and which are not subject to outstanding Awards at the termination of the Plan shall cease to be subject to the Plan but, until termination 4 5 of the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan. VI. ELIGIBILITY Awards may be granted only to persons who, at the time of grant, are Employees, Consultants, or Directors. An Award may be granted on more than one occasion to the same person, and, subject to the limitations set forth in the Plan, such Award may include an Incentive Stock Option, an Option that is not an Incentive Stock Option, a Restricted Stock Award, a Performance Award, an Incentive Award, or any combination thereof. VII. STOCK OPTIONS (a) OPTION PERIOD. The term of each Option shall be as specified by the Committee at the date of grant. (b) LIMITATIONS ON EXERCISE OF OPTION. An Option shall be exercisable in whole or in such installments and at such times as determined by the Committee. (c) SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS. An Incentive Stock Option may be granted only to an individual who is employed by the Company or any parent or subsidiary corporation (as defined in section 424 of the Code) at the time the Option is granted. To the extent that the aggregate Fair Market Value (determined at the time the respective Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options granted after 1986 are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of the Company and its parent and subsidiary corporations exceeds $100,000, such Incentive Stock Options shall be treated as Options which do not constitute Incentive Stock Options. The Committee shall determine, in accordance with applicable provisions of the Code, Treasury Regulations and other administrative pronouncements, which of a Holder's Incentive Stock Options will not constitute Incentive Stock Options because of such limitation and shall notify the Holder of such determination as soon as practicable after such determination. No Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporation, within the meaning of section 422(b)(6) of the Code, unless (i) at the time such Option is granted the option price is at least 110% of the Fair Market Value of the Common Stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. An Incentive Stock Option shall not be transferable otherwise than by will or the laws of descent and distribution, and shall be exercisable during the Holder's lifetime only by such Holder or the Holder's guardian or legal representative. (d) OPTION AGREEMENT. Each Option shall be evidenced by an Option Agreement in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve, including, without limitation, provisions to qualify an Incentive Stock Option under section 422 of the Code. Each Option Agreement shall specify the effect of termination of (i) employment, (ii) the consulting or advisory relationship, or (iii) membership on the Board, as applicable, on the exercisability of the Option. An Option Agreement 5 6 may provide for the payment of the option price, in whole or in part, by the delivery of a number of shares of Common Stock (plus cash if necessary) having a Fair Market Value equal to such option price. Moreover, an Option Agreement may provide for a "cashless exercise" of the Option by establishing procedures satisfactory to the Committee with respect thereto. Further, an Option Agreement may provide for the surrender of the right to purchase shares under the Option in return for a payment in cash or shares of Common Stock or a combination of cash and shares of Common Stock equal in value to the excess of the Fair Market Value of the shares with respect to which the right to purchase is surrendered over the option price therefor ("Stock Appreciation Rights"), on such terms and conditions as the Committee in its sole discretion may prescribe. In the case of any such Stock Appreciation Right that is granted in connection with an Incentive Stock Option, such right shall be exercisable only when the Fair Market Value of the Common Stock exceeds the price specified therefor in the Option or the portion thereof to be surrendered. Finally, the Committee (concurrently with the grant of an Option or subsequent to such grant) may, in its sole discretion, provide in an Option Agreement respecting an Option that, if the Holder pays the Option exercise price in shares of Common Stock, upon the date of such payment a new option shall be granted under this Plan or under another available plan and the number of shares of Common Stock subject to such new option shall be equal to the number of shares of Common Stock tendered in payment (plus the number of any shares of Common Stock respecting the exercised Option retained (not in excess of the minimum required) to satisfy any tax withholding obligations); provided that such new option shall not be exercisable in any event after the original term of the exercised Option. The terms and conditions of the respective Option Agreements need not be identical. (e) OPTION PRICE AND PAYMENT. The price at which a share of Common Stock may be purchased upon exercise of an Option shall be determined by the Committee but, subject to adjustment as provided in Paragraph XI shall not be less than the Fair Market Value of a share of Common Stock on the date such Option is granted. The Option or portion thereof may be exercised by delivery of an irrevocable notice of exercise to the Company, as specified by the Committee. The purchase price of the Option or portion thereof shall be paid in full in the manner prescribed by the Committee. Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of any Option that does not constitute an Incentive Stock Option. (f) STOCKHOLDER RIGHTS AND PRIVILEGES. The Holder shall be entitled to all the privileges and rights of a stockholder only with respect to such shares of Common Stock as have been purchased under the Option and for which certificates of stock have been registered in the Holder's name. (g) OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER CORPORATIONS. Options and Stock Appreciation Rights may be granted under the Plan from time to time in substitution for stock options held by individuals employed by corporations who become Employees as a result of a merger or consolidation or other business combination of the employing corporation with the Company or any subsidiary. 6 7 VIII. RESTRICTED STOCK AWARDS (a) FORFEITURE RESTRICTIONS TO BE ESTABLISHED BY THE COMMITTEE. Shares of Common Stock that are the subject of a Restricted Stock Award shall be subject to restrictions on disposition by the Holder and an obligation of the Holder to forfeit and surrender the shares to the Company under certain circumstances (the "Forfeiture Restrictions"). The Forfeiture Restrictions shall be determined by the Committee in its sole discretion, and the Committee may provide that the Forfeiture Restrictions shall lapse upon (i) the attainment of one or more performance measures established by the Committee that are based on (1) the price of a share of Common Stock, (2) the Company's earnings per share, (3) the Company's market share, (4) the market share of a business unit of the Company designated by the Committee, (5) the Company's sales, (6) the sales of a business unit of the Company designated by the Committee, (7) the net income (before or after taxes) of the Company or any business unit of the Company designated by the Committee, (8) the cash flow return on investment of the Company or any business unit of the Company designated by the Committee, (9) the earnings before or after interest, taxes, depreciation, and/or amortization of the Company or any business unit of the Company designated by the Committee, (10) the economic value added, or (11) the return on stockholders' equity achieved by the Company, (ii) the Holder's continued employment with the Company for a specified period of time, (iii) the occurrence of any event or the satisfaction of any other condition specified by the Committee in its sole discretion, or (iv) a combination of any of the foregoing. The performance measures may be subject to adjustment for specified significant extraordinary items or events, and may be absolute, relative to one or more other companies, or relative to one or more indexes, and may be contingent upon future performance of the Company or any subsidiary, division, or department thereof by or in which the Holder is employed during the performance period. Each Restricted Stock Award may have different Forfeiture Restrictions, in the sole discretion of the Committee. (b) OTHER TERMS AND CONDITIONS. Common Stock awarded pursuant to a Restricted Stock Award shall be represented by a stock certificate registered in the name of the Holder of such Restricted Stock Award. The Holder shall have the right to receive dividends with respect to Common Stock subject to a Restricted Stock Award, to vote Common Stock subject thereto and to enjoy all other stockholder rights, except that (i) the Holder shall not be entitled to delivery of the stock certificate until the Forfeiture Restrictions have expired, (ii) the Company shall retain custody of the stock until the Forfeiture Restrictions have expired, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the stock until the Forfeiture Restrictions have expired, and (iv) a breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Agreement shall cause a forfeiture of the Restricted Stock Award. At the time of such Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to Restricted Stock Awards, including, but not limited to, rules pertaining to the termination of employment or service as a Consultant or Director (by retirement, disability, death or otherwise) of a Holder prior to expiration of the Forfeitures Restrictions. Such additional terms, conditions or restrictions shall be set forth in a Restricted Stock Agreement made in conjunction with the Award. (c) PAYMENT FOR RESTRICTED STOCK. The Committee shall determine the amount and form of any payment for Common Stock received pursuant to a Restricted Stock Award, provided that in the absence of such a determination, a Holder shall not be required to make any payment for Common Stock received pursuant to a Restricted Stock Award, except to the extent otherwise required by law. 7 8 (d) COMMITTEE'S DISCRETION TO ACCELERATE VESTING OF RESTRICTED STOCK AWARDS. The Committee may, in its discretion and as of a date determined by the Committee, fully vest any or all Common Stock awarded to a Holder pursuant to a Restricted Stock Award and, upon such vesting, all restrictions applicable to such Restricted Stock Award shall terminate as of such date. Any action by the Committee pursuant to this Subparagraph may vary among individual Holders and may vary among the Restricted Stock Awards held by any individual Holder. Notwithstanding the preceding provisions of this Subparagraph, the Committee may not take any action described in this Subparagraph with respect to a Restricted Stock Award that has been granted to a "covered Employee" (within the meaning of Treasury Regulation section 1.162-27(c)(2)) if such Award has been designed to meet the exception for performance-based compensation under section 162(m) of the Code. (e) RESTRICTED STOCK AGREEMENTS. At the time any Award is made under this Paragraph VIII, the Company and the Holder shall enter into a Restricted Stock Agreement setting forth each of the matters contemplated hereby and such other matters as the Committee may determine to be appropriate. The terms and provisions of the respective Restricted Stock Agreements need not be identical. IX. PERFORMANCE AWARDS (a) PERFORMANCE PERIOD. The Committee shall establish, with respect to and at the time of each Performance Award, the number of shares of Common Stock subject to, or the maximum value of, the Performance Award and the performance period over which the performance applicable to the Performance Award shall be measured. (b) PERFORMANCE MEASURES. A Performance Award shall be awarded to a Holder contingent upon future performance of the Company or any subsidiary, division, or department thereof by or in which such Holder is employed during the performance period. The Committee shall establish the performance measures applicable to such performance prior to the beginning of the performance period; provided such measures may be made subject to adjustment for specified significant extraordinary items or events. The performance measures may be absolute, relative to one or more other companies, or relative to one or more indexes. The performance measures established by the Committee may be based upon (i) the price of a share of Common Stock, (ii) the Company's earnings per share, (iii) the Company's market share, (iv) the market share of a business unit of the Company designated by the Committee, (v) the Company's sales, (vi) the sales of a business unit of the Company designated by the Committee, (vii) the net income (before or after taxes) of the Company or any business unit of the Company designated by the Committee, (viii) the cash flow return on investment of the Company or any business unit of the Company designated by the Committee, (ix) the earnings before or after interest, taxes, depreciation, and/or amortization of the Company or any business unit of the Company designated by the Committee, (x) the economic value added, (xi) the return on stockholders' equity achieved by the Company, or (xii) a combination of any of the foregoing. The Committee, in its sole discretion, may provide for an adjustable Performance Award value based upon the level of achievement of performance measures. 8 9 (c) AWARDS CRITERIA. In determining the value of Performance Awards, the Committee shall take into account a Holder's responsibility level, performance, potential, other Awards, and such other considerations as it deems appropriate. The Committee, in its sole discretion, may provide for a reduction in the value of a Holder's Performance Award during the performance period. (d) PAYMENT. Following the end of the performance period, the Holder of a Performance Award shall be entitled to receive payment of an amount not exceeding the number of shares of Common Stock subject to or the maximum value of the Performance Award, based on the achievement of the performance measures for such performance period, as determined by the Committee. Payment of a Performance Award may be made in cash, Common Stock, or a combination thereof, as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee. If a Performance Award covering shares of Common Stock is to be paid in cash, such payment shall be based on the Fair Market Value of the Common Stock on the payment date. (e) TERMINATION OF AWARD. A Performance Award shall terminate if the Holder does not remain continuously in the employ or in service as a Consultant or Director of the Company at all times during the applicable performance period, except as may be determined by the Committee. (f) PERFORMANCE AWARD AGREEMENTS. At the time any Award is made under this Paragraph IX, the Company and the Holder shall enter into a Performance Award Agreement setting forth each of the matters contemplated hereby, and such additional matters as the Committee may determine to be appropriate. The terms and provisions of the respective Performance Award Agreements need not be identical. X. INCENTIVE AWARDS (a) INCENTIVE AWARDS. Incentive Awards are rights to receive shares of Common Stock (or the Fair Market Value thereof), or rights to receive an amount equal to any appreciation or increase in the Fair Market Value of Common Stock over a specified period of time, which vest over a period of time as established by the Committee, without satisfaction of any performance criteria or objectives. The Committee may, in its discretion, require payment or other conditions of the Holder respecting any Incentive Award. (b) AWARD PERIOD. The Committee shall establish, with respect to and at the time of each Incentive Award, a period over which the Award shall vest with respect to the Holder. (c) AWARDS CRITERIA. In determining the value of Incentive Awards, the Committee shall take into account a Holder's responsibility level, performance, potential, other Awards, and such other considerations as it deems appropriate. (d) PAYMENT. Following the end of the vesting period for an Incentive Award (or at such other time as the applicable Incentive Award Agreement may provide), the Holder of an Incentive Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Incentive Award, based on the then vested value of the Award. Payment of an Incentive Award may 9 10 be made in cash, Common Stock, or a combination thereof as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee. Any payment to be made in cash shall be based on the Fair Market Value of the Common Stock on the payment date. Cash dividend equivalents may be paid during or after the vesting period with respect to an Incentive Award, as determined by the Committee. (e) TERMINATION OF AWARD. An Incentive Award shall terminate if the Holder does not remain continuously in the employ or in service as a Consultant or Director of the Company at all times during the applicable vesting period, except as may be otherwise determined by the Committee. (f) INCENTIVE AWARD AGREEMENTS. At the time any Award is made under this Paragraph X, the Company and the Holder shall enter into an Incentive Award Agreement setting forth each of the matters contemplated hereby, and such additional matters as the Committee may determine to be appropriate. The terms and provisions of the respective Incentive Award Agreements need not be identical XI. RECAPITALIZATION OR REORGANIZATION (a) NO EFFECT ON RIGHT OR POWER. The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's or any subsidiary's capital structure or its business, any merger or consolidation of the Company or any subsidiary, any issue of debt or equity securities ahead of or affecting Common Stock or the rights thereof, the dissolution or liquidation of the Company or any subsidiary or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. (b) SUBDIVISION OR CONSOLIDATION OF SHARES; STOCK DIVIDENDS. The shares with respect to which Awards may be granted are shares of Common Stock as presently constituted, but if, and whenever, prior to the expiration of an Award theretofore granted, the Company shall effect a subdivision or consolidation of shares of Common Stock or the payment of a stock dividend on Common Stock without receipt of consideration by the Company, the number of shares of Common Stock with respect to which such Award may thereafter be exercised or satisfied, as applicable (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the purchase price per share shall be proportionately increased. Any factional share resulting from such adjustment shall be rounded down to the next whole share. (c) RECAPITALIZATIONS AND CORPORATE CHANGES. If the Company recapitalizes, reclassifies its capital stock, or otherwise changes its capital structure (a "recapitalization"), the number and class of shares of Common Stock covered by an Award theretofore granted shall be adjusted so that such Award shall thereafter cover the number and class of shares of stock and securities to which the Holder would have been entitled pursuant to the terms of the recapitalization 10 11 if, immediately prior to the recapitalization, the Holder had been the holder of record of the number of shares of Common Stock then covered by such Award. If (i) the Company shall not be the surviving entity in any merger or consolidation (or survives only as a subsidiary of an entity), (ii) the Company sells, leases or exchanges or agrees to sell, lease or exchange all or substantially all of its assets to any other person or entity, (iii) the Company is to be dissolved and liquidated, (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of the Company's voting stock (based upon voting power), or (v) as a result of or in connection with a contested election of Directors, the persons who were Directors of the Company before such election shall cease to constitute a majority of the Board (each such event is referred to herein as a "Corporate Change"), no later than (x) ten days after the approval by the stockholders of the Company of such merger, consolidation, reorganization, sale, lease or exchange of assets or dissolution or such election of Directors or (y) thirty days after a Corporate Change of the type described in clause (iv), the Committee, acting in its sole discretion without the consent or approval of any Holder, shall effect one or more of the following alternatives, which alternatives may vary among individual Holders and which may vary among Options held by any individual Holder: (1) accelerate the time at which Options then outstanding may be exercised so that such Options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by the Committee, after which specified date all unexercised Options and all rights of Holders thereunder shall terminate, (2) require the mandatory surrender to the Company by selected Holders of some or all of the outstanding Options held by such Holders (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date, before or after such Corporate Change, specified by the Committee, in which event the Committee shall thereupon cancel such Options and the Company shall pay (or cause to be paid) to each Holder an amount of cash per share equal to the excess, if any, of the amount calculated in Subparagraph (d) below (the "Change of Control Value") of the shares subject to such Option over the exercise price(s) under such Options for such shares, (3) make such adjustments to Options then outstanding as the Committee deems appropriate to reflect such Corporate Change (provided, however, that the Committee may determine in its sole discretion that no adjustment is necessary to Options then outstanding), or (4) provide that the number and class of shares of Common Stock covered by an Option theretofore granted shall be adjusted so that such Option shall thereafter cover the number and class of shares of stock or other securities or property (including, without limitation, cash) to which the Holder would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets and dissolution, the Holder had been the holder of record of the number of shares of Common Stock then covered by such Option. (d) CHANGE OF CONTROL VALUE. For the purposes of clause (2) in Subparagraph (c) above, the "Change of Control Value" shall equal the amount determined in clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per share price offered to stockholders of the Company in any such merger, consolidation, sale of assets or dissolution transaction, (ii) the price per share offered to stockholders of the Company in any tender offer or exchange offer whereby a Corporate Change takes place, or (iii) if such Corporate Change occurs other than pursuant to a tender or exchange offer, the Fair Market Value per share of the shares into which such Options being surrendered are exercisable, as determined by the Committee as of the date determined by the Committee to be the date of cancellation and surrender of such Options. In the event that the consideration offered to 11 12 stockholders of the Company in any transaction described in this Subparagraph (d) or Subparagraph (c) above consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash. (e) OTHER CHANGES IN THE COMMON STOCK. In the event of changes in the outstanding Common Stock by reason of recapitalizations, reorganizations, mergers, consolidations, combinations, split-ups, split-offs, spin-offs, exchanges or other relevant changes in capitalization or distributions to the holders of Common Stock occurring after the date of the grant of any Award and not otherwise provided for by this Paragraph XI, such Award and any agreement evidencing such Award shall be subject to adjustment by the Committee at its sole discretion as to the number and price of shares of Common Stock or other consideration subject to such Award. In the event of any such change in the outstanding Common Stock or distribution to the holders of Common Stock, the aggregate number of shares available under the Plan and the maximum number of shares that may be subject to Awards granted to any one individual may be appropriately adjusted by the Committee, whose determination shall be conclusive. (f) STOCKHOLDER ACTION. Any adjustment provided for in the above Subparagraphs shall be subject to any required stockholder action. (g) NO ADJUSTMENTS UNLESS OTHERWISE PROVIDED. Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Common Stock subject to Awards theretofore granted or the purchase price per share, if applicable. XII AMENDMENT AND TERMINATION OF THE PLAN Subject to the last sentence of Paragraph III, the Board in its discretion may terminate the Plan at any time. The Board shall have the right to alter or amend the Plan or any part thereof from time to time; provided that no change in any Award theretofore granted may be made which would impair the rights of the Holder without the consent of the Holder, and provided, further, that the Board may not, without approval of the stockholders, amend the Plan to (a) increase the maximum aggregate number of shares that may be issued under the Plan or (b) change the class of individuals eligible to receive Awards under the Plan. 12 13 XIII MISCELLANEOUS (a) NO RIGHT TO AN AWARD. Neither the adoption of the Plan nor any action of the Board or of the Committee shall be deemed to give an Employee, Consultant, or Director any right to be granted an Option, a right to a Restricted Stock Award, a right to a Performance Award or a right to an Incentive Award, or any other rights hereunder except as may be evidenced by an Award agreement duly executed on behalf of the Company, and then only to the extent and on the terms and conditions expressly set forth therein. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of funds or assets to assure the performance of its obligations under any Award. (b) NO EMPLOYMENT/MEMBERSHIP RIGHTS CONFERRED. Nothing contained in the Plan shall (i) confer upon any Employee or Consultant any right with respect to continuation of employment or of a consulting or advisory relationship with the Company or any subsidiary or (ii) interfere in any way with the right of the Company or any subsidiary to terminate his or her employment or consulting or advisory relationship at any time. Nothing contained in the Plan shall confer upon any Director any right with respect to continuation of membership on the Board. (c) OTHER LAWS; WITHHOLDING. The Company shall not be obligated to issue any Common Stock pursuant to any Award granted under the Plan at any time when the shares covered by such Award have not been registered under the Securities Act of 1933, as amended, and such other state and federal laws, rules and regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules and regulations available for the issuance and sale of such shares. No fractional shares of Common Stock shall be delivered, nor shall any cash in lieu of fractional shares be paid. The Company shall have the right to deduct in connection with all Awards any taxes required by law to be withheld and to require any payments required to enable it to satisfy its withholding obligations. (d) NO RESTRICTION ON CORPORATE ACTION. Nothing contained in the Plan shall be construed to prevent the Company or any subsidiary from taking any corporate action which is deemed by the Company or such subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Award made under the Plan. No Employee, Consultant, Director, beneficiary or other person shall have any claim against the Company or any subsidiary as a result of any such action. (e) RESTRICTIONS ON TRANSFER. An Award (other than an Incentive Stock Option, which shall be subject to the transfer restrictions set forth in Paragraph VII(c)) shall not be transferable otherwise than (i) by will or the laws of descent and distribution, (ii) pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder, (iii) with respect to Option Awards other than Incentive Stock Options, if such transfer is permitted in the sole discretion of the Committee, by transfer by a Holder to a member of the Holder's Immediate Family, to a trust solely for the benefit of the Holder and the Holder's Immediate Family, or to a partnership or limited liability company whose only partners or shareholders are the Holder and members of the Holder's Immediate Family, with the consent of the Committee, or (iv) with the consent of the Committee. 13 14 (f) SECTION 162(m). It is intended that the Plan comply fully with and meet all the requirements of section 162(m) of the Code so that Options and Performance Awards granted hereunder and, if determined by the Committee, Restricted Stock Awards shall constitute "performance-based" compensation within the meaning of such section. If any provision of the Plan would disqualify the Plan or would not otherwise permit the Plan to comply with section 162(m) as so intended, such provision shall be construed or deemed amended to conform to the requirements or provisions of section 162(m); provided that no such construction or amendment shall have an adverse effect on the economic value to a Holder of any Award previously granted hereunder. (g) GOVERNING LAW. THE PLAN SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE. 14 EX-10.13 4 401(K) RETIREMENT PLAN 1 EXHIBIT 10.13 TOM BROWN, INC. 401(k) RETIREMENT PLAN The TOM BROWN, INC. 401(k) Retirement Plan ("this Plan") is adopted as of January 1, 2000, by TOM BROWN, INC., a corporation. TOM BROWN, INC. provides its employees a means to accumulate voluntary savings for their retirement years; and This Plan is adopted to provide: 1. Name of Plan; Effective Date. This Plan is known as the TOM BROWN, INC. 401(k) Retirement Plan. This Plan is effective as of January 1, 2000 and is a restatement of the TOM BROWN, INC. KSOP effective January 1, 1996. 2. Definitions. In this Plan: 2.1 "Anniversary Date" is the last day of a Plan Year. 2.2 "Code" is the Internal Revenue Code of 1986, as amended, and its Regulations. 2.3 "Committee" is the Committee in Section 14. 2.4 "Company" is TOM BROWN, INC.. Any corporation a member of a controlled group of corporations with TOM BROWN, INC. or an affiliate may also sponsor this Plan if such corporation is designated by TOM BROWN, INC. as a sponsoring employer and such corporation agrees to this Plan. 2.5 "Compensation" is all of each Participant's W-2 earnings, but excluding taxable fringe benefits (such as car allowances and moving expenses). Compensation includes only that Compensation actually paid to the Participant during the Plan Year. Notwithstanding the above, Compensation includes any amount contributed by TOM BROWN, INC. to a salary reduction agreement not includible in the gross income of the Employee by Code Section 125, Code Section 401(k), Code Section 402(e)(3), Code Section 402(h) or Code Section 403(b). The annual Compensation of each Participant does not exceed $150,000, as adjusted for increases in the cost of living in Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, for which compensation is determined (determination period) beginning in such calendar year. If a determination period is less than 12 months, ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 1 of 41 2 the annual compensation limit is multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. 2.6 "Computation Period" is the 12-consecutive month period beginning with the Employee's Employment Beginning Date (or, if applicable, his Re-Employment Beginning Date) and the succeeding 12-consecutive month periods beginning on the anniversaries of that beginning date. 2.7 "Disability" is a Participant's physical or mental condition from bodily injury, disease or mental disorder that renders him incapable of continuing any gainful occupation and constitutes total disability by a medically determinable physical or mental impairment expected to result in death or to be of long, continued and indefinite duration. A licensed physician chosen by the Committee determines a Participant's disability. 2.8 "Employee" is any person employed by TOM BROWN, INC. or a sponsoring employer. Employee also includes any Leased Employee deemed to be an Employee by Code Section 414(n) or Code Section 414(o) but only to the extent necessary to meet the requirements of Code Section 414(n)(3). "Employee" excludes: A. Individuals hired on a temporary basis and not expected to complete at least 1,000 Hours of Service during the applicable Computation Period; B. Individuals whose employment is governed by a collective bargaining agreement between TOM BROWN, INC. and employee representatives by which retirement benefits were the subject of good faith bargaining; and C. Non-resident aliens who receive no earned income (in Code Section 911(d)(2)) from TOM BROWN, INC. constituting income from sources within the United States (in Code Section 861(a)(3)). 2.9 "Employment Beginning Date" is the date the Employee first performs an Hour of Service for TOM BROWN, INC.. "Re-Employment Beginning Date" is the date an Employee who was previously employed by the Employer but whose employment terminated from a One-Year Break in Service first completes an Hour of Service for TOM BROWN, INC. after the last applicable Computation Period he incurred a One-Year Break in Service. 2.10 "Fund" or "Funds" is the investment fund or funds established and maintained by the Trustee for this Plan by subsection 8.1. 2.11 "Highly Compensated Employee" is any Employee who (A) was a 5% owner (in Code Section 416(I)(1)) of TOM BROWN, INC. at any time during the current or the preceding Plan Year, or (B) for the preceding Plan Year, ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 2 of 41 3 A. had Compensation in excess of $80,000 (as adjusted by the Secretary by Code Section 415(d), with a base period of the calendar quarter ending September 30, 1996), and B. if TOM BROWN, INC. elects, was in the top-paid group of Employees for such preceding year. An Employee is in the top-paid group of Employees for any year if such Employee is in the group of the top 20% of the Employees when ranked on the basis of Compensation paid during such year. A former employee is treated as a highly compensated employee if: (A) such Employee was a highly compensated employee when such Employee separated from Service, or (B) such Employee was a highly compensated employee at any time after age 55. The determination of who is a highly compensated employee, including the determinations of the number and identity of Employees in the top-paid group, is made by Code Section 414(q). For this subsection, the term "Compensation" means compensation in Code Section 415(c)(3). 2.12 "Hour of Service" is each hour an Employee is directly or indirectly paid, or entitled to payment, by TOM BROWN, INC. for the performance of duties (credited for the computation period in which the duties were performed), each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by TOM BROWN, INC. (credited for the computation period to which the award or agreement pertains), and each hour for which an Employee is directly or indirectly paid, or entitled to payment, by TOM BROWN, INC. for reasons (such as vacation, sickness, disability, holidays, paid layoff and similar paid periods of nonworking time) other than the performance of duties (credited for the computation period in which such period of nonworking time first occurs). For an Employee who is absent from work for any period for - A. the pregnancy of the Employee; B. the birth of a child of the Employee; C. for the placement of a child with the Employee for the adoption of such child by such Employee, or D. for the caring for such child for a period beginning immediately following such birth or placement, solely to determine whether a One-Year Break in Service occurs, such Employee is credited with the Hours of Service which otherwise is credited to such Employee but for such absence. If the Plan Administrator is unable to determine the Hours of Service for such ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 3 of 41 4 an absence, the Employee is credited with 8 Hours of Service for each normal workday of such absence. No credit for Hours of Service are granted for an absence described in this subsection if the Employee does not timely provide information required by the Plan Administrator to reasonably establish whether the Employee was absent from work for a reason in this subsection and to establish the number of days for which there was such an absence. Hours of Service credited by this subsection are credited only in the Plan Year in which the absence from work begins (if the Employee is prevented from incurring a One-Year Break in Service in such year solely because the Employee is credited with Hours of Service by this subsection), or in any other case, in the immediately following Plan Year. No more than 501 Hours of Service are credited to an Employee for any single continuous period the Employee performs no duties. In addition, the rules in Labor Reg ss. 2530.200b-2(b) and Labor Reg ss. 2530.200b-2(c) apply to determine Hours of Service. An Hour of Service for any member of a controlled group of corporations or any member of an affiliated service group (Code Section 414(b), Code Section 414(m) or Code Section 414(o)) of which TOM BROWN, INC. is a member, or for an unincorporated trade or business in common control with TOM BROWN, INC. (in Code Section 414(c)) or any other entity required to be aggregated with TOM BROWN, INC. by Code Section 414(o) are credited as an Hour of Service with TOM BROWN, INC.. 2.13 "Income" is the income allocable to "excess contributions" or "excess aggregate contributions" in subsection 7.2 below, for the Plan Year in which such excess contribution is made. The amount of income attributable to such excess contributions is determined by the Committee in a reasonable and consistent manner. Income does not include income allocable to excess contributions for the Plan Year the excess contribution is returned to the Participant. 2.14 "Non-Highly Compensated Employee" is an Employee who is not a Highly Compensated Employee. 2.15 "Normal Retirement Age" is age 65. 2.16 "One-Year Break in Service" is a Computation Period in which the Employee completes 500 or less Hours of Service. 2.17 "Participating Employee" and "Participant" is any Employee of Tom Brown, Inc. eligible to participate in TOM BROWN, INC. contributions. "Beneficiary" is a person who becomes eligible to participate and for whom an account is maintained by the Trustee, but who ceases to be an Employee of TOM BROWN, INC., or a person entitled to benefits in this Plan as beneficiary of a deceased Participating ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 4 of 41 5 Employee or as beneficiary of a deceased Beneficiary. 2.18 "this Plan" is the TOM BROWN, INC. 401(k) Retirement Plan, as amended. 2.19 "Plan Year" is the calendar year. 2.20 "Pooled Investment Account" is an account established by an administrative services agreement between TOM BROWN, INC. and Trustee. 2.21 "Qualified Non-Elective Contribution" is TOM BROWN, INC.'S contributions made by subsection 7.2. Such contributions are a Salary Reduction Contribution and are used to satisfy the "Actual Deferral Percentage" tests. In addition, TOM BROWN, INC.'S contributions made for subsection 7.2 used to satisfy the "Actual Contribution Percentage" tests are Qualified Non-Elective Contributions and subject to subsection 5.1A. and Section 6. 2.22 "Service" is employment with TOM BROWN, INC. including leaves of absence authorized by TOM BROWN, INC. (such as a temporary absence authorized by TOM BROWN, INC. for vacation, sickness, injury, disability, layoff, or jury duty) and service in the armed forces of the United States, beginning while he is an Employee, if he returns to the employment of TOM BROWN, INC. at the end of such authorized absence, or within the applicable period specified in the Military Selective Service Act of 1967, and its amendments, after release from such service with the armed forces. In calculating the number of a Participant's Vesting Years of Service and length of participation in this Plan, such period of absence or service with the armed forces subsequent to becoming a Participant, are counted. However, no Contributions are made during such periods of absence or service with the armed forces. TOM BROWN, INC.'S leave of absence policy is applied in a uniform and non-discriminatory manner for all Participants in similar circumstances. Any period of Service as a sole proprietor or partner of a predecessor business organization prior to becoming an Employee is taken into consideration as Service for this Plan. 2.23 "Trust" is the TOM BROWN, INC. 401(k) Retirement Plan Trust entered into between TOM BROWN, INC. and the Trustee. 2.24 "Trustee" is the Trustee or Trustees appointed from time to time by TOM BROWN, INC. to accept contributions, administer the assets of the Trust, and otherwise to act by this Plan and the Trust. 2.25 "Valuation Date" is any day that the New York Stock Exchange is open for business or any other date chosen by the Committee. 2.26 "Vesting Year of Service" is the completion of at least 1,000 Hours of Service ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 5 of 41 6 during the applicable Computation Period. An individual's entire Service is counted in computing his Vesting Years of Service even if the individual is not in a class of employees qualifying such individual as an "Employee" in subsection 2.9. To determine a Participant's vested interest at his resumption of Service after a One-Year Break in Service, a Vesting Year of Service is determined the same as a Vesting Year of Service for Participants with no prior Service, except the applicable Computation Period for measuring his Vesting Years of Service following such break begins on the Participant's Re-Employment Beginning Date instead of on his Employment Beginning Date. 2.27 Number; Gender. Where necessary or appropriate, the singular includes the plural, the plural includes the singular, the masculine includes the feminine and neuter, the feminine includes the masculine and neuter, and the neuter includes the masculine and feminine. 3. Purpose. This Plan is created to enable eligible TOM BROWN, INC. Employees to defer a portion of their compensation until retirement and to potentially share in any TOM BROWN, INC. discretionary contributions. Except by Section 26. below, no part of the principal or income of this Plan is paid to or reinvested in TOM BROWN, INC., or used for any purpose other than the exclusive benefit of such Employees and their Beneficiaries. All discretionary acts taken by TOM BROWN, INC., Plan Administrator or Committee are uniform in their nature and application to all persons similarly situated, and no discretionary acts are taken which are discriminatory by the Code or the Employee Retirement Income Security Act of 1974, for employees' profit-sharing trusts, as amended. 4. Plan Entry Requirements. Each Employee of TOM BROWN, INC. shall enter the Plan and become a Participant immediately upon employment. An Employee who meets the entry requirements may elect not to participate in this Plan by giving TOM BROWN, INC. written notice of his or her election not to be included as a Participant. Such election remains in effect until the Employee gives TOM BROWN, INC. written notice of his or her election to become a Participant. An Employee who meet the eligibility requirements but who has incurs a One-Year Break in Service is eligible to re-enter this Plan on the first day of the calendar month after his return. If an Employee who is not a member of an eligible class of employees becomes a member of an eligible class, such employee participates immediately if such Employee satisfies the minimum age requirement and would have otherwise previously become a Participant. If a temporary employee who was not expected to complete 1,000 Hours of Service in a ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 6 of 41 7 Computation Period actually completes 1,000 Hours of Service during an applicable Computation Period, he is deemed an Employee in an eligible class as of the first day of the applicable Computation Period in which he first completes 1,000 Hours of Service (or, if later, his attainment of age 18). If the eligibility of any person to participate in the Plan is disputed, the decision of the Committee for such eligibility is controlling. To enable the Committee to make such determination, all information available to TOM BROWN, INC. required by the Committee shall be made available to the Committee. 5. Contributions. Subject to subsections 5.3 and 5.4 below, contributions to this Plan are made as follows: 5.1 Salary Reduction Contributions. Each Participant may elect to enter into a salary reduction agreement with TOM BROWN, INC. to accept a reduction in salary from TOM BROWN, INC. (such reduction not to be less than 2% nor greater than 15% of the Participant's Compensation for any Plan Year). For such agreement, TOM BROWN, INC. makes a salary reduction contribution to the Participant's Salary Reduction Contribution Account for the Participant for such Plan Year in an amount equal to the total amount by which the Participant's Compensation from TOM BROWN, INC. is reduced during the Plan Year by the salary reduction agreement. TOM BROWN, INC. Contributions for a given Plan Year for salary reduction agreements are deposited with the Trustee within a reasonable amount of time, not more than 90 days after the date such funds are withheld from the Participant's salary. Salary reduction contributions are governed by the following: A. Amounts credited to a Participant's Salary Reduction Account are 100% vested and nonforfeitable at all times. B. Amounts credited to a Participant's Salary Reduction Account are considered a contribution made by TOM BROWN, INC. for subsections 8.8, 8.9 and 19.2. C. A salary reduction agreement may provide for a reduction in salary by means of reducing the Participant's payroll on a periodic basis or the agreement may provide for lump sum reductions for any compensation payments in such amounts that do not cause the limitations of Section 7. and subsections 8.8, or 8.9 to be exceeded. D. A salary reduction agreement for reductions to a Participant's periodic payroll may be cancelled at any time by a Participant by giving TOM BROWN, INC. a written notice, specifying the effective date of the cancellation. A Participant may change the rate of his salary reduction at such times, and with such frequency, as determined by the Committee. ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 7 of 41 8 E. TOM BROWN, INC. may refrain from making contributions to this Plan, for the salary reduction agreement entered into by the Participant, if TOM BROWN, INC. determines that such action is necessary to insure that the Participant's annual additions for any Plan Year do not exceed the limitations of subsections 8.8 or 8.9, or to insure that the Actual Deferral Percentage Test in Section 7. is met for such Plan Year. TOM BROWN, INC. may pay to the Participant the amount that otherwise would have been paid prior to the Participant's election to reduce his salary, rather than as a contribution made for a salary reduction agreement. F. The maximum salary reduction is $7,000 (or such higher amount in Code Section 402(g)) by all plans maintained by TOM BROWN, INC. for any Employee's taxable year. 5.2 Matching Company Contributions. During the Plan Year, TOM BROWN, INC. contributes on behalf of each Participant who enters into a salary reduction agreement, any discretionary "periodic" TOM BROWN, INC. Matching Contribution is announced by the TOM BROWN, INC. Board. The periodic TOM BROWN, INC. Matching Contribution, if any, is determined by TOM BROWN, INC. and announced to all Participants. The resolution sets forth the amount of the periodic TOM BROWN, INC. Matching Contribution expressed as a percentage of the amount of each Participant's Salary Reduction Contribution. Further, the resolution may limit the amount of a Participant's Salary Reduction Contribution eligible for a periodic TOM BROWN, INC. Matching Contribution, by limiting the Salary Reduction Contribution expressed as a fixed dollar amount or as a percentage of the Participant's Compensation. The periodic TOM BROWN, INC. Matching Contribution is deposited for each deposit of Salary Reduction Contributions at the end of each quarter. In addition, TOM BROWN, INC. may contribute to the Plan on behalf of each Participant who is eligible to share in "year-end" TOM BROWN, INC. Matching Contributions, a discretionary year-end TOM BROWN, INC. Matching Contribution. The TOM BROWN, INC. Matching Contribution is expressed as a fixed dollar amount or as a percentage of the amount of each Participant's Salary Reduction Contribution. Further, the resolution may limit the amount of a Participant's Salary Reduction Contribution eligible for the year-end TOM BROWN, INC. Matching Contribution, by limiting the Salary Reduction Contribution expressed as a fixed dollar amount or as a percentage of the Participant's Compensation. 5.3 Discretionary TOM BROWN, INC. Contributions. By the time for filing its federal income tax return (including extensions thereof) for its current taxable year and for each succeeding taxable year, TOM BROWN, INC. may contribute to this Plan, as its contribution for the Plan Year ending within or co-terminous with such taxable year of TOM BROWN, INC., to be held in trust, administered and distributed by the terms of this Plan, an amount or amounts TOM BROWN, INC., in its sole discretion determines. TOM BROWN, INC. may contribute such amount or amounts at any time; ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 8 of 41 9 and it may make such contribution in 2 or more installments. TOM BROWN, INC. determines and communicates to the Trustee for each Plan Year either (i) the amount in dollars to be contributed for such year, or (ii) a formula by which such amount may be determined. These contributions are totally in TOM BROWN, INC.'s discretion as to amount, timing and form, and they need not be limited to TOM BROWN, INC.'s profits. Nothing in this Plan entitles any Trustee, Participating Employee or Beneficiary to inquire into or demand the right to inspect TOM BROWN, INC.'s books or records. 5.4 Rollover Contributions. An Employee, whether or not he would otherwise be a Participant in the Plan, may contribute a "Rollover Contribution" to this Plan by delivery of such contribution to the Trustee if such Employee submits a written certification that such contribution qualifies as a Rollover Contribution. For this subsection 5.3 or 5.4, for an amount to qualify for contribution by an Employee as a Rollover Contribution, it must: A. represent a distribution to such Employee from a plan qualified by Code Section 401, and not paid to him: (1) as a required minimum distribution by Code Section 401(a)(9), or (2) as one of a series of substantially equal periodic payments made on the life expectancy of the Employee (or joint life expectancy of the Employee and a designated beneficiary) or over a specified period of 10 years or more; or B. represent the balance to his credit of a conduit Individual Retirement Account or similar account or annuity, unless such balance is derived in any part from a previous rollover of a partial qualified plan contribution; and (in either the case of compliance with subparagraph A. above or this subparagraph B.); and C. be contributed to this Plan within 60 days following distribution of such amount to the Employee. An amount does not qualify as a Rollover Contribution if it includes any amount which the Employee contributed to a Code Section 401 plan. A Rollover Contribution is considered as a part of the account of the contributing Employee in this Plan, is fully vested and nonforfeitable, and is accounted for separately from TOM BROWN, INC. contributions. A Participant may also arrange for the direct transfer of his benefit from a Code Section 401 plan to this Plan. For accounting and record keeping, transfer contributions are identical to Rollover Contributions. ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 9 of 41 10 Contributions, benefits and service credit for qualified military service are provided by Code Section 414(u). 60 Withdrawals. 6.1 Age 59-1/2. A Participant age 59-1/2 may withdraw all or any portion of his Salary Reduction Contribution Account and/or his Rollover Account by notifying the Committee of his election to make such a withdrawal. Further, a Participant age 59-1/2 and satisfying the requirements for full 100% vesting may withdraw all or any portion of his Matching TOM BROWN, INC. Contribution Account and/or his] TOM BROWN, INC. Discretionary Contribution Account by notifying the Committee of his election to make such a withdrawal. Distribution may be made to the electing Participant, but only if the spousal consent in subsection 10.6 is satisfied. 6.2 Hardship. If a Participant not more than age 59-1/2 has a serious financial hardship, such Participant may withdraw a portion of his Salary Reduction Contribution Account and/or Rollover Account. Hardship distributions are made from the Salary Reduction Contribution Account, if available, and then from the Rollover Account. Whether a serious financial hardship exists is based on all relevant facts and circumstances. A need is not disqualified because it was reasonably foreseeable or voluntarily incurred. Withdrawal by this subsection 6.2 is authorized only if the distribution is for: A. Medical expenses in Code Section 213(d) incurred by the Participant, his spouse, or any of his dependents (in Code Section 152); B. The purchase (excluding mortgage payments) of a principal residence for the Participant; C. 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 D. The need to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence. 6.3 Conditions for Hardship Distribution. No distribution is made by subsection 6.2 unless the Committee, based upon the Participant's representation and other facts known to the Committee, determines that the following conditions are satisfied: A. The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant; and B. The Participant has obtained all distributions, other than hardship ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 10 of 41 11 distributions, and all nontaxable loans currently available by TOM BROWN, INC. maintained plans. 6.4 Available Other Resources. No distribution is made by subsection 6.2 unless the Committee determines, based upon all relevant facts and circumstances, that the amount to be distributed is not in excess of the amount required to relieve the financial need and that such need cannot be satisfied from other resources reasonably available to the Participant. The Participant's resources are deemed to include those assets of his spouse and minor children that are reasonably available to the Participant. A distribution may be treated as necessary to satisfy a financial need if the Committee relies on the Participant's representation that the need cannot be relieved: A. Through reimbursement or compensation by insurance or otherwise; B. By reasonable liquidation of the Participant's assets, to the extent such liquidation would not itself cause an immediate and heavy financial need; C. By stopping of Salary Reduction Contributions and voluntary Employee contributions, if available, to this Plan; or D. By other distributions or loans from this Plan, if available, or any other qualified retirement plan, or by borrowing from commercial sources on reasonable commercial terms. Any Participant who elects a hardship distribution by subsection 6.2 may not enter into a salary reduction agreement for any Compensation received during the one-year period beginning with the date of such hardship distribution. 70 Special Nondiscrimination Testing. 7.1 Actual Deferral Percentage Tests. For each Plan Year the Plan shall satisfy one of the following tests: A. The "Actual Deferral Percentage" for the Highly Compensated Employee group is not more than the "Actual Deferral Percentage" of the Non-Highly Compensated Employee group multiplied by 1.25, or B. The excess of the "Actual Deferral Percentage" for the Highly Compensated Employee group over the "Actual Deferral Percentage" for the Non-Highly Compensated Employee group is not more than two percentage points. Additionally, the "Actual Deferral Percentage" for the Highly Compensated Employee group does not exceed the "Actual Deferral Percentage" for the Non-Highly Compensated Employee group multiplied by 2. Code Section 401(k)(3) and Reg ss. 1.401(k)-1(b) are incorporated herein by reference. ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 11 of 41 12 "Actual Deferral Percentage" means, for the Highly Compensated Employee group and Non-Highly Compensated Employee group for a Plan Year, the average of the ratios, calculated separately for each Participant in such group, of the amount of Salary Reduction Contributions allocated to each Participant's Salary Reduction Contribution Account for such Plan Year to such Participant's Compensation for such Plan Year. In performing the nondiscrimination testing, the Actual Deferral Percentage for the Highly Compensated Employee group is determined for the current Plan Year, and the Actual Deferral Percentage for the Non-Highly Compensated Employee group is determined for the current Plan Year. For the first Plan Year (if this Plan is not a successor plan), the amount taken into account as the Actual Deferral Percentage for the Non-Highly Compensated Employee group for the current Plan Year is 3% or, at TOM BROWN, INC.'S election, the Actual Deferral Percentage for the first Plan Year. The actual deferral ratio for each Participant and the "Actual Deferral Percentage" for each group are calculated to the nearest one-hundredth of one percent. A Highly Compensated Employee and a Non-Highly Compensated Employee include any Employee eligible to make a Salary Reduction Contribution, whether or not such deferral election is made or suspended. For this subsection and Code Section 401(a)(4), Code Section 410(b) and Code Section 401(k), if two or more plans which include cash or deferred arrangements are considered one plan for Code Section 410(a)(4) or Code Section 410(b) (other than Code Section 410(b)(2)(A)(ii)), the cash or deferred arrangements included in such plans are treated as one arrangement. In addition, two or more cash or deferred arrangements may be considered as a single arrangement to determine whether or not such arrangements are treated as one arrangement and as one plan for this subsection and Code Section 401(a)(4), Code Section 410(b) and Code Section 401(k). Plans may be aggregated by this subsection only if they have the same plan year. An employee stock ownership plan in Code Section 4975(e)(7) may not be combined with this Plan to determine whether the employee stock ownership plan or this Plan satisfies this subsection, Code Section 401(a)(4), Code Section 410(b) and Code Section 401(k). If a Highly Compensated Employee is a Participant in two or more cash or deferred arrangements of TOM BROWN, INC., all such cash or deferred arrangements are treated as one cash or deferred arrangement to determine the actual deferral ratio for such Highly Compensated Employee. However, if the cash or deferred arrangements have different Plan Years, this paragraph is applied by treating all cash or deferred arrangements ending with or within the same calendar year as a single arrangement. ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 12 of 41 13 7.2 Actual Contribution Percentage Tests. For each Plan Year, this Plan shall satisfy one of the following tests: A. The "Actual Contribution Percentage" for the Highly Compensated Employee group is not more than the "Actual Contribution Percentage" of the Non-Highly Compensated Employee group multiplied by 1.25, or B. The excess of the "Actual Contribution Percentage" for the Highly Compensated Employee group over the "Actual Contribution Percentage" for the Non-Highly Compensated Employee group is not more than two percentage points. Additionally, the "Actual Contribution Percentage" for the Highly Compensated Employee group does not exceed the "Actual Contribution Percentage" for the Non-Highly Compensated Employee group multiplied by 2. However, to prevent the multiple use of the alternative method (2) described in this subsection and Code Section 401(m)(9)(A), any Highly Compensated Employee eligible to make Salary Reduction Contributions or to receive Matching TOM BROWN, INC. Contributions by this Plan has his actual contribution ratio reduced by Reg Section 1.401(m)-2. Code Section 401(m) and Reg Section 1.401(m)-1(b) and Reg Section 1.401(m)-2 are incorporated here by reference. "Actual Contribution Percentage" for a Plan Year is, for the Highly Compensated Employee group and the Non-Highly Compensated Employee group, the same as Actual Deferral Percentage in subsection 7.1, but substituting "Matching TOM BROWN, INC. Contributions" for "Salary Reduction Contributions." In performing the nondiscrimination testing required by this subsecton 7.2, the Actual Contribution Percentage for the Highly Compensated Employee group is determined for the current Plan Year, and the Actual contribution Percentage for the Non-Highly Compensated Employee group is determined for the current Plan Year. For the first Plan Year (if this Plan is not a successor plan), the amount taken into account as the Actual Contribution Percentage for the Non-Highly Compensated Employee group for the prior Plan Year is 3% or, at the Employer's election, the Actual Contribution Percentage for that first Plan Year. To determine the "Actual Contribution Percentage" and the amount of Excess Aggregate Contributions pursuant to subsection 7.2, only TOM BROWN, INC. Matching Contributions contributed to this Plan prior to the end of the succeeding Plan Year are considered. C. Adjustment to Actual Deferral Percentage Tests. If the initial allocations of the Salary Reduction Contributions do not satisfy one of the ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 13 of 41 14 tests set forth in subsection 7.1, TOM BROWN, INC. shall correct for Excess Contributions (i.e., Salary Reduction Contributions in excess of the limits established by the tests set forth in subsection 7.1) by either or a combination of the options forth below: (3) On or before the 15th day of the 3rd month after the end of each Plan Year, the Highly Compensated Employee with the highest Salary Reduction Contributions for that Plan Year shall have his portion of Excess Contributions distributed to him until one of the tests set forth in subsection 7.1 is satisfied, or until his Salary Reduction Contributions for that Plan Year equal the Salary Reduction Contributions for that Plan Year of the Highly Compensated Employee having the second highest Salary Reduction Contributions for that Plan Year. This process continues until all Excess Contributions are distributed. For each Highly Compensated Employee, the amount of Excess Contributions is equal to the Salary Reduction Contributions for such Highly Compensated Employee (determined prior to the application of this paragraph) minus the amount determined by multiplying the Highly Compensated Employee's actual deferral ratio (determined after application of this paragraph) by his Compensation. However, to determine the amount of Excess Contributions to be distributed for an affected Highly Compensated Employee, such amount is reduced by any Salary Reduction Contributions previously distributed to such affected Highly Compensated Employee for his taxable year ending with or within such Plan Year. If the distribution of Excess Contributions is made, the test provided in Code Section 401(k)(3) is deemed to be met regardless of whether the test provided in subsection 7.1, if recalculated after distribution of the Excess Contributions, satisfies Code Section 401(k)(3). For Code Section 401(m)(9), if a corrective distribution of Excess Contributions is made, or a recharacterization occurs, the Actual Deferral Percentage for Highly Compensated Employees is deemed to be the largest amount permitted by Code Section 401(k)(3). For the distribution of Excess Contributions as described above, such distribution: (a) may be postponed but not later than the close of the succeeding Plan Year; (b) is adjusted for Income; and (c) is designated by TOM BROWN, INC. as a distribution of Excess Contributions (and Income). ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 14 of 41 15 D. Within 12 months after the end of the Plan Year, TOM BROWN, INC. shall make a special Qualified Non-Elective Contribution for participating Non-Highly Compensated Employees sufficient to satisfy one of the tests in subsection 7.1. Such contribution shall be allocated to the Participant's Salary Reduction Contribution Account of each Non-Highly Compensated Employee in the same proportion that each participating Non-Highly Compensated Employee's Compensation for the year bears to the total Compensation of all participating Non-Highly Compensated Employees. E. Safe Harbor Nondiscrimination Rules. Notwithstanding subsection 7.1, for Plan Years beginning after 1998, the test in Code Section 401(k)(3) is met if this Plan meets both the Notice Requirement and the Contribution Requirements. The Notice Requirement is met if each Employee eligible to participate in this Plan is, within a reasonable period before any Plan Year, given written notice of the Employee's rights and obligations by this Plan. The notice must be sufficiently accurate and comprehensive to apprise the Employee of such rights and obligations, and be written in a manner to be understood by the average Employee eligible to participate. The Contribution Requirements are met if (i) the Matching Contribution Requirement is met, or (ii) TOM BROWN, INC. is required to make a nonelective contribution of at least 3% of an Employee's Compensation to a defined compensation plan on behalf of each Non-Highly Compensated Employee who is eligible to participate in this Plan whether or not such Employee makes a Salary Reduction Contribution. The Matching Contribution Requirement is met if TOM BROWN, INC. makes Matching Contributions for each Non-Highly Compensated Employee equal to 100% of the Salary Reduction Contribution of the Employee to the extent such Salary Reduction Contributions does not exceed 3% of the Employee's Compensation, and 50% of the Salary Reduction Contribution to the extent that such Salary Reduction Contribution exceeds 3% of Compensation, but does not exceed 5% of Compensation. The rate of Matching Contributions for Highly Compensated Employees cannot be greater than the rate of Matching Contributions for Non-Highly Compensated Employees at any rate of Salary Reduction Contributions. If the rate of Matching Contribution is not equal to the percentage required by the Matching Contribution Requirement, this Plan will nevertheless meet the Matching Contribution Requirement if the rate of Matching Contributions does not increase as an Employee's rate of Salary Reduction Contributions increases, and the aggregate amount of Matching Contributions at such rate is equal to or greater than the aggregate amount of Matching Contributions which would be made if Matching Contributions were made on the basis of the percentages specified above. F. Adjustment to Actual Contribution Percentage Tests. If the "Actual Contribution Percentage" for the Highly Compensated Employee group exceeds the "Actual Contribution Percentage" for the Non-Highly Compensated Employee group by subsection 7.2, the Administrator (on or before the 15th day of the 3rd month following the end of the Plan Year, but ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 15 of 41 16 not later than the close of the following Plan Year) directs the Trustee to distribute to the Highly Compensated Employee with the highest Matching TOM BROWN, INC. Contributions for that Plan Year, his portion of Excess Aggregate Contributions (i.e., Matching TOM BROWN, INC. Contributions in excess of the limits established by the tests in subsection 7.2) and Income allocable to such contributions or, if forfeitable, forfeit such non-Vested Excess Aggregate Contributions attributable to Matching TOM BROWN, INC. Contributions (and Income allocable to such Forfeitures) until his Matching TOM BROWN, INC. Contributions for that Plan Year equal the Matching TOM BROWN, INC. Contributions for that Plan Year of the Highly Compensated Employee having the second highest Matching TOM BROWN, INC. Contributions for that Plan Year. This process continues until all Excess Aggregate Contributions are distributed. Any distribution and/or Forfeiture of less than the entire amount of Excess Aggregate Contributions (and Income) is treated as a pro rata distribution and/or Forfeiture of Excess Aggregate Contributions and Income. Distribution of Excess Aggregate Contributions are designated by TOM BROWN, INC. as a distribution of Excess Aggregate Contributions (and Income). Forfeitures of Excess Aggregate Contributions are treated by subsection 9.4. However, no such Forfeiture may be allocated to a Highly Compensated Employee whose contributions are reduced by this subparagraph. Excess Aggregate Contributions are treated as TOM BROWN, INC. contributions for Code Section 404 and Code Section 415 even if distributed from this Plan. For each Highly Compensated Employee, the amount of Excess Aggregate Contributions is equal to the Matching TOM BROWN, INC. Contributions made by subsection 5.2 (determined prior to the application of this paragraph) minus the amount determined by multiplying the Highly Compensated Employee's actual contribution ratio (determined after application of this paragraph) by his Gross Compensation. The actual contribution ratio is rounded to the nearest one-hundredth of one percent. The amount of Excess Contribution for any Highly Compensated Employee shall not exceed the amount of Matching TOM BROWN, INC. Contributions made by subsection 5.2 for such Highly Compensated Employee for such Plan Year. If the distribution of Excess Aggregate Contributions is made, the test in Code Section 401(m)(2) is deemed to be met regardless of whether the test in subsection 7.2, if recalculated after distribution of the Excess Aggregate Contributions, would satisfy Code Section 401(m)(2). For Code Section 401(m)(9), if a corrective distribution of Excess Aggregate Contributions is made, the Actual Contribution Percentage for Highly Compensated Employees is deemed to be the largest amount permitted by Code Section 401(m)(2). ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 16 of 41 17 G. Safe Harbor Nondiscrimination Rules. This subparagraph applies for Plan years beginning after 1998. (4) Salary Reduction Contribution Safe Harbor. Notwithstanding subsection 7.1, the test in Code Section 401(k)(3) is met if the Plan meets both the Notice Requirement and the Contribution Requirements. The Notice Requirement is met if each Employee eligible to participate in the Plan is, within a reasonable period before any Plan Year, given written notice of the Employee's rights and obligations in this Plan. The notice must be sufficiently accurate and comprehensive to apprise the Employee of such rights and obligations, and be written in a manner calculated to be understood by the average Employee eligible to participate. The Contribution Requirements are met if (i) the Matching Contribution Requirement is met or (ii) TOM BROWN, INC. is required to make a nonelective contribution of at least 3% of an Employee's Compensation to a defined compensation plan for each Non-Highly Compensated Employee eligible to participate in this Plan whether or not such Employee makes a Salary Reduction Contribution. The Matching Contribution Requirement is met if TOM BROWN, INC. makes Matching Contributions for each Non-Highly Compensated Employee in an amount equal to 100% of the Salary Reduction Contribution of the Employee to the extent such Salary Reduction Contributions do not exceed 3% of the Employee's Compensation, and 50% of the Salary Reduction Contribution to the extent that such Salary Reduction Contribution exceeds 3% of Compensation, but does not exceed 5% of Compensation. The rate of Matching Contributions for Highly Compensated Employees cannot be greater than the rate of Matching Contributions for Non-Highly Compensated Employees at any rate of Salary Reduction Contributions. If the rate of Matching Contribution is not equal to the percentage required by the Matching Contribution Requirement, this Plan will nevertheless meet the Matching Contribution Requirement if the rate of Matching Contributions does not increase as an Employee's rate of Salary Reduction Contributions increases, and the aggregate amount of Matching Contributions at such rate is equal to or greater than the aggregate amount of Matching Contributions which would be made if Matching Contributions were made on the basis of such percentages. (5) Matching TOM BROWN, INC. Contribution Safe Harbor. Notwithstanding the terms of subsection 7.2, the test in Code Section 401(m)(2) is met if this Plan meets the Notice Requirement and the Contribution Requirements described in subparagraph (1) above, and the Special Limitation on Matching Contributions. ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 17 of 41 18 The Special Limitation on Matching Contributions is met if (i) Matching Contributions for any Employee may not be made for an Employee's Salary Reduction Contributions in excess of 6% of the Employee's Compensation, (ii) the rate of Employer Matching Contributions does not increase as the rate of an Employee's Salary Reduction Contributions increases, and (iii) the Matching Contribution for any Highly Compensated Employee at any rate of Employee contribution or rate of Salary Reduction Contribution is not greater than that for a Non-Highly Compensated Employee. 8. Selection of Investments; Employee Accounts and Allocation of Benefits. 8.3 Establishment of Investment Funds. For each Plan Year, the Committee may designate and describe 1 or more investment funds available for the allocation of Participants' accounts. Subject to Section 13., the Trustee has the responsibility to decide the allocation of contributions made to the available Funds. TOM BROWN, INC. may delegate this responsibility to each Participant in a consistent and nondiscriminatory manner. If TOM BROWN, INC. so delegates the investment responsibility to Participants, each Participating Employee has the opportunity to designate how his account is allocated among the available Funds, by subsection 8.2. 8.4 Selections. The designation by a Participant of the allocation of his account among the available investment funds may be made from time to time, with such frequency and by such procedures as established by the Committee and applied in a uniform nondiscriminatory manner. Any such procedure is communicated to the Participants and designed to permit the Participants to exercise control over the assets in their respective accounts in Code Section 404(c) of the Employee Retirement Income Security Act. If and to the extent that a Participant does not designate an allocation of his account by this subsection 8.2, the Committee selects a Fund or Funds to which such amount is allocated. Otherwise, the Committee instructs the Trustee to allocate and invest the assets of the Trust by the Participant's selections. If and to the extent that the account of a Participant or Beneficiary is directed by this subsection 8.2, no person who is otherwise a fiduciary is liable to the directing Participant or Beneficiary for any particular loss, for failure to diversify assets, or otherwise in such directed investment. No investment is directed by a Participant or Beneficiary, nor made by the Trustee even if so directed, which directly or indirectly inures to the benefit of TOM BROWN, INC. or which constitutes a prohibited transaction. 8.5 Separate Records. The Trustee maintains a separate account in the name of each Participating Employee and each Beneficiary having a share in the Trust. Separate records are kept of: A. the portion of each Participating Employee's share or account from ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 18 of 41 19 TOM BROWN, INC. contributions for a salary reduction agreement (such amounts to be recorded in a "Salary Reduction Contribution Account"); B. the portion of each Participating Employee's share or account from Matching TOM BROWN, INC. Contributions intended to supplement amounts contributed by a salary reduction agreement (such amount to be recorded in a "Matching TOM BROWN, INC. Contribution Account"); C. the portion of each Participating Employee's share or account from TOM BROWN, INC.'s Discretionary Contributions (such amounts to be recorded in a "TOM BROWN, INC. Discretionary Contribution Account"). D. the portion of each Participating Employee's share or account from the Participating Employee's Rollover Contribution (such amount to be recorded in a "Rollover Contribution Account"). References to the "share" or "account" of a Participating Employee, the word "share" or "account" where the context so permits, are deemed to refer severally to the Salary Reduction Contribution Account, TOM BROWN, INC. Discretionary Contribution Account, and the Rollover Contribution Account, each such account being adjusted for income and expense credited or charged as hereinafter described. 8.6 Allocation of Income and Expenses. As of each Valuation Date, all income of this Plan for the period since the preceding Valuation Date is credited to, and all losses and expenses of this Plan for such period are charged to, the various Accounts maintained by the Trustee for the Participating Employees and Beneficiaries. Such credits and charges are made in proportion to the value of the respective Participating Employee and Beneficiary Accounts as of the preceding Valuation Date (after recording all credits and charges otherwise made based on Account balances as of the preceding Valuation Date). Further, the Trustee may adjust in a nondiscriminatory and consistent manner the credits and charges otherwise made based on Account balances as of the preceding Valuation Date to take into account inter-Fund transfers, periodic contributions for Participants, repayments of Participant loans or borrowing by Participants, Rollover contributions, or any other transactions occurring since the preceding Valuation Date. Any loan extended by the Trustee to a Participant pursuant to Section 11 is deemed, for allocation of income, as an earmarked investment made for such Participant's benefit. All interest or other earnings attributable to such loan is allocated and credited exclusively to the account of the Participant to whom such loan was made. 8.7 Revaluation of Assets. As of each Valuation Date, the Trustee revalues the various Accounts maintained by the Trustee for the Participating Employees and Beneficiaries, so that such Employee and Beneficiary Accounts reflect any increase ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 19 of 41 20 or decrease in fair market value of the assets of the Trust as of such date. Any such increase or decrease in market value is apportioned in the same manner that income, expenses, and losses are to be apportioned by the provisions of this Section 8. 8.8 Unit Accounting. Notwithstanding the accounting procedures described in subsections 8.4 and 8.5, the Committee may, for administrative purposes, instruct the Trustee to establish unit values for one or more Funds (or any portion thereof) and maintain the accounts setting forth each Participant's interest in such Fund (or any portion thereof) in terms of such units, all by such rules and procedures as the Committee deems to be fair, equitable and administratively practicable. Any Pooled Investment Service Agreement so designed and adopted, is incorporated by reference. If unit accounting is established for any Fund (or any portion thereof) the value of a Participant's interest in such Fund at any time is an amount equal to the then value of a unit in such Fund (or any portion thereof) multiplied by the number of units then credited to the Participant. 8.9 Allocation of Contributions. There is credited to the Salary Reduction Contribution Account of each Participant, from TOM BROWN, INC.'S current contribution, an amount equal to the amount set forth in the salary reduction agreement in effect with such Participant. At the end of each quarter, there is credited to the Matching TOM BROWN, INC. Contribution Account of each Participant who makes Salary Reduction Contributions, an amount equal to the periodic TOM BROWN, INC. Matching Contribution. As of the Anniversary Date ending each Plan Year for which Tom Brown, Inc. makes a year-end TOM BROWN, INC. Matching Contribution, there is credited to the Matching TOM BROWN, INC. Contribution Account of each Participant who entered into a salary reduction agreement for such year. As of the Anniversary Date ending each Plan Year for which TOM BROWN, INC. makes a Discretionary contribution, there is credited to the Tom Brown, Inc. Discretionary Account of each Participating Employee, an amount which bears the same ratio to the total of TOM BROWN, INC.'s Profit-Sharing Contribution as such Employee's Compensation for such year bears to the aggregate of the Compensation of all Participating Employees for such year. For a Participating Employee entitled to have credited to his account a portion of a TOM BROWN, INC. Discretionary contribution for such year but whose employment is terminated after the close of such year and before such contribution is made to this Plan and such credit effected, such credit is effected as though such Employee's employment does not terminate. In addition, from time to time there is credited to the Rollover Contribution Account of each Employee the amounts contributed by him to this Plan which is a Rollover ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 20 of 41 21 Contribution. 8.10 Limitation on Annual Additions. If the Participant does not participate in, and has never participated in another qualified plan maintained by TOM BROWN, INC. that has an annual addition as defined in subparagraph 8.10A., the amount of annual additions credited to the Participant's account for any limitation year does not exceed the lesser of the maximum permissible amount or any other limitation contained in this Plan. If the TOM BROWN, INC. contribution that would otherwise be contributed or allocated to the Participant's account causes the annual additions for the limitation year to exceed the maximum permissible amount, the amount contributed or allocated is reduced so that the annual additions for the limitation year equal the maximum permissible amount. Prior to determining the Participant's actual Compensation for the limitation year, TOM BROWN, INC. may determine the maximum permissible amount for a Participant on a reasonable estimate of the Participant's Compensation for the limitation year, uniformly determined for all Participants similarly situated. As soon as administratively feasible after the end of the limitation year, the maximum permissible amount for the limitation year is determined on the basis of the Participant's actual Compensation for the limitation year. If as a result of forfeitures or as a result of exceeding the maximum permissible amount there is an excess amount, the excess will be disposed of as follows: A. Any contributions by a salary reduction agreement, to the extent they reduce the excess amount, are returned to the Participant; B. If after the application of subparagraph A. an excess amount still exists, and the Participant is a Participant in this Plan at the end of the limitation year, the excess amount in the Participant's account is used to reduce TOM BROWN, INC. contributions (including any allocation of forfeitures) for such Participant in the next limitation year, and each succeeding limitation year if necessary; C. If after the application of subparagraph A. an excess amount still exists, and the Participant is not a Participant in this Plan at the end of a limitation year, the excess amount is held unallocated in a suspense account. The suspense account is applied to reduce TOM BROWN, INC. contributions for all remaining Participants in the next limitation year, and each succeeding limitation year if necessary; and D. If a suspense account is in existence at any time during a limitation year by this subsection, it does not participate in the allocation of this Plan's 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 are allocated and reallocated to Participants' accounts before any TOM BROWN, INC. or Employee contributions are made to this Plan for that limitation year. Excess amounts are not distributed to Participants or former ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 21 of 41 22 Participants. 8.11 Combination With Other Plans. This subsection applies if, in addition to this Plan, the Participant is a Participant in another qualified defined contribution plan maintained by TOM BROWN, INC., a welfare benefit fund (in Code Section 419(e)) maintained by TOM BROWN, INC., or an individual medical account (in Code Section 415(1)(2)), maintained by TOM BROWN, INC., which provides an annual addition in subsection 8.10F., during any limitation year. The annual additions credited to a Participant's account by this Plan for any such limitation year do not exceed the maximum permissible amount reduced by the annual additions credited to a Participant's account by the other plans and welfare benefit funds for the same limitation year. If the annual additions for the Participant in other defined contribution plans and welfare benefit funds maintained by TOM BROWN, INC. are less than the maximum permissible amount and TOM BROWN, INC. contribution that would otherwise be contributed or allocated to the Participant's account by this Plan causes the annual additions for the limitation year to exceed this limitation, the amount contributed or allocated is reduced so that the annual additions by all such plans and funds for the limitation year equal the maximum permissible amount. If the annual additions for the Participant by such other defined contribution plans and welfare benefit funds in the aggregate are equal to or greater than the maximum permissible amount, no amount is contributed or allocated to the Participant's account by this Plan for the limitation year. Prior to determining the Participant's actual compensation for the limitation year, TOM BROWN, INC. may determine the maximum permissible amount for a Participant as described in subsection 8.8. As soon as is administratively feasible after the end of the limitation year, the maximum permissible amount for the limitation year is determined on the basis of the Participant's actual Compensation for the limitation year. If forfeitures, or the excess over the maximum permissible amount, cause a Participant's annual additions in this Plan and such other plans cause an excess amount for a limitation year, the excess amount is deemed to consist of the annual additions last allocated, except annual additions attributable to a welfare benefit fund or individual medical account are deemed allocated first regardless of the actual allocation date. If an excess amount is 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 is the product of: A. the total excess amount allocated as of such date, times B. the ratio of (i) the annual additions allocated to the Participant for the limitation year as of such date by this Plan to (ii) the total annual additions allocated to the Participant for the limitation year as of such date by this and all the other qualified defined contribution plans. Any excess amount attributed to this Plan is disposed by subsection 8.8. ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 22 of 41 23 For limitation years beginning before 2000, if TOM BROWN, INC. maintains, or at any time maintained, a qualified defined benefit plan covering any Participant in this Plan, the sum of the Participant's defined benefit plan fraction and defined contribution plan fraction shall not exceed 1.0 in any limitation year. The annual additions credited to the Participant's account by this Plan for any limitation year are reduced or limited by the Trustee in a uniform and nondiscriminatory manner to effect the foregoing limitation. 8.12 Code Section 415 Definitions. A. Annual additions are the sum of the following amounts credited to a Participant's account for the limitation year: (6) Employer contributions, (7) Employee contributions, and (8) forfeitures. Any excess amount applied by subsections 8.8 or 8.9 in the limitation year to reduce TOM BROWN, INC. contributions are considered annual additions for such limitation year. B. Compensation. A Participant's wages, salaries, and fees for professional services and other amounts received for personal services actually rendered in the employment with TOM BROWN, INC. (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips and bonuses), and including any elective deferral (in Code Section 402(g)(3)), and any amount contributed or deferred by TOM BROWN, INC. at the election of the Employee and not includible in the gross income of the Employee by Code Section 125 or Code Section 457, but excluding the following: (9) Any distributions from a plan of deferred compensation; (10) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (11) Amounts realized from the sale, exchange or other disposition of stock acquired by a qualified stock option; and (12) Other amounts which received special tax benefits, or contributions made by TOM BROWN, INC. (whether or not by a salary reduction agreement) towards the purchase of an annuity described in Code Section 403(b) (whether or not the amounts are actually excludible from the gross income of the Employee). ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 23 of 41 24 For applying the limitations of this Section, Compensation for a limitation year is the Compensation actually paid or includible in gross income during such limitation year. Notwithstanding the preceding sentence, Compensation for a Participant in a defined contribution plan who is Disabled 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 Disabled; such imputed Compensation for the Disabled Participant may be taken into account only if the Participant is not a Highly Compensated Employee and contributions made on behalf of such Participant are nonforfeitable when made. C. Defined benefit fraction is a fraction, the numerator of which is the sum of the Participant's projected annual benefits by all the defined benefit plans (whether or not terminated) maintained by TOM BROWN, INC., and the denominator of which is the lesser of 125% of the dollar limitation determined for the limitation year by Code Section 415(b) and Code Section 415(d) or 140% of the highest average compensation, including any adjustments by Code Section 415(b). D. Defined contribution dollar limitation is $30,000. E. Defined contribution fraction is a fraction, the numerator of which is the sum of the annual additions to the Participant's account by all the defined contribution plans (whether or not terminated) maintained by TOM BROWN, INC. for the current and all prior limitation years (including the annual additions attributable to the Participant's nondeductible employee contributions to all defined benefit plans, whether or not terminated, maintained by TOM BROWN, INC., and the annual additions attributable to all welfare benefit funds (in Code Section 419(e)), and individual medical accounts (in Code Section 415(1)(2)), maintained by TOM BROWN, INC.), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior limitation Years of Service with TOM BROWN, INC. (regardless of whether a defined contribution plan was maintained by TOM BROWN, INC.). The maximum aggregate amount in any limitation year is the lesser of 125% of the dollar limitation in Code Section 415(b) and Code Section 415(d) in effect by Code Section 415(c)(1)(A) or 35% of the Participant's Compensation for such year. F. Employer. Subparagraphs 8.8, 8.9 and 8.10 apply to TOM BROWN, INC., and all members of a controlled group of corporations (in Code Section 414(b) as modified by Code Section 415(h)), all commonly controlled trades or businesses (in Code Section 414(c) as modified by Code Section 415(h)) or affiliated service groups (in Code Section 414(m)) of which TOM BROWN, INC. is a part, and any other entity required to be aggregated with TOM ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 24 of 41 25 BROWN, INC. by Code Section 414(o). G. Excess amount is the excess of the Participant's annual additions for the limitation year over the maximum permissible amount. H. Highest average compensation is the average compensation for the 3 consecutive Years of Service with TOM BROWN, INC. that produces the highest average. I. Limitation year is a calendar year, or the 12-consecutive month period elected by TOM BROWN, INC.. J. Maximum permissible amount. The maximum annual addition that may be contributed or allocated to a Participant's account by this Plan for any limitation year shall not exceed the lesser of: (13 the defined contribution dollar limitation, or (14 25% of the Participant's Compensation for the limitation year. The Compensation limitation referred to in (2) does not apply to any contribution for medical benefits (in Code Section 401(h) or Code Section 419A(f)(2)) otherwise treated as an annual addition by Code Section 415(l)(1) or Code Section 419A(d)(2). If a short limitation year is created by an amendment changing the limitation year to a different 12-consecutive month period, the maximum permissible amount does not exceed the defined contribution dollar limitation multiplied by the following fraction: Number of months in the short limitation year --------------------------------------------- 12 K. Projected Annual Benefit is the annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity) or qualified joint and survivor annuity to which the Participant is entitled by this Plan assuming: (1 the Participant continues employment until Normal Retirement Age by the Plan (or current age, if later), and (2 the Participant's Compensation for the current limitation year and all other relevant factors used to determine benefits by the Plan remains constant for all future limitation years. 9. Retirement and Severance. 9.1 Normal Retirement, Etc. When a Participant reaches the Normal Retirement ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 25 of 41 26 Age of 65, such Participant's account is fully vested and nonforfeitable. If the employment of a Participating Employee terminates at any time from the death or Disability of such Participating Employee, such Participant's account is fully vested and nonforfeitable from and after the date of termination of employment. Payment of benefits by this Plan to or on behalf of such Participant is made by Section 10. 9.2 Vested Benefits; Termination of Employment. The portion of a Participating Employee's share in this Plan allocated to the Salary Reduction Contribution Account and the Rollover Contribution Account is at all times fully and immediately vested in such Employee. This portion, together with the vested portion of TOM BROWN, INC. Discretionary Contribution Account, determined by the schedule set forth below, depending upon such Participant's Vesting Years of Service completed to the date of termination of employment is paid to or on behalf of such Participant as provided by this Plan. The vesting schedule applicable to a Participant's TOM BROWN, INC. Discretionary Contribution Account shall be as follows: Vested Vesting Years of Service Percentage Less than 2 years 20% 2 or more, but less than 3 40% 3 or more, but less than 4 60% 4 or more, but less than 5 80% 5 years or more 100% Any amount not vested by the foregoing vesting schedule constitutes a Forfeiture as of the date of termination of employment, and applied by subsection 9.4. For a terminated Participating Employee who incurs 5 consecutive One-Year Breaks in Service, Vesting Years of Service after such break are not taken into account to determine the vested percentage of his account accrued prior to such 5 consecutive One-Year Breaks in Service. For a Participating Employee whose interest in this Plan is distributed on termination of participation and is not repaid by subsection 9.3 below, any Service after the distribution date does not increase the amount of the Participant's non-forfeitable benefit in this Plan as computed at the time of distribution. Separate accounts for the pre-break and post-break portions of such person's interest in this Plan are maintained, if and to the extent necessary to properly reflect this subsection. 9.3 Restoration of Vesting Service and Forfeited Amounts. Any amount forfeited by subsection 9.2 is restored to the credit of a former Participant who previously terminated employment by: A. A former Participant resumes employment with TOM BROWN, INC. and becomes eligible to re-enter the Plan by subsection 9.2 before having ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 26 of 41 27 received a distribution from this Plan; or B. A former Participant who received a distribution from this Plan resumes employment with TOM BROWN, INC. and becomes eligible to re-enter this Plan by subsection 9.2 before incurring 5 consecutive One-Year Breaks in Service, and repays to this Plan the full amount of the distribution previously received (unadjusted by any later gains or losses). Such repayment must be made before the Anniversary Date ending the Plan Year within which the Participant incurs a 5th consecutive One-Year Break in Service. If a restoration of previously forfeited amounts occurs because of the circumstance in subparagraph A., the prior amount of forfeiture is restored with adjustment for any subsequent gains or losses, as determined by the Committee. If a restoration of previously forfeited amounts occurs because of the circumstance described in subparagraph B., the prior amount of forfeiture is restored without adjustment for any subsequent gains or losses. If a Participant terminates employment with TOM BROWN, INC. at a time when his vested account balance is zero, he is deemed to receive a distribution of his vested account balance and treated as a former Participant in subparagraph B. On re-entry into this Plan, such a Participant has his previously forfeited amount restored without adjustment for any subsequent gains or losses. Funds needed in any Plan Year to reinstate the amount previously forfeited by a re-employed Participant are provided first by Forfeitures occurring during that Plan Year, and second, if necessary, by TOM BROWN, INC. by a separate Plan contribution. If a previously forfeited amount is later restored by this subsection, upon a subsequent termination of employment, the Participant's vested interest is determined by the foregoing vesting schedule as if no previous separation from service occurs. 9.4 Treatment of Forfeitures. The nonvested portion of a Participant's account by the Plan is a Forfeiture. Any such Forfeiture for a TOM BROWN, INC. Discretionary Contribution Account is reallocated to the accounts of those persons who, on the Anniversary Date ending the Plan Year during which the Forfeiture occurs are eligible to participate in TOM BROWN, INC. Discretionary contributions for such Plan Year, and is allocated as TOM BROWN, INC. Discretionary contributions to this Plan are allocated by subsection 8.7. Any such Forfeiture of a Participant's Matching TOM BROWN, INC. Contribution Account is used to reduce the Company's Matching TOM BROWN, INC. Contributions to this Plan, and are not used to increase the benefits of the Participants and Beneficiaries. 10. Distribution of Benefits. ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 27 of 41 28 10.1 Normal Form of Payment. The normal form of distribution of benefits by this Plan to an unmarried Participant who retires or whose employment with TOM BROWN, INC. is otherwise terminated is a single life annuity. The normal form of distribution of benefits by this Plan to a married Participant who retires or whose employment with TOM BROWN, INC. is otherwise terminated, is a qualified Joint and Survivor Annuity. The Qualified Joint and Survivor Annuity consists of an immediate annuity for the life of the Participating Employee, with a survivor annuity for the life of his or her spouse which is equal to 50% of the amount of the annuity payable during the joint lives of the Participating Employee and the spouse, and which is the actuarial equivalent of a single annuity for the life of the Participating Employee. Payment of the normal form of benefit begins as of the first day of the month after the Participant's attainment of Normal Retirement Age, unless subsection 10.5 applies, when case distribution is immediate in the form of a cash lump sum. Notwithstanding the foregoing, the Participant may elect to have such annuity distributed as soon as administratively feasible after termination of employment, if the Participant and the Participant's spouse consent to the distribution. If there is an effective waiver of the Qualified Joint and Survivor Annuity form of payment, by subsection 10.6, the amount payable to the Participating Employee (or his or her Beneficiary) is paid by subsection 10.2. 10.2 Alternative Form of Payment. If there is an effective waiver of the normal form of payment of benefits by subsection 10.1, a Participant's benefit is paid in a cash lump sum or any annuity form of payment available to Participants by subsection 10.2. A Participant who terminates employment after attaining Normal Retirement Age receives or begins to receive his benefit within 60 days after the Anniversary Date after his termination of employment. A Participant who terminates employment prior to his attaining Normal Retirement Age has the option to receive, at his or her election, a distribution of his or her entire benefit to begin as soon as administratively feasible after the Participant's termination of employment with TOM BROWN, INC.. 10.3 Other Rules for Beginning and Duration of Benefits. The entire interest in this Plan of any Participating Employee must be, or begin to be, distributed before the required beginning date. For a Participant who is not a 5% owner, the required beginning date is the April 1 of the calendar year following the later of (i) the calendar year the Participant attains age 70-1/2, or (ii) the calendar year the Participant retires. The required beginning date for a Participant who is a 5% owner (in Code Section 416(i)) is April 1 of the calendar year following the calendar year the Participant attains age 70-1/2. Benefits are distributed over a period not to exceed the life of the Participant, the life of the Participant and his designated Beneficiary, the life expectancy of the Participating Employee, or the joint life expectancy of the Participating Employee and his designated Beneficiary. If the Participant's entire interest is to be distributed ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 28 of 41 29 in a form other than a lump sum, the amount to be distributed each year must be at least equal in amount to the quotient obtained by dividing the Participant's entire interest by the lesser of (i) the applicable life expectancy (ii) if the Participant's spouse is not the designated Beneficiary, the applicable divisor from the table set forth in Q&A-4 of Prop Reg ss. 1.401(a)(9)-2. For this computation, the life expectancy of the Participant may be recalculated no more frequently than annually, but the life expectancy of a nonspouse Beneficiary may not be recalculated. Payments shall not be delayed in violation of Code Section 401(a)(14). 10.4 Death Benefits; Beneficiary Designation; Distribution of Death Benefits. If a Participant dies, his accrued benefit is paid in full as soon as practicable to his surviving spouse, as his Beneficiary. Distribution is made as an immediate single life annuity unless the surviving spouse otherwise elects to receive payment in the form of a single cash lump sum. Notwithstanding the foregoing, however, a Participant may designate a Beneficiary other than the Participant's spouse if (1) the spouse has waived his or her right to be the Participant's Beneficiary by this subsection 10.4; or (2) the Participant has no spouse; or (3) the spouse cannot be located. The designation of a Beneficiary, other than a spouse, is made on a form satisfactory to TOM BROWN, INC.. 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 TOM BROWN, INC.. However, the Participant's spouse must again consent in writing to any such change or revocation. Any consent by the Participant's spouse to waive any rights to the death benefit must be in writing, must acknowledge the effect of such waiver, and be witnessed by a Plan representative or a notary public. If no valid designation of Beneficiary exists at the Participant's death, and the Participant has no surviving spouse, the death benefit is payable to his estate. If payments are made to a non-spouse Beneficiary, because of a Participant's death (or the death of a Participant's spouse), the entire interest of the Participant is distributed to such Beneficiary within 5 years after such death. 10.5 Small Distributions. Notwithstanding the normal form of payment of benefits as a Qualified Joint and Survivor Annuity, and the distribution of death benefits as a single life annuity to the Participating Employee's surviving spouse, the Trustee makes distribution of the present value of such annuity (or other benefit available by the Plan) in cash if the value of such annuity or other benefit does not exceed, nor has ever exceeded, $5,000. 10.6 Waiver of Form of Benefit; Notification. A Participant may, during the Applicable Election Period, (i) elect to waive the Qualified Joint and Survivor Annuity form of benefit, and (ii) elect an alternate Beneficiary. A Participant may revoke any such election any number of times within the Applicable Election Period. Such elections do not take effect unless (i) the spouse of the Participant consents in writing to such election, and the spouse's consent acknowledges the effect of such ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 29 of 41 30 election and is witnessed by a Plan representative or a notary public, or (ii) it is established to the satisfaction of a Plan representative that such consent may not be obtained because there is no spouse, because the spouse cannot be located, or because of such other circumstances as are prescribed by regulations of the Secretary of Treasury. Any consent by a spouse (or establishment that the consent of a spouse may not be obtained) is effective only for such spouse and is limited to a specific alternate Beneficiary (or a form of benefits) unless such consent expressly permits designations by the Participant without any requirement of further consent by the spouse. Without such a provision, any new waiver or change of Beneficiary requires a new spousal consent. For this subsection, the term "Applicable Election Period" is the 90-day period ending on the Annuity Starting Date. This Plan provides to each Participating Employee a written explanation of the following: A. the terms and conditions of the Qualified Joint and Survivor Annuity; B. the Participant's right to make, and the effect of, an election to waive the Qualified Joint and Survivor Annuity form of benefit; C. the rights of the Participant's spouse for such election; and D. the right to make, and the effect of, a revocation of such election. The written explanation of the Qualified Joint and Survivor Annuity is provided no less than 30 days and no more than 90 days prior to the Annuity Starting Date. However, the written explanation may be provided after the Annuity Starting Date. The 90-day applicable election period to waive the Qualified Joint and Survivor Annuity does not end before the 30th day after the date such explanation is provided. The Secretary of the Treasury may, by regulations, limit the period of time by which the Annuity Starting Date precedes the provision of the written explanation other than by providing that the Annuity Starting Date may not be earlier than termination of employment. A Participant may elect (with any applicable spousal consent) to waive any requirement that the written explanation be provided at least 30 days before the Annuity Starting Date (or to waive the 30-day requirement by the above paragraph) if the distribution begins more than 7 days after such explanation is provided. 10.7 Segregated Accounts. Amounts credited to the accounts of Participants whose employment has terminated or Beneficiaries not paid out may be held with other assets of this Plan or may be held separately from the assets held for the benefit of other Participating Employees. If so segregated, the Trustee invests such segregated accounts in savings accounts, certificates of deposit, Treasury bills, bonds, or similar interest-bearing investments, as instructed by the Committee, regardless of the investment policy adopted for the balance of the Trust assets. In so doing, the Committee shall not discriminate in favor of one or some retired Employees or Beneficiaries as against one or some other retired Employees or ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 30 of 41 31 Beneficiaries. Each such payee is credited or charged with appropriate adjustments for earnings, losses, and revaluations of the segregated amount being held for his benefit; all such adjustments are made as of each Anniversary Date as adjustments to other assets of this Plan. Nothing in this subsection, however, entitles such payee to share in any TOM BROWN, INC. contributions to this Plan he would not otherwise be entitled to share by this Plan. 10.8 Location of Participant or Beneficiary Unknown. If all, or any portion, of the distribution payable to a Participant or his Beneficiary at the expiration of 5 years after it is payable, remains unpaid solely for the inability of the Committee, 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 is reallocated in the same manner as Forfeitures are allocated by subsection 9.4. If a Participant or Beneficiary is located subsequent to his benefit being reallocated, such benefit is restored. 10.9 Special Distribution Rules Applicable to Qualified Domestic Relations Order. If all, or any portion of the amounts credited to the accounts of a Participant are required to be paid to an alternate payee by any Qualified Domestic Relations Order ("QDRO"), as that term is defined in Section 12, the Committee instructs the Trustee to distribute to such designated alternate payee all amounts required by the QDRO whether or not the Participant is entitled to a distribution of his account by virtue of termination of employment or attainment of retirement age. The alternate payee of the QDRO has the option to receive, at his or her election, the entire amount required by the QDRO in the form of a cash lump sum as soon as administratively feasible after the Committee's receipt and verification of the QDRO. 10.10 Direct Rollovers. A distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. For this subsection 10.10: A. Eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for 10 years or more; any distribution required by Code Section 401(a)(9); and the portion of any distribution not includible in gross income (without the exclusion of net unrealized appreciation with respect to employer securities). B. Eligible retirement plan is an individual retirement account in Code Section 408(a), an individual retirement annuity in Code Section 408(b), an annuity plan in Code Section 403(a), or a qualified trust in Code Section ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 31 of 41 32 401(a), that accepts the distributee's eligible rollover distribution. However, for an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. C. Distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee by a qualified domestic relations order, in Code Section 414(p) are distributees for the interest of the spouse or former spouse. D. Direct rollover is a payment by this Plan to the eligible retirement plan specified by the distributee. 11. Loans to Participating Employees. The Committee, in its discretion, may authorize a loan to a Participant who is a party in interest, within ERISA ss. 3(14), upon receipt of a written request from the Participant. The total amount of any such loan (when added to the outstanding balance of all other loans to the Participant by the Plan or any other qualified plan of the Employer) cannot exceed the lesser of $50,000 or 50% of the value of the Participant's vested Account Balance. The $50,000 limitation is reduced by the excess, if any, of the highest outstanding balance of loans from the Plan during the one-year period ending on the day before such loan is made over the outstanding balance of loans from the Plan on the date that such loan is made. A Participant can have only one outstanding loan and payments must be made by payroll deduction. A request by a Participant for a loan is made in writing to the Committee and specifies the amount of the loan, and the account(s) of the Participant from which the loan is to be made. The terms and conditions on which the Committee approves loans by this Plan are applied on a reasonably equivalent basis for all Participants. If a Participant's request for a loan is approved by the Committee, the Committee arranges for the distribution of the specified amount in a single sum payment of cash to the Participant. Loans are made on such terms and subject to such limitations as the Committee prescribes, provided any such loan is evidenced by a written promissory note, bears a reasonable rate of interest on the unpaid principal, is adequately secured, and will be repaid by the Participant over a period not to exceed 5 years, unless the loan is for the purpose of acquiring a dwelling unit used or to be used within a reasonable time as the principal residence of the Participant. The interest rate charged on a loan must be at least equivalent to the prevailing interest rate charged by persons in the business of lending money for loans which would be made by similar circumstances. Loan repayments are suspended while a Participant is performing service in the Uniformed Services by Code Section 414(i)(4). Any loan to a Participant is secured by the pledge of 50% of the Participant's right, title, and interest in his Account. The pledge will be evidenced by the execution of a promissory ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 32 of 41 33 note by the Participant. The Committee has the sole responsibility to ensure that a Participant timely makes all scheduled loan repayments. Repayment is paid to the Trust, and is to be accompanied by written instructions from the Committee identifying the Participant on whose behalf the loan repayment is being made. Each loan is amortized on a substantially level basis, with payments at least quarterly over the term of the loan. A loan may be prepaid without penalty at any time. If the Participant's employment with TOM BROWN, INC. terminates or there is a default by a Participant on a loan repayment, all remaining principal payments on the loan are immediately due and payable. The Committee is authorized (to the extent permitted by law) to take any and all actions necessary and appropriate to enforce collection of an unpaid loan. However, on a default, foreclosure on the note and attachment of security does not occur until a distributable event occurs by this Plan. A default is deemed to have occurred if any loan payment is not made within 90 days of when the payment is due by the Participant. On a Participant's retirement or death or on a Participant's termination of employment or earlier distribution, the unpaid balance of any loan, including any unpaid interest, is deducted from any payment or distribution from this Plan to which the Participant or his designated Beneficiary are entitled and the vested interest in the account is correspondingly reduced. The Committee issues written loan guidelines, which forms part of this Plan, describing the procedures and conditions for making loans, and may revise the guidelines at any time, and for any reason. A Participant must obtain the consent of his or her spouse, if any, to use of the account balance as security for the loan. Spousal consent shall be obtained no earlier than the beginning of the 90-day period that ends on the date on which the loan is to be so secured. The consent must be in writing, must acknowledge the effect of the loan, and must be witnessed by a plan representative or notary public. Such consent is binding for the consenting spouse or any subsequent spouse for that loan. A new consent is required if the account balance is used for renegotiation, extension, renewal, or other revision of the loan. 12. Spendthrift Clause. The rights of a Participant or Beneficiary to receive payments or benefits from this Plan are not subject to alienation or assignment, and are not subject to anticipation, encumbrance or claims of creditors. Notwithstanding the foregoing, this Plan shall pay benefits by the terms of any Qualified Domestic Relations Order, if such Order (i) does not require this Plan to provide any type or form of benefits, or any option not otherwise provided, (ii) does not require this Plan to provide increased benefits, and (iii) does not require the payment of benefits to an alternate payee required to be paid to another alternate payee by another order previously determined to be a Qualified Domestic Relations Order. A "Domestic Relations Order" is any judgment, decree or order (including approval of a property ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 33 of 41 34 settlement agreement) which relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a Participant and is made pursuant to a state domestic relations law. "Qualified Domestic Relations Order" is a Domestic Relations Order which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a Participant by this Plan and which clearly specifies (i) the name and the last known mailing address of the Participant and each alternate payee covered by the Order, (ii) the amount or percentage of the Participant's benefits to be paid by this Plan to each such alternate payee, or the manner in which such amount or percentage is to be determined, (iii) the number of payments or period to which such Order applies, and (iv) each plan to which such Order applies. A distribution by the estate of a deceased Participant or Beneficiary to an heir or legatee of a right to receive payments is not deemed an alienation, assignment or anticipation for this Section 12. 13. Administration of Plan Trust. The Committee and TOM BROWN, INC. administer this Plan for the benefit of all Participating Employees and Beneficiaries, without discrimination in favor of one or some Participating Employees or Beneficiaries as against one or some other Participating Employees or Beneficiaries. Whenever action is required by TOM BROWN, INC. or the Committee, it may be taken by any individual designated as agent for the purpose. TOM BROWN, INC. or the Committee notify the Trustee of any change of agent. 14. Administrative Committee. The Committee is a body appointed by TOM BROWN, INC. and, subject to the terms of this Plan, has general supervision of the administration of this Plan. The members of the Committee elect from their number a chairman and appoint a secretary who need not be a member of the Committee. They may appoint any person or persons to have such duties in connection with administration of this Plan as the Committee may from time to time provide. The Committee may appoint from their number such subcommittees with such powers as the Committee determines, and may authorize one or more of their number, any person or persons having duties for administration of this Plan or any agent to execute or deliver any instrument or make any payment on their behalf, except a request for funds from or a direction for, the payment or application of funds by the Insurance Company shall be signed by at least one member of the Committee. The Committee may retain such legal counsel and accountants, who may or may not be in the employ of TOM BROWN, INC., actuaries, and such clerical services as it may require in carrying out this Plan. The Committee holds meetings upon such notice, at such time or times, and at such place or places as it may determine. A majority of the members of the Committee at the time in office constitutes a quorum for the transaction of business at all meetings. All resolutions or other actions taken by the Committee are by a vote of a majority of the members, if they act without a meeting. ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 34 of 41 35 The Committee may from time to time establish rules for the administration of this Plan. Except as otherwise herein expressly provided, the Committee has the exclusive right to interpret this Plan and to decide any matters arising hereunder in the administration and operation of this Plan. It shall endeavor to act by general rules so as not to discriminate in favor of any person. The members of the Committee are free from all liability, joint or several, for their acts as members of such Committee, except to the extent that they may have been guilty of misconduct, or except to the extent otherwise required by the Employee Retirement Income Security Act of 1974. The members of the Committee serve without compensation for their services. All reasonable and necessary costs, expenses and liabilities incurred by the Committee in the supervision of the administration of this Plan and the Group contract shall be paid by TOM BROWN, INC. separate and apart from the Contributions to this Plan. The Committee and its individual members are indemnified by TOM BROWN, INC. and not from this Plan against any and all liabilities arising by reason of any act or failure to act made in good faith pursuant to this Plan, including expenses reasonably incurred in the defense of any claim. 15. Allocation of Responsibilities. 15.1 Administrative Responsibilities. The Committee is the Named Fiduciary which has the authority to control and manage the operation and administration of the Plan. TOM BROWN, INC. shall make such rules, regulations, interpretations, and shall take such other actions to administer the Plan as TOM BROWN, INC. may deem appropriate. In administering the Plan, TOM BROWN, INC. acts in a nondiscriminatory manner for Plan Participants and Beneficiaries, and at all times discharges its duties for this Plan by applicable fiduciary standards. 15.2 Management of Plan Assets. TOM BROWN, INC. is the Named Fiduciary for control and management of this Plan's assets only to the extent that it (i) appoints one or more Trustees to hold the assets of the Plan in trust, (ii) appoints one or more Investment Managers for any Plan assets and enters into an investment management agreement with each Investment Manager it appoints, and (iii) exercises its authority to direct the sale, investment or reinvestment of Plan assets. TOM BROWN, INC. is responsible for diversifying the investments of this Plan only if it directs investments, and the Trustee and the Investment Managers, if any, are responsible for diversifying the specific investments in accounts by their management. 15.3 Trustee and Investment Managers. The Trustee has the exclusive authority and discretion to control and manage the assets of this Plan, and is the Named Fiduciary for such control and management, except to the extent that TOM BROWN, ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 35 of 41 36 INC. exercises its authority to direct investment of this Plan's assets, or the authority to manage such assets is allocated by TOM BROWN, INC. to one or more Investment Managers. Each Investment Manager appointed by TOM BROWN, INC. has the authority to manage, including the power to acquire and dispose of, such assets of this Plan assigned to it by TOM BROWN, INC.. 15.4 Delegation of Fiduciary Responsibilities. Except as otherwise expressly stated herein, TOM BROWN, INC. does not allocate or delegate to any other person any of its duties and responsibilities. The duties and responsibilities of TOM BROWN, INC. are carried out by TOM BROWN, INC.'S Directors and officers, acting on behalf of and in the name of TOM BROWN, INC. in their capacities as such, and not as individual fiduciaries. TOM BROWN, INC. is specifically prohibited from designating any Director or officer of TOM BROWN, INC. as a fiduciary and from allocating or delegating to any such person any of the fiduciary responsibilities of TOM BROWN, INC.. 16. Amendments. TOM BROWN, INC. reserves the right by action of its Board of Directors to amend this Plan at any time without the consent of the Trustee, but no such amendment shall cause or permit any portion of the principal or income of the Trust to revert to or become the property of or be used for the benefit of TOM BROWN, INC.. Any amendment necessary to bring this Trust into conformity with government laws or regulations in order to qualify this Plan and Trust for tax exemption may be made retroactively. No amendment to this Plan may be made which results in a cutback of vested rights or rights to accrued benefits by Code Section 411(a)(10)(A) or Code Section 411(d)(6). If the vesting schedule, if any, in this Plan is amended, each Participant with at least 3 Years of Service may elect to have his accrued benefit determined by the vesting schedule in effect prior to the amendment. 17. Termination of Contributions. TOM BROWN, INC. establishes this Plan intending and expecting to make its contributions. If TOM BROWN, INC. decides it is impossible or inadvisable to continue to make its contributions, TOM BROWN, INC. has the right to terminate its contributions. If there is a complete termination of contributions by TOM BROWN, INC., with or without formal action by TOM BROWN, INC., this Plan remains in force until terminated. Any provision requiring forfeiture of a Participating Employee's share (the shares of each Participating Employee become fully vested in such Participant, regardless of the length of his employment or his participation, on such termination of contributions); and all of the assets in this Plan on the date specified in such resolutions shall be held, administered by the Committee and distributed by the Trustee as provided herein. 18. Merger or Consolidation of Plan, Transfer of Plan Assets. If this Plan is merged or consolidated with, or its assets and liabilities transferred to any other plan, each Participant and Beneficiary in this Plan is entitled, after the merger, ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 36 of 41 37 consolidation or transfer, to a benefit equal to or greater than the benefit to which he would have been entitled by this Plan, immediately prior to such merger, consolidation or transfer, as if the Plan had terminated at such time. 19. Top-Heavy Provisions. 19.1 Determination of Top-Heavy Status. As of each determination date, the Committee computes the aggregate amounts allocated to the accounts of all "key employees" of TOM BROWN, INC.. The term "key employee" is any Employee, former Employee, or beneficiary thereof who, at any time during the Plan Year or any of the 4 preceding Plan Years, is or was (i) an officer of TOM BROWN, INC. with an annual Compensation greater than 50% of the dollar limitation then in effect in Code Section 415(b)(1)(A), (ii) 1 of the 10 Employees having an annual Compensation greater than the dollar limitation then in effect in Code Section 415(c)(1)(A) and owning (or considered as owning in Code Section 318) the largest interests in TOM BROWN, INC., (iii) a 5% owner of TOM BROWN, INC. or (iv) a 1% owner of TOM BROWN, INC. with annual Compensation from TOM BROWN, INC. in excess of $150,000. To determine percentage ownership in the foregoing sentence, Code Section 416(i)(1)(B) applies and Code Sections 414(b), 414(c), and Sec. 414(m) do not apply. If the aggregate amount allocated to the accounts of all key employees exceeds 60% of the aggregate amount allocated to the accounts of all Participants, this Plan is deemed to be top-heavy for the Plan Year next following such Anniversary Date (and for the initial Plan Year, for the Plan Year ending with such Anniversary Date). To determine the aggregate amounts allocated to the accounts of Participants, there is added any amount of TOM BROWN, INC. contributions required for the Plan Year ending on the determination date (unless this Plan is not subject to the minimum funding in Code Section 412). The present value of accrued benefits is determined by the interest and mortality rates specified in the defined benefit plan. The account balances attributable to a Participant who has not performed any services for TOM BROWN, INC. at any time during the five-year period ending on any determination date are disregarded. To make the above determination, (i) all other qualified plans of TOM BROWN, INC. in which a key employee is a participant, (ii) all other plans which enable this Plan or plans described in (i) above to meet the requirements of Code Section 401(a)(4) or Code Section 410, and (iii) all other qualified plans which may have been terminated but which were maintained by the Employer within the five-year period ending on the determination date. There shall also be considered any distributions made to any Participant within a five-year period ending on the determination date. At the option of the Committee, any other qualified plans maintained by TOM BROWN, INC. may be included in the group of plans to determine the top-heavy status of this Plan, if the group of plans continues to meet the requirements of Code Section 401(a)(4) and Code Section 410 with such plans as are added at the option of TOM BROWN, INC. being taken into account. If any plans of TOM BROWN, INC. are ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 37 of 41 38 aggregated with this Plan as described in the preceding sentence, this Plan is deemed to be top-heavy only if the aggregate present value of accrued benefits of key employees in the aggregated group of plans exceeds 60% of the aggregate present value of accrued benefits of all employees in the aggregated group of plans. To determine present value of accrued benefits, the rules of Code Section 416(g) apply. Accrued benefits are determined by the method used for accrual purposes for all plans of TOM BROWN, INC., or if there is no such method, by the slowest accrual rate permitted by Code Section 411(b)(1)(C). The determination date is the last day of the preceding Plan Year. However, for the first Plan Year the determination date is the last day of that year. To determine whether or not an Employee is a key employee, "Compensation" is compensation in Code Section 415(c)(3), but including Salary Reduction Contributions to this Plan. 19.2 Minimum Allocations. For each Plan Year that this Plan is top-heavy, there shall be allocated to the account of each Participant who is not a key employee and who is employed by TOM BROWN, INC. on the last day of the Plan Year, irrespective of whether he has completed 1,000 Hours of Service with TOM BROWN, INC. during the Plan Year, an amount not less than 3% of each such Participant's W-2 Compensation (without taking into account Social Security and similar contributions and benefits). If the TOM BROWN, INC. contribution for any Plan Year (including Salary Reduction Contributions) is less than 3% of the W-2 Compensation of the key employee for whom such contribution percentage is the highest, the amount allocable to each nonkey employee shall be such lesser percentage. If TOM BROWN, INC. maintains both a defined contribution plan and a defined benefit plan with a nonkey employee who participates, or could participate in both plans, there is allocated to the account of each Participant who otherwise would be entitled to receive a minimum allocation as described above an amount not less than 5% of such Participant's W-2 Compensation (but without taking into account Social Security and similar contributions and benefits). For this subsection, all defined contribution plans of TOM BROWN, INC. are aggregated to satisfy the percentage rules if the aggregate contribution made to all defined contribution plans equals 5% of any nonkey Participant's W-2 Compensation. 19.3 Effect on Code Section 415 Limitations. If TOM BROWN, INC. maintains both a defined contribution plan and a defined benefit plan with a Participant who participates, or could participate, in both plans, for computing the defined contribution fraction and defined benefit fraction described in subparagraph 8.J. hereunder, the dollar limitation of Code Section 415(b)(1)(A) and Code Section 415(c)(1)(A) are multiplied by 1.0 in lieu of 1.25, unless: A. the defined contribution plan allocates to the account of each Participant who is not a key employee not less than 7-1/2% of each such Participant's W-2 Compensation (without taking into account Social Security and similar contributions and benefits); and ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 38 of 41 39 B. the plan would not be top-heavy if 90% were substituted for 60% in subparagraph A. above. 20. Expenses of Administration. The Trustee's compensation is fixed by agreement with TOM BROWN, INC.; however, no person compensated as an Employee of TOM BROWN, INC. shall be compensated as Trustee. TOM BROWN, INC. intends to pay, in addition to the contributions provided for, any expenses of administering the Trust, including the Trustee's compensation, if any, except that any investment counsel fees incurred by the Trust, and any expenses directly related to particular transactions involving purchases or sales of property by the Trust or the production or collection of income, such as transfer taxes, brokers' commissions, etc., are paid by the Trustee from the assets of the Trust. 21. Rights of Participants. Participating in this Plan and Trust does not give any Participant any right to be retained in the service of TOM BROWN, INC. or any right or claim to any benefits unless such benefits accrue by this Plan. 22. Claims Procedure. Claims for benefits by this Plan may be filed with the Committee on forms supplied by it. Written notice of the disposition of a claim is furnished to the claimant within 90 days after the application is filed. If the claim is denied, the reasons for the denial are specifically set forth in the notice in language calculated to be understood by the claimant, pertinent provisions of the Plan are cited, and, where appropriate, an explanation as to how the claimant can perfect the claim is provided. In addition, the claimant is furnished an explanation of this Plan's claims review procedure, as described below. Any Employee or Beneficiary denied a benefit is entitled to request the Committee to give further consideration to his claim by filing with the Committee (on a form which may be obtained from the Committee) a 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 Committee no later than 60 days after receipt of the written notification furnished by the Committee for the claim. The Committee shall 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 at which the claimant has an opportunity to submit written and oral evidence and arguments in support of his claim. At the hearing (or prior thereto upon 5 business days written notice to the Committee) the claimant or his representative has an opportunity to review all documents in the possession of the Committee pertinent to the claim at issue and its disallowance. Either the claimant or the Committee may have a court reporter attend the hearing and record the proceedings. 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 are borne by the party causing the court reporter to attend the hearing. ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 39 of 41 40 A final decision as to the allowance of the claim shall be made by the Committee within 60 days of receipt of the appeal (unless there is an extension of 60 days due to special circumstances, if 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. 23. Construction. This Plan shall be construed so as to qualify as a tax-free employees' profit-sharing plan, contributions to which by TOM BROWN, INC. are deductible from its taxable income. 24. Defense of Plan. TOM BROWN, INC. has the right to defend the position of this Plan as a qualified profit-sharing plan, in Code Section 401(a). 25. Governing Law. This Plan is executed and delivered in the State of Texas and is to be construed and regulated by the laws of the State of Texas. 26. Mistaken Contributions, Etc. The assets of this Plan shall not inure to the benefit of TOM BROWN, INC., and shall be held for the exclusive purposes of providing benefits to Participants and Beneficiaries and defraying reasonable expenses of administering the Plan. Notwithstanding the foregoing sentence: A. If a contribution is made by TOM BROWN, INC. by a mistake of fact, such contribution may be returned, at the discretion of TOM BROWN, INC., within 1 year after payment of such contribution. B. All contributions to this Plan are conditioned on initial qualification of this Plan by Code Section 401. If this Plan does not so qualify for any Plan Year for which a contribution is made, such contribution may be returned, at the discretion of TOM BROWN, INC., within 1 year after the date of denial of initial qualification of this Plan if the application for qualification is made by the time prescribed by law for filing the Employer's tax return for the taxable year this Plan is adopted, or such later date as the Secretary of the Treasury may prescribe. C. All contributions to this Plan are conditioned upon their deductibility, for Federal income tax purposes, by Code Section 404. If and to the extent that such deduction is disallowed, TOM BROWN, INC.'S contribution (to the extent disallowed) may be returned, at the discretion of TOM BROWN, INC., ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 40 of 41 41 within 1 year after the disallowance of the deduction. Earnings on such TOM BROWN, INC. contributions are not returned to TOM BROWN, INC., but losses on such contributions reduce the amount to be returned. Notwithstanding the foregoing, if this Plan does not initially qualify by Code Section 401, the entire assets of this Plan may be returned to TOM BROWN, INC.. 27. Plan Administrator; Legal Agent. The Committee serves as the Plan Administrator and is the legal agent for service of process on this Plan, to be served at the following address: TOM BROWN, INC. 401(k) Retirement Plan Committee c/o TOM BROWN, INC. 508 West Wall, Suite 500 Midland, Texas 79702 This Plan is executed by TOM BROWN, INC. on February , 2000, effective as of January 1, 2000. TOM BROWN, INC. By: ____________________________ B. JACK REED, Vice-President Human Relations ================================================================================ TOM BROWN, INC. 401(k) Retirement Plan Page 41 of 41 EX-10.14 5 SAUER DRILLING CO. ADOPTION AGREEMENT & PROTOTYPE 1 EXHIBIT 10.14 INWEST PENSION MANAGEMENT, INC. REGIONAL PROTOTYPE DEFINED CONTRIBUTION PLAN BASIC PLAN DOCUMENT #02 TABLE OF CONTENTS SECTION 1. PARTICIPATION....................................................3 1.1 Participation...................................................3 1.2 Years of Service and Break in Service - Participation...........3 1.3 Participation Effective Date....................................4 DEFINITIONS..............................................................5 1.4 Service.........................................................5 1.5 Employee........................................................6 1.6 "Collective Bargaining Agreement................................7 1.7 Employer........................................................7 1.8 "This Plan".....................................................7 SECTION 2. CONTRIBUTIONS....................................................8 2.1 Contributions to this Plan......................................8 2.2 Profit-Sharing and Profit-Sharing 401(k) - Non-Integrated Contribution Allocation.........................................8 2.3 Permitted disparity.............................................8 2.4 Allocation Limitations.........................................11 2.5 Employee Contributions.........................................14 2.6 Vesting........................................................15 2.7 Top Heavy Allocation...........................................18 2.8 Elective Deferrals.............................................20 2.9 Excess Elective Deferrals......................................20 2.10 Distribution of Excess Elective Deferrals......................20 2.11 Actual Deferral Percentage Test................................20 2.12 Distribution of Excess Contributions...........................22 2.13 Recharacterization.............................................23 2.14 Matching Contributions.........................................23 2.15 Limitations on Employee Contributions and Matching Contributions..................................................24 2.16 Distribution of Excess Aggregate Contributions.................27 2.17 Qualified Non-Elective Contributions...........................27 2.18 Forfeitures of Excess Aggregate Contributions..................28 2.19 Nonforfeitability and Vesting..................................28 DEFINITIONS.............................................................28 2.20 Compensation...................................................28 2.21 Maximum Annual Additions.......................................33 2.22 Top-Heavy......................................................35 2.23 Elective Deferrals.............................................39 2.24 Contribution Percentage........................................40
2 SECTION 3. BENEFITS........................................................41 3.1 Benefiting.....................................................41 3.2 Joint and survivor annuity and preretirement survivor annuity........................................................42 3.3 Restrictions on immediate distributions........................46 3.4 When benefits begin............................................48 3.5 Early retirement benefit.......................................48 3.6 Nontransferability of annuities................................48 3.7 Conflicts with annuity contracts...............................48 3.8 Timing and modes of distribution...............................48 3.9 Direct Rollovers...............................................53 3.10 Life insurance.................................................53 3.11 Loans to Participants..........................................54 3.12 Distribution Requirements......................................56 3.13 Hardship Distribution..........................................57 3.14 Reinstatement of benefit.......................................58 DEFINITIONS.............................................................58 3.15 Joint and Survivor and Pre-retirement Survivor Annuities.......58 3.16 Minimum Distribution...........................................61 3.17 Rollovers......................................................64 SECTION 4. OTHER...........................................................65 4.1 Annual valuation of assets; allocation of trust net earnings and losses.....................................................65 4.2 Treatment of insurance dividends or credits....................65 4.3 Directed investments...........................................65 4.4 Participating Employer.........................................66 4.5 Amendment by Employer..........................................66 4.6 Plan merger - maintenance of benefits..........................66 4.7 Inalienability of benefits.....................................66 4.8 Exclusive benefit..............................................66 4.9 Failure to qualify.............................................67 4.10 Disqualification of plan.......................................67 4.11 Administrator..................................................67 4.12 Allocation of Responsibility Among Fiduciaries.................70 4.13 Management of Trust............................................71 4.14 Accounting; Distributions......................................73 4.15 Replacement/Removal of Trustee.................................74 4.16 Miscellaneous..................................................75 4.17 Trustee, Named Fiduciary.......................................76
2 3 INWEST PENSION MANAGEMENT, INC. REGIONAL PROTOTYPE DEFINED CONTRIBUTION PLAN BASIC PLAN DOCUMENT #02 An EMPLOYER who executes an ADOPTION AGREEMENT, subject to approval by the TRUSTEE and InWest Pension Management, Inc., creates THIS PLAN for its EMPLOYEES. Defined terms are ITALICIZED; definitions are in the ADOPTION AGREEMENT and at the end of each SECTION. "Section" and "subsection" refer to the Sections and subsections in THIS PLAN. THIS PLAN is effective on the EFFECTIVE DATE selected in the ADOPTION AGREEMENT and is applied on a uniform and consistent basis. The purpose of THIS PLAN is to provide benefits of a qualified retirement plan in CODE SECTION 401(a). SECTION 1. PARTICIPATION =============================================================================== 1.1 PARTICIPATION An EMPLOYEE who meets the eligibility, minimum age and SERVICE requirements selected in the ADOPTION AGREEMENT participates in THIS PLAN. 1.2 YEARS OF SERVICE AND BREAK IN SERVICE - PARTICIPATION To determine YEARS OF SERVICE (see 1.4(c)) and BREAKS IN SERVICE (see 1.4 (d)) for eligibility, the initial eligibility computation period is the 12-consecutive month period beginning on the date the EMPLOYEE first performs an HOUR OF SERVICE (employment beginning date). Succeeding 12-consecutive month periods begin with the first PLAN YEAR which begins on or prior to the first anniversary of the EMPLOYEE'S employment beginning date regardless of whether the Employee is credited with 1,000 HOURS OF SERVICE during the initial eligibility computation period. YEARS OF SERVICE and BREAKS IN SERVICE are measured by the PLAN YEAR. All YEARS OF SERVICE are counted toward eligibility except the following: 3 4 (a) If the EMPLOYER elects in the Adoption Agreement, an EMPLOYEE who has a 1-year BREAK IN SERVICE before satisfying THIS PLAN'S requirement for eligibility, SERVICE before such break will not be taken into account, otherwise, for a PARTICIPANT who does not have any nonforfeitable right to his ACCOUNT balance derived from EMPLOYER CONTRIBUTIONS, YEARS OF SERVICE before a period of consecutive 1-year BREAKS IN SERVICE will not be taken into account in computing eligibility SERVICE if the number of consecutive 1-year BREAKS IN SERVICE in such period equals or exceeds the greater of 5 or the aggregate number of YEARS OF SERVICE. Such aggregate number of YEARS OF SERVICE will not include any YEARS OF SERVICE disregarded by the preceding sentence from prior BREAKS IN SERVICE. (b) A PARTICIPANT whose YEARS OF SERVICE are disregarded by the preceding paragraph is treated as a new EMPLOYEE for eligibility purposes. A PARTICIPANT'S YEARS OF SERVICE not disregarded by the preceding paragraph continues to participate in THIS PLAN, or, if terminated, participates immediately upon reemployment. ELIGIBILITY BREAK IN SERVICE - 1-YEAR HOLDOUT For any PARTICIPANT who has a 1-year BREAK IN SERVICE, years of eligibility SERVICE before such break will not be taken into account until the EMPLOYEE completes a YEAR OF SERVICE after returning to employment. Such YEAR OF SERVICE is measured by the 12-consecutive month period beginning on an EMPLOYEE'S reemployment beginning date and, if necessary, subsequent 12-consecutive month periods beginning on anniversaries of the reemployment beginning date. Such YEAR OF SERVICE is measured by the 12-consecutive month period beginning on an EMPLOYEE'S reemployment beginning date and, if necessary, PLAN YEARS beginning with the PLAN YEAR which includes the first anniversary of the reemployment beginning date. The reemployment beginning date is the first day on which the EMPLOYEE is credited with an HOUR OF SERVICE for the performance of duties after the first eligibility computation period in which the EMPLOYEE incurs a 1-year BREAK IN SERVICE. If a PARTICIPANT completes a YEAR OF SERVICE by this provision, his/her participation is reinstated as of the reemployment beginning date. 1.3 PARTICIPATION EFFECTIVE DATE If a PARTICIPANT who is not a member of an eligible class of EMPLOYEES and becomes ineligible to participate but has not incurred a BREAK IN SERVICE, such EMPLOYEE participates immediately upon returning to an eligible class of EMPLOYEES. If such PARTICIPANT incurs a BREAK IN SERVICE, eligibility is determined by the BREAK IN SERVICE rules. 4 5 If an EMPLOYEE who is not a member of an eligible class of EMPLOYEES becomes a member of an eligible class, such EMPLOYEE participates immediately if such EMPLOYEE satisfies the minimum age and SERVICE requirements and would otherwise previously be a PARTICIPANT. DEFINITIONS The following are definitions for this SECTION and THIS PLAN. 1.4 SERVICE (a) "SERVICE" is employment with the EMPLOYER. (b) "HOUR OF SERVICE" is: (1) Each hour for which an EMPLOYEE is paid, or entitled to payment, for the performance of duties for the EMPLOYER. These hours are credited to the EMPLOYEE for the computation period in which the duties are performed; and (2) Each hour for which an EMPLOYEE is paid, or entitled to payment, by the EMPLOYER for a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. No more than 501 HOURS OF SERVICE will be credited under this paragraph for any single continuous period (whether or not such period occurs in a single computation period). Hours in this paragraph will be calculated and credited by Section 2530.200b-2 of the DOL REGULATIONS; and (3) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the EMPLOYER. The same HOURS OF SERVICE are not credited both by paragraph (1) or paragraph (2), as the case may be, and by this paragraph (3). These hours are credited to the EMPLOYEE for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. HOURS OF SERVICE are credited for employment with other members of an affiliated service group (in CODE SECTION 414(m)), a controlled group of corporations (in CODE SECTION 414(b)), or a group of trades or businesses under common control (in CODE SECTION 414(c)) of which the EMPLOYER is a member, and any other entity required to be aggregated with the EMPLOYER by CODE SECTION 414(o). HOURS OF SERVICE are also credited for any individual considered an EMPLOYEE by CODE SECTION 414(n) or 414(o). 5 6 Solely to determine whether a BREAK IN SERVICE, for participation and vesting purposes has occurred in a computation period, an individual who is absent from work for maternity or paternity reasons receives credit for the HOURS OF SERVICE which would otherwise be credited to such individual but for such absence, or in any case in which such hours cannot be determined, 8 HOURS OF SERVICE per day of such absence. For this paragraph, an absence from work for maternity or paternity reasons means an absence (i) for the pregnancy of the individual, (ii) for a birth of a child of the individual, (iii) for the placement of a child with the individual in the adoption of such child by such individual, or (iv) for caring for such child for a period beginning immediately following such birth or placement. The HOURS OF SERVICE credited by this paragraph are credited (v) in the computation period in which the absence begins if the crediting is necessary to prevent a BREAK IN SERVICE in that period or (vi) in all other cases, in the following computation period. (c) "YEAR OF SERVICE" is a PLAN YEAR after the initial eligibility period (computation period) during which the EMPLOYEE completes at least 1,000 HOURS OF SERVICE. (d) "BREAK IN SERVICE" is a PLAN YEAR (computation period) during which the PARTICIPANT completes less than 501 HOURS OF SERVICE. (e) Predecessor Employer Service. If the EMPLOYER maintains the plan of a predecessor employer, SERVICE with such employer will be treated as SERVICE for the EMPLOYER. 1.5 EMPLOYEE (a) "EMPLOYEE" is any employee of the EMPLOYER or of any other employer required to be aggregated with the EMPLOYER by CODE SECTIONS 414(b), (c), (m) or (o). EMPLOYEE also includes any LEASED EMPLOYEE deemed to be an employee of any employer in the previous paragraph by CODE SECTIONS 414(n) or (o). (b) "LEASED EMPLOYEE" is any person (other than an employee of the recipient) who by 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 by CODE SECTION 414(n)(6)) on a substantially full time basis for a period of at least 1 year, and such services are performed under primary direction or control by the recipient. Contributions or benefits provided a LEASED EMPLOYEE by the leasing organization which are attributable to services performed for the recipient employer are treated as provided by the recipient employer. A LEASED EMPLOYEE is not considered an employee of the recipient if: (i) such employee is covered by a money purchase pension plan providing: (1) a 6 7 nonintegrated employer contribution rate of at least 10% of compensation, as defined in CODE SECTION 415(c)(3), but including amounts contributed by a salary reduction agreement which are excludable from the employee's gross income by CODE SECTIONS 125, 402(e)(3), 402(h)(1)(B) or 403(b), (2) immediate participation, and (3) full and immediate vesting; and (ii) LEASED EMPLOYEES do not constitute more than 20% of the recipient's nonhighly compensated work force. 1.6 "COLLECTIVE BARGAINING AGREEMENT" is an agreement which the Secretary of Labor finds to be a Collective Bargaining Agreement between EMPLOYEE representatives and 1 or more Employers, if there is evidence that retirement benefits were the subject of good faith bargaining and if less than 2% of the EMPLOYEES of the EMPLOYER who are covered by such agreement are professionals in REGULATIONS 1.410(b)-9. "NON-RESIDENT ALIEN" is an EMPLOYEE who is a non-resident alien (within the meaning of CODE SECTION 7701(b)(1)(B)) and who receives no earned income (within the meaning of CODE SECTION 911(d)(2)) from the EMPLOYER which constitutes income from sources within the United States (within the meaning of CODE SECTION 861(a)(3)). 1.7 EMPLOYER (a) "EMPLOYER" is the employer in the Adoption Agreement that adopts THIS PLAN. (b) "AFFILIATED EMPLOYER" is any corporation which is a member of a controlled group of corporations (by CODE SECTION 414(b)) including the EMPLOYER; any trade or business (whether or not incorporated) under common control (by CODE SECTION 414(c)) with the EMPLOYER; any organization (whether or not incorporated) which is a member of an affiliated service group (by CODE SECTION 414(m)) including the EMPLOYER; and any other entity required to be aggregated with the EMPLOYER by CODE SECTION 414(o) REGULATIONS. (c) "PARTICIPATING EMPLOYER" is a Participating Employer in subsection 4.4. 1.8 "THIS PLAN" (a) is this instrument and the ADOPTION AGREEMENT. (b) "ADOPTION AGREEMENT" is the separate instrument the EMPLOYER executes, accepted by the TRUSTEE and InWest Pension Management, Inc., which contains the EMPLOYER'S elections. 7 8 SECTION 2. CONTRIBUTIONS ================================================================================ 2.1 CONTRIBUTIONS TO THIS PLAN CONTRIBUTIONS to THIS PLAN are as the EMPLOYER elects in the ADOPTION AGREEMENT. EMPLOYER CONTRIBUTIONS are EMPLOYEE ELECTIVE DEFERRALS, QUALIFIED NON-ELECTIVE CONTRIBUTIONS, QUALIFIED MATCHING CONTRIBUTIONS, MATCHING CONTRIBUTIONS, and NON-ELECTIVE EMPLOYER CONTRIBUTIONS; all other CONTRIBUTIONS are EMPLOYEE CONTRIBUTIONS. A PARTICIPANT'S accrued benefit derived from EMPLOYEE ELECTIVE DEFERRALS, QUALIFIED NON-ELECTIVE CONTRIBUTIONS, EMPLOYEE CONTRIBUTIONS and QUALIFIED MATCHING CONTRIBUTIONS is nonforfeitable. Separate accounts for EMPLOYEE ELECTIVE DEFERRALS, QUALIFIED NON-ELECTIVE CONTRIBUTIONS, EMPLOYEE CONTRIBUTIONS, MATCHING CONTRIBUTIONS, NON-ELECTIVE EMPLOYER CONTRIBUTIONS and QUALIFIED MATCHING CONTRIBUTIONS are maintained for each PARTICIPANT. Each ACCOUNT is credited with the applicable CONTRIBUTIONS and earnings thereon. 2.2 PROFIT-SHARING AND PROFIT-SHARING 401(K) - NON-INTEGRATED CONTRIBUTION ALLOCATION Unless otherwise elected by the EMPLOYER in the ADOPTION AGREEMENT, EMPLOYER PROFIT-SHARING CONTRIBUTIONS and EMPLOYER NON-ELECTIVE CONTRIBUTIONS are allocated to each PARTICIPANT who either completes more than 500 HOURS OF SERVICE during the PLAN YEAR or who is employed on the last day of the PLAN YEAR in the ratio that such PARTICIPANT'S COMPENSATION bears to all PARTICIPANTS' total COMPENSATION for the PLAN YEAR. 2.3 PERMITTED DISPARITY FOR PROFIT-SHARING AND PROFIT-SHARING 401(K) PLANS: Subject to the overall permitted disparity limits, EMPLOYER PROFIT-SHARING CONTRIBUTIONS, EMPLOYER NON-ELECTIVE CONTRIBUTIONS and FORFEITURES for the PLAN YEAR, unless otherwise elected by the EMPLOYER in the ADOPTION AGREEMENT, are allocated to each PARTICIPANT'S ACCOUNT who either completes more than 500 HOURS OF SERVICE during the PLAN YEAR or who is employed on the last day of the PLAN YEAR as follows: (a) For Profit-Sharing Plans: (1) CONTRIBUTIONS and FORFEITURES are allocated to each PARTICIPANT'S Account in the ratio that each PARTICIPANT'S total COMPENSATION bears to all PARTICIPANTS' total COMPENSATION, but not in excess of 3% of each PARTICIPANT'S total COMPENSATION. 8 9 (2) Any CONTRIBUTIONS and FORFEITURES remaining after the allocation in (a)(1) are allocated to each PARTICIPANT'S ACCOUNT in the ratio that each PARTICIPANT'S COMPENSATION for the PLAN YEAR in excess of the INTEGRATION LEVEL bears to the excess COMPENSATION of all PARTICIPANTS, but not in excess of 3% of each PARTICIPANT'S COMPENSATION in excess of the INTEGRATION LEVEL. For this (a)(2), any PARTICIPANT who has exceeded the cumulative permitted disparity limit described below, such PARTICIPANT'S total COMPENSATION for the PLAN YEAR will be taken into account. (3) Any CONTRIBUTIONS and FORFEITURES remaining after the allocation in (a)(2) are allocated to each PARTICIPANT'S ACCOUNT in the ratio that the sum of each PARTICIPANT'S total COMPENSATION and COMPENSATION in excess of the INTEGRATION LEVEL bears to the sum of all PARTICIPANTS' total COMPENSATION and COMPENSATION in excess of the INTEGRATION LEVEL, but not in excess of the MAXIMUM PROFIT-SHARING DISPARITY RATE. For this (a)(3), for any PARTICIPANT who has exceeded the cumulative permitted disparity limit described below, 2 times such PARTICIPANT'S total COMPENSATION for the PLAN YEAR is taken into account. (4) Any remaining EMPLOYER CONTRIBUTIONS or FORFEITURES are allocated to each PARTICIPANT'S ACCOUNT in the ratio that each PARTICIPANT'S total COMPENSATION for the PLAN YEAR bears to all PARTICIPANTS' total COMPENSATION for that year. (b) For Money Purchase Plans: CONTRIBUTIONS and FORFEITURES are allocated to each PARTICIPANT'S ACCOUNT in the percentage of the PARTICIPANT'S COMPENSATION elected by the EMPLOYER in the ADOPTION AGREEMENT, up to the INTEGRATION LEVEL plus a Base Percentage specified in the ADOPTION AGREEMENT (not to exceed the Base Percentage by more than the lesser of (i) the Base Percentage, or (ii) the maximum disparity rate of such PARTICIPANT'S COMPENSATION in excess of the INTEGRATION LEVEL. "BASE PERCENTAGE" means the percentage of compensation contributed by the Employer for compensation not in excess of the INTEGRATION LEVEL. FOR MONEY PURCHASE PLANS: Subject to the overall permitted disparity limits, the EMPLOYER contributes for each PARTICIPANT who either completes more than 500 HOURS OF SERVICE during the PLAN YEAR or who is employed on the last day of the PLAN YEAR an amount equal to the Base Percentage, (not less than 3%) of each PARTICIPANT'S COMPENSATION for the PLAN YEAR, up to the INTEGRATION LEVEL plus the Excess Percentage, (not less than 3%) and not to exceed (i) the Base Percentage or (ii) the money purchase 9 10 maximum disparity rate of such PARTICIPANT'S COMPENSATION in excess of the INTEGRATION LEVEL. However, for any PARTICIPANT who exceeds the cumulative permitted disparity limit, the EMPLOYER contributes for each PARTICIPANT who either completes more than 500 HOURS OF SERVICE during the PLAN YEAR or is employed on the last day of the PLAN YEAR an amount equal to the excess contribution percentage multiplied by the PARTICIPANT'S total COMPENSATION. OVERALL PERMITTED DISPARITY LIMIT ANNUAL OVERALL PERMITTED DISPARITY LIMIT: Notwithstanding the preceding paragraph(s), for any PLAN YEAR THIS PLAN benefits any PARTICIPANT who benefits under another qualified plan or simplified employee pension, as defined in CODE Section 408(k), maintained by the EMPLOYER that provides for permitted disparity (or imputes disparity), the EMPLOYER contributes for each PARTICIPANT who either completes more than 500 HOURS OF SERVICE during the PLAN YEAR or who is employed on the last day of the PLAN YEAR an amount equal to the excess contribution percentage multiplied by the PARTICIPANT'S total COMPENSATION. CUMULATIVE PERMITTED DISPARITY LIMIT: Effective for PLAN YEARS beginning on or after January 1, 1995, the cumulative permitted disparity limit for a PARTICIPANT is 35 total cumulative permitted disparity years. Total cumulative permitted years is the number of years credited to the PARTICIPANT for allocation or accrual purposes by THIS PLAN, any other qualified plan or simplified employee pension plan (whether or not terminated) ever maintained by the EMPLOYER. To determine the PARTICIPANT'S cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If the PARTICIPANT does not benefit by a defined benefit or target benefit plan for any year beginning on or after January 1, 1994, the PARTICIPANT has no cumulative disparity limit. The INTEGRATION LEVEL is the TAXABLE WAGE BASE (TWB) or such lesser amount elected by the EMPLOYER in the ADOPTION AGREEMENT . The TAXABLE WAGE BASE is the contribution and benefit base in effect in Section 230 of the Social Security Act at the beginning of the PLAN YEAR. COMPENSATION is compensation as defined in 2.20. The MAXIMUM DISPARITY RATE is equal to the lesser of: (a) A Base Percentage of 2.7% for Profit-Sharing Plans or 5.7% for Money Purchase Plans (b) the applicable percentage determined by the following table: 10 11 If the INTEGRATION LEVEL ("TWB" means TAXABLE WAGE BASE) -
the applicable percentage is: ------------------------------------------------------------ for Top-Heavy for NonTop-Heavy for Money is more than but not more than.Profit-Sharing Plans Profit-Sharing Plans Purchase Plans - -------------------------------------------------------------------------------------------------------- $0 X* 2.7% 5.7% 5.7% X* of TWB 80% of TWB 1.3% 4.3% 4.3% 80% of TWB Y** 2.4% 5.4% 5.4%
* X equals the greater of $10,000 or 20% of the TWB. ** Y equals an amount more than 80% of the TWB but less than 100 % of the TWB. If the INTEGRATION LEVEL used is equal to the TAXABLE WAGE BASE, the applicable percentage is 2.7% for Profit-Sharing Plans and 5.7% for Money Purchase Plans. 2.4 ALLOCATION LIMITATIONS (a) If the PARTICIPANT does not participate in, and never participated in (i) another qualified plan, or (ii) a welfare benefit fund (in CODE SECTION 419(e)), or (iii) an individual medical account (in CODE SECTION 415(1)(2)), or (iv) a simplified employee pension (in CODE SECTION 408(k)), which provides an ANNUAL ADDITION, the amount of ANNUAL ADDITIONS which may be credited to the PARTICIPANT'S ACCOUNT for any LIMITATION YEAR does not exceed the lesser of the MAXIMUM PERMISSIBLE AMOUNT or any other limitation in THIS PLAN. If the EMPLOYER CONTRIBUTION that would otherwise be contributed or allocated to the PARTICIPANT'S ACCOUNT causes the ANNUAL ADDITIONS for the LIMITATION YEAR to exceed the MAXIMUM PERMISSIBLE AMOUNT, the amount contributed or allocated is reduced so that the ANNUAL ADDITIONS for the LIMITATION YEAR equal the MAXIMUM PERMISSIBLE AMOUNT. (b) Prior to determining the PARTICIPANT'S actual COMPENSATION for the LIMITATION YEAR, the EMPLOYER may determine the MAXIMUM PERMISSIBLE AMOUNT for a PARTICIPANT on a reasonable estimate of the PARTICIPANT'S COMPENSATION for the LIMITATION YEAR, uniformly determined for all PARTICIPANTS similarly situated. (c) As soon as is administratively feasible after the end of the LIMITATION YEAR, the MAXIMUM PERMISSIBLE AMOUNT for the LIMITATION YEAR is determined on the basis of the PARTICIPANT'S actual COMPENSATION for the LIMITATION YEAR. (d) If by subsection 2.4(c) or as a result of the allocation of FORFEITURES, there is an EXCESS AMOUNT, such excess is disposed of as follows: 11 12 (1) Any NONDEDUCTIBLE VOLUNTARY EMPLOYEE CONTRIBUTIONS, (plus attributable earnings), to the extent they would reduce the EXCESS AMOUNT, is returned to the PARTICIPANT; (2) If after the application of (1) an EXCESS AMOUNT still exists, any ELECTIVE DEFERRALS (plus attributable earnings), to the extent they would reduce the excess amount, is distributed to the PARTICIPANT. (3) If after the application of (2) an EXCESS AMOUNT still exists, and the PARTICIPANT is covered by THIS PLAN at the end of the LIMITATION YEAR, the EXCESS AMOUNT in the PARTICIPANT'S ACCOUNT is 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. (4) If after the application of (2) an EXCESS AMOUNT still exists and the PARTICIPANT is not covered by THIS PLAN at the end of a LIMITATION YEAR, the EXCESS AMOUNT is held unallocated in a suspense account consisting of Plan assets. The suspense account is applied to reduce future EMPLOYER CONTRIBUTIONS for all remaining PARTICIPANTS in the next LIMITATION YEAR, and each succeeding LIMITATION YEAR if necessary. (5) If a suspense account is in existence at any time during a LIMITATION YEAR by (4), it does 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 are allocated and reallocated to PARTICIPANTS' ACCOUNTS before any EMPLOYER or any EMPLOYEE CONTRIBUTIONS are made to THIS PLAN for that LIMITATION YEAR. EXCESS AMOUNTS cannot be distributed to PARTICIPANTS or former PARTICIPANTS. (e) This Section applies if, in addition to THIS PLAN, the PARTICIPANT is covered by (i) another qualified master or prototype defined contribution plan, (ii) a welfare benefit fund, (iii) an individual medical account, or (iv) a simplified employee pension maintained by the EMPLOYER, that provides an ANNUAL ADDITION, during any LIMITATION YEAR. The ANNUAL ADDITIONS which are credited to a PARTICIPANT'S ACCOUNT by THIS PLAN for any such LIMITATION YEAR cannot exceed the MAXIMUM PERMISSIBLE AMOUNT reduced by the ANNUAL ADDITIONS credited to a PARTICIPANT'S ACCOUNT in such other qualified master and prototype defined contribution plans, welfare benefit funds, individual medical accounts, and simplified employee pensions for the same LIMITATION YEAR. 12 13 If the ANNUAL ADDITIONS for the PARTICIPANT in such other qualified master and prototype defined contribution plans, welfare benefit funds, individual medical accounts, and simplified employee pensions maintained by the EMPLOYER are less than the MAXIMUM PERMISSIBLE AMOUNT and the EMPLOYER CONTRIBUTION otherwise contributed or allocated to the PARTICIPANT'S ACCOUNT in THIS PLAN causes the ANNUAL ADDITIONS for the LIMITATION YEAR to exceed this limitation, the amount contributed or allocated is reduced so that the ANNUAL ADDITIONS by all such plans and funds for the LIMITATION YEAR equal the MAXIMUM PERMISSIBLE AMOUNT. If the ANNUAL ADDITIONS for the PARTICIPANT in such other qualified master and prototype defined contribution plans, welfare benefit funds, individual medical accounts, and simplified employee pensions in the aggregate are equal to or greater than the MAXIMUM PERMISSIBLE AMOUNT, no amount is contributed or allocated to the PARTICIPANT'S ACCOUNT for the LIMITATION YEAR. (f) 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 (b). (g) As soon as is administratively feasible after the end of the LIMITATION YEAR, the MAXIMUM PERMISSIBLE AMOUNT for the LIMITATION YEAR is determined on the basis of the PARTICIPANT'S actual COMPENSATION for the LIMITATION YEAR. (h) If, by (g) or as a result of the allocation of FORFEITURES, a PARTICIPANT'S ANNUAL ADDITIONS in THIS PLAN and such other plans results in an EXCESS AMOUNT for a LIMITATION YEAR, the EXCESS AMOUNT is deemed to consist of the ANNUAL ADDITIONS last allocated, except that ANNUAL ADDITIONS attributable to a simplified employee pension is deemed to have been allocated first, followed by ANNUAL ADDITIONS to a welfare benefit fund or individual medical account, regardless of the actual allocation date. (i) If an EXCESS AMOUNT is allocated to a PARTICIPANT on an allocation date which coincides with an allocation date of another plan, the EXCESS AMOUNT attributed to THIS PLAN is the product of (1) the total EXCESS AMOUNT allocated as of such date, times (2) the ratio of (i) the ANNUAL ADDITIONS allocated to the PARTICIPANT for the LIMITATION YEAR as of such date by THIS PLAN to (ii) the total ANNUAL ADDITIONS allocated to the PARTICIPANT for the LIMITATION YEAR as of such date in this and all the other qualified MASTER OR PROTOTYPE DEFINED CONTRIBUTION PLANS. 13 14 (j) Any EXCESS AMOUNT attributed to THIS PLAN is disposed of as described in (d). (k) If the PARTICIPANT is covered by another qualified defined contribution plan maintained by the EMPLOYER which is not a MASTER OR PROTOTYPE DEFINED CONTRIBUTION PLAN, ANNUAL ADDITIONS which are credited to the PARTICIPANT'S ACCOUNT by THIS PLAN for any LIMITATION YEAR are limited by (e) through (j) as though the other plan were a MASTER OR PROTOTYPE PLAN unless the EMPLOYER provides other limitations in ADOPTION AGREEMENT Section 2. (l) If the EMPLOYER maintains, or at any time maintained, a qualified defined benefit plan (other than paired plan #P-1) covering any PARTICIPANT, the sum of the PARTICIPANT'S DEFINED BENEFIT PLAN FRACTION and DEFINED CONTRIBUTION PLAN FRACTION do not exceed 1.0 in any LIMITATION YEAR. The ANNUAL ADDITIONS which may be credited to the PARTICIPANT'S ACCOUNT by THIS PLAN for any LIMITATION YEAR are limited by ADOPTION AGREEMENT Section 2. 2.5 EMPLOYEE CONTRIBUTIONS (a) Nondeductible Employee Contributions and Matching Contributions. THIS PLAN does not accept NONDEDUCTIBLE EMPLOYEE CONTRIBUTIONS for PLAN YEARS beginning after the PLAN YEAR in which THIS PLAN is adopted by the EMPLOYER. NONDEDUCTIBLE EMPLOYEE CONTRIBUTIONS for PLAN YEARS beginning after December 31, 1986, together with any MATCHING CONTRIBUTIONS, are limited so as to meet the nondiscrimination test of CODE SECTION 401(m). NONDEDUCTIBLE EMPLOYEE CONTRIBUTIONS, including transfers from other qualified plans, and earnings thereon are nonforfeitable at all times. (b) Deductible voluntary employee contributions. The ADMINISTRATOR will not accept DEDUCTIBLE EMPLOYEE CONTRIBUTIONS made for a taxable year beginning after December 31, 1986. Such contributions made prior to that date are maintained in a separate ACCOUNT which will be nonforfeitable at all times. The ACCOUNT shares in the gains and losses in THIS PLAN as described in 2.6(f). No part of the DEDUCTIBLE VOLUNTARY CONTRIBUTION ACCOUNT is used to purchase life insurance. Subject to subsection 3.2, JOINT AND SURVIVOR ANNUITY requirements (if applicable), a PARTICIPANT may withdraw any part of his/her DEDUCTIBLE VOLUNTARY CONTRIBUTION ACCOUNT by making a written application to the ADMINISTRATOR. No FORFEITURES occur solely as a result of an EMPLOYEE'S withdrawal of EMPLOYEE CONTRIBUTIONS. 14 15 2.6 VESTING A PARTICIPANT'S ACCOUNT BALANCE from EMPLOYER CONTRIBUTIONS which are not otherwise vested shall vest as elected by the EMPLOYER in the ADOPTION AGREEMENT. (a) Before BREAK IN SERVICE If an EMPLOYEE terminates SERVICE, and the value of the EMPLOYEE'S VESTED ACCOUNT BALANCE is not greater than $5,000 (plan years beginning after August 5, 1997) or $3,500 (plan years beginning before August 6, 1997), the EMPLOYEE will receive a distribution of the value of the entire vested portion of such ACCOUNT BALANCE, and the nonvested portion is treated as a FORFEITURE. For this Section, if the value of an EMPLOYEE'S vested ACCOUNT BALANCE is zero, the EMPLOYEE is deemed to receive a distribution of such vested ACCOUNT BALANCE. A PARTICIPANT'S vested ACCOUNT BALANCE does not include accumulated DEDUCTIBLE EMPLOYEE CONTRIBUTIONS in CODE SECTION 72(o)(5)(B) for PLAN YEARS beginning prior to January 1, 1989. If an EMPLOYEE terminates SERVICE, and elects, by the requirements of subsection 3.3, to receive the value of the EMPLOYEE'S vested ACCOUNT BALANCE, the nonvested portion is treated as a FORFEITURE. If the EMPLOYEE elects to have distributed less than the entire vested portion of the ACCOUNT BALANCE derived from EMPLOYER CONTRIBUTIONS, the part of the nonvested portion that is treated as a FORFEITURE is the total nonvested portion multiplied by a fraction, the numerator of which is the amount of the distribution attributable to EMPLOYER CONTRIBUTIONS and the denominator of which is the total value of the vested ACCOUNT BALANCE derived from EMPLOYER CONTRIBUTIONS. If an EMPLOYEE receives or is deemed to receive a distribution by this Section and the EMPLOYEE resumes SERVICE, the EMPLOYEE'S ACCOUNT BALANCE derived from EMPLOYER CONTRIBUTIONS is restored to the amount on the date of distribution if the EMPLOYEE repays to THIS PLAN the full amount of the distribution attributable to EMPLOYER CONTRIBUTIONS before the earlier of (i) 5 years after the first date on which the PARTICIPANT is reemployed by the EMPLOYER or (ii) the date the PARTICIPANT incurs 5 consecutive 1-year BREAKS IN SERVICE following the date of the distribution. If an EMPLOYEE is deemed to receive a distribution by this Section and the EMPLOYEE resumes SERVICE before the PARTICIPANT incurs 5 consecutive 1-year BREAKS IN SERVICE, on such EMPLOYEE'S reemployment, the EMPLOYEE'S ACCOUNT BALANCE is restored to the amount on the date of such deemed distribution. If a distribution is made at a time when the PARTICIPANT has a nonforfeitable right to less than 100% of the ACCOUNT BALANCE derived from EMPLOYER Contributions and the PARTICIPANT may increase the nonforfeitable percentage in the account: 15 16 (1) A separate ACCOUNT is established for the PARTICIPANT'S interest in THIS PLAN as of the time of the distribution and (2) At any relevant time the PARTICIPANT'S nonforfeitable portion of the separate ACCOUNT is equal to an amount ("X") determined by the formula: X equals P(AB plus (R multiplied by D)) minus (R multiplied by D) To apply the formula: P is the nonforfeitable percentage at the relevant time, AB is the ACCOUNT BALANCE at the relevant time, D is the amount of the distribution, and R is the ratio of the ACCOUNT BALANCE at the relevant time to the ACCOUNT BALANCE after distribution. (b) Vesting Computation Period To compute an EMPLOYEE'S nonforfeitable right to his/her ACCOUNT BALANCE derived from EMPLOYER CONTRIBUTIONS, YEARS OF SERVICE and BREAKS IN SERVICE are measured by the PLAN YEAR. (c) Normal Retirement Age. Notwithstanding the vesting schedule elected by the EMPLOYER in ADOPTION Agreement Section 2, an EMPLOYEE'S right to his or her ACCOUNT BALANCE is nonforfeitable on his or her NORMAL RETIREMENT AGE. (d) One Year Hold-out. If a PARTICIPANT incurs a 1-year BREAK IN SERVICE, YEARS OF SERVICE before such break are not taken into account until the PARTICIPANT completes a YEAR OF Service after such break in SERVICE. (e) Rule of parity. For a PARTICIPANT with 5 or more consecutive 1-year BREAKS IN SERVICE, the PARTICIPANT'S pre-break SERVICE counts in vesting of the EMPLOYER-derived accrued benefit only if either: (1) such PARTICIPANT has any nonforfeitable interest in the accrued benefit attributable to EMPLOYER CONTRIBUTIONS at separation from SERVICE or (2) on returning to SERVICE the number of consecutive 1-year BREAKS IN SERVICE is less than the number of YEARS OF SERVICE. 16 17 f) Pre-break and Post-break Account For a PARTICIPANT with 5 consecutive 1-year BREAKS IN SERVICE, all YEARS OF SERVICE after such BREAKS IN SERVICE are disregarded for vesting the Employer-derived ACCOUNT BALANCE that accrues before such breaks, but both pre-break and post-break SERVICE count for vesting the EMPLOYER-derived ACCOUNT BALANCE that accrues after such breaks. Both ACCOUNTS will share in the earnings and losses of the TRUST. For a PARTICIPANT without 5 consecutive 1-year BREAKS IN SERVICE, both the pre-break and post-break SERVICE count in vesting both the pre-break and post-break EMPLOYER-derived ACCOUNT BALANCE. For a PARTICIPANT with 5 or more consecutive 1-year BREAKS IN SERVICE all SERVICE after such BREAKS IN SERVICE are disregarded for vesting the EMPLOYER-derived ACCOUNT BALANCE that accrued before such BREAKS IN SERVICE. Such PARTICIPANT'S pre-break SERVICE count in vesting the post-break EMPLOYER-derived ACCOUNT Balance only if either: (1) such PARTICIPANT has any nonforfeitable interest in the ACCOUNT BALANCE attributable to EMPLOYER CONTRIBUTIONS at the time of separation from SERVICE or -- (2) upon returning to SERVICE the number of consecutive 1-year BREAKS IN SERVICE is less than the number of YEARS OF SERVICE. (g) Vesting Schedule Amendment If THIS PLAN'S vesting schedule is amended or THIS PLAN is amended in any way that directly or indirectly affects the computation of the PARTICIPANT'S nonforfeitable percentage or if THIS PLAN is deemed amended by an automatic change to or from a TOP-HEAVY vesting schedule, each PARTICIPANT with at least 3 YEARS OF SERVICE may elect, within a reasonable period after the adoption of the amendment or change, to have the nonforfeitable percentage computed by THIS PLAN without such amendment or change. For PARTICIPANTS without at least 1 HOUR OF SERVICE in any PLAN YEAR beginning after December 31, 1988, the preceding sentence is applied by substituting "5 YEARS OF SERVICE" for "3 YEARS OF SERVICE" where such language appears. The period during which the election may be made shall begin with the date the amendment is adopted or deemed to be made and ends on the latest of: (1) 60 days after the amendment is adopted; (2) 60 days after the amendment becomes effective; or 17 18 (3) 60 days after the PARTICIPANT is issued written notice of the amendment by the EMPLOYER or ADMINISTRATOR. No amendment is effective if it decreases a PARTICIPANT'S ACCRUED BENEFIT. Notwithstanding the preceding sentence, a PARTICIPANT'S ACCOUNT BALANCE may be reduced as permitted by CODE SECTION 412(c)(8). For this paragraph, a plan amendment which decreases a PARTICIPANT'S ACCOUNT BALANCE or eliminates an optional form of benefit, as to benefits attributable to SERVICE before the amendment, is treated as reducing an ACCRUED BENEFIT. Furthermore, if the vesting schedule of a plan is amended, for an EMPLOYEE who is a PARTICIPANT as of the later of the date such amendment is adopted or the date it becomes effective, the nonforfeitable percentage (determined as of such date) of such EMPLOYEE'S EMPLOYER-derived ACCRUED BENEFIT is not less than the percentage computed by THIS PLAN without such amendment. If THIS PLAN is or becomes TOP-HEAVY in any PLAN YEAR beginning after December 31, 1983, the provisions of 2.7(d) supersede any conflicting provisions in THIS PLAN or the ADOPTION AGREEMENT. (h) Plan Termination. On THIS PLAN'S termination or partial termination, the ACCOUNT BALANCE of each affected PARTICIPANT is nonforfeitable. (i) Contribution Discontinuance. On THIS PLAN'S complete discontinuance of CONTRIBUTIONS, the ACCOUNT BALANCE of each affected PARTICIPANT is nonforfeitable. 2.7 TOP HEAVY ALLOCATION (a) No Employer defined benefit plan. The EMPLOYER shall not maintain THIS PLAN at any time when the EMPLOYER maintains a defined benefit plan. (b) Minimum allocation. 18 19 (1) When THIS PLAN is TOP-HEAVY and except as otherwise provided in (2) below, the EMPLOYER CONTRIBUTIONS and FORFEITURES allocated to any PARTICIPANT who is not a KEY EMPLOYEE are not less than the lesser of 3% of such PARTICIPANT'S COMPENSATION or if the EMPLOYER has no defined benefit plan which designates THIS PLAN to satisfy CODE SECTION 401, the largest percentage of EMPLOYER CONTRIBUTIONS and FORFEITURES, as a percentage of KEY EMPLOYEE'S COMPENSATION, as limited by CODE SECTION 401(a)(17), allocated to any KEY EMPLOYEE for that year. The minimum allocation is determined without any Social Security contribution. The minimum allocation is made even though, under other plan provisions, the PARTICIPANT is not otherwise entitled to receive an allocation, or receives a lesser allocation for the year because the PARTICIPANT does not (i) complete 500 HOURS OF SERVICE (or any equivalent provided in THIS PLAN), (ii) make MANDATORY EMPLOYEE CONTRIBUTIONS to THIS PLAN or (iii) have a certain amount of Compensation less than a stated amount. (2) The provision in (1) does not apply to any PARTICIPANT to the extent the PARTICIPANT is covered by any other plan or plans of the EMPLOYER and the EMPLOYER provides in ADOPTION AGREEMENT that the minimum allocation or benefit requirement applicable to TOP-HEAVY plans is met in the other plan or plans. (c) Nonforfeitability of minimum allocation. The minimum allocation required (to the extent required to be nonforfeitable in CODE SECTION 416(b)) is not forfeited by CODE SECTION 411(a)(3)(B) or 411(a)(3)(D). (d) Minimum vesting schedules. For any PLAN YEAR in which THIS PLAN is TOP-HEAVY, 1 of the minimum vesting schedules as elected by the EMPLOYER in the ADOPTION AGREEMENT automatically applies to THIS PLAN. The minimum vesting schedule applies to all benefits in 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 THIS PLAN became TOP-HEAVY. No decrease in a PARTICIPANT'S nonforfeitable percentage occurs if THIS PLAN'S status as TOP-HEAVY changes for any PLAN YEAR. However, this paragraph does not apply to the ACCOUNT BALANCES of any EMPLOYEE who does not have an HOUR OF SERVICE after THIS PLAN initially becomes TOP-HEAVY and such EMPLOYEE'S ACCOUNT BALANCE attributable to EMPLOYER CONTRIBUTIONS and FORFEITURES are determined without this paragraph. (e) The EMPLOYER may elect in the ADOPTION AGREEMENT how paired plans will satisfy the Code Section 416 minimum benefit. 19 20 (f) For this subsection, COMPENSATION has the meaning in subsection 2.20(g). 2.8 ELECTIVE DEFERRALS A PARTICIPANT may elect to have his/her COMPENSATION reduced as elected by the EMPLOYER in the ADOPTION AGREEMENT. 2.9 EXCESS ELECTIVE DEFERRALS No PARTICIPANT is permitted to have ELECTIVE DEFERRALS made to THIS PLAN, or any other qualified plan maintained by the EMPLOYER, during any taxable year, in excess of the dollar limitation in CODE SECTION 402(g) in effect at the beginning of such taxable year. 2.10 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS A PARTICIPANT may assign to THIS PLAN any EXCESS ELECTIVE DEFERRALS made during the PARTICIPANT'S taxable year by notifying the ADMINISTRATOR on or before the date specified in the ADOPTION AGREEMENT of the amount of the EXCESS ELECTIVE DEFERRALS to be assigned to THIS PLAN. A Participant is deemed to notify the ADMINISTRATOR of any EXCESS ELECTIVE DEFERRALS from taking into account only those ELECTIVE DEFERRALS made to THIS PLAN and any other plans of the EMPLOYER. Notwithstanding any other provision, EXCESS ELECTIVE DEFERRALS, plus any income and minus any loss allocable thereto, are distributed no later than April 15 to the PARTICIPANT to whose ACCOUNT EXCESS ELECTIVE DEFERRALS are assigned for the preceding year and who claims EXCESS ELECTIVE DEFERRALS for such taxable year. EXCESS ELECTIVE DEFERRALS are adjusted for any income or loss up to the date of distribution. The income or loss allocable to EXCESS ELECTIVE DEFERRALS is the sum of: (i) income or loss allocable to the PARTICIPANT'S ELECTIVE DEFERRAL ACCOUNT for the taxable year multiplied by a fraction, the numerator of which is such PARTICIPANT'S EXCESS ELECTIVE DEFERRALS for the year and the denominator is the PARTICIPANT'S ACCOUNT BALANCE attributable to ELECTIVE DEFERRALS without any income or loss occurring during such taxable year and (ii) 10% of the amount determined by (i) multiplied by the number of whole calendar months between the end of the PARTICIPANT'S taxable year and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. 2.11 ACTUAL DEFERRAL PERCENTAGE TEST PRIOR YEAR TESTING (a) The ACTUAL DEFERRAL PERCENTAGE ("ADP") for a PLAN YEAR for PARTICIPANTS who are HIGHLY COMPENSATED EMPLOYEES for each PLAN YEAR and the prior year's ADP for PARTICIPANTS who were NON-HIGHLY COMPENSATED EMPLOYEES for the prior PLAN YEAR satisfies 1 of the following (the "ADP TEST"): 20 21 (1) The ADP for a PLAN YEAR for PARTICIPANTS who are HIGHLY COMPENSATED EMPLOYEES for the PLAN YEAR does not exceed the prior year's ADP for PARTICIPANTS who were NON-HIGHLY COMPENSATED EMPLOYEES for the prior PLAN YEAR multiplied by 1.25; or (2) The ADP for a PLAN YEAR for PARTICIPANTS who are HIGHLY COMPENSATED EMPLOYEES for the PLAN YEAR does not exceed the prior year's ADP for PARTICIPANTS who were NON-HIGHLY COMPENSATED EMPLOYEES for the prior PLAN YEAR multiplied by 2.0, provided the ADP for PARTICIPANTS who are HIGHLY COMPENSATED EMPLOYEES does not exceed the ADP for PARTICIPANTS who were NON-HIGHLY COMPENSATED EMPLOYEES in the prior PLAN YEAR by more than 2 percentage points. For the first PLAN YEAR, THIS PLAN permits any PARTICIPANT to make ELECTIVE DEFERRALS and this is not a successor plan, for the foregoing tests, the prior year's NON-HIGHLY COMPENSATED EMPLOYEES' ADP shall be 3% unless the EMPLOYER has elected to use the PLAN YEAR'S ADP for these PARTICIPANTS. CURRENT YEAR TESTING If elected by the EMPLOYER, the ADP TESTS in (1) and (2), above, will be applied by comparing the current PLAN YEAR'S ADP for PARTICIPANTS who are HIGHLY COMPENSATED Employees with the current PLAN YEAR'S ADP for PARTICIPANTS who are NON-HIGHLY COMPENSATED EMPLOYEES. Once made, this election can only be undone if THIS PLAN meets the requirements for changing to prior year testing set forth in Notice 98-1 (or superseding guidance). (b) A PARTICIPANT is a HIGHLY COMPENSATED EMPLOYEE for a particular PLAN YEAR if he or she meets the definition of a HIGHLY COMPENSATED EMPLOYEE in effect for that PLAN YEAR. Similarly, a PARTICIPANT is a NON-HIGHLY COMPENSATED EMPLOYEE for a particular PLAN YEAR if he or she does not meet the definition of a HIGHLY COMPENSATED EMPLOYEE in effect for that PLAN YEAR. (c) The ADP for any PARTICIPANT who is a HIGHLY COMPENSATED EMPLOYEE for the PLAN YEAR and who is eligible to have ELECTIVE DEFERRALS (and QUALIFIED NON-ELECTIVE CONTRIBUTIONS or QUALIFIED MATCHING CONTRIBUTIONS, or both, if treated as ELECTIVE DEFERRALS for the ADP test) allocated to his or her accounts under 2 or more arrangements described in CODE SECTION 401(k), maintained by the EMPLOYER are determined as if such ELECTIVE DEFERRALS (and, if applicable, such QUALIFIED NON-ELECTIVE CONTRIBUTIONS or QUALIFIED MATCHING CONTRIBUTIONS, or both) were made by 1 arrangement. If a HIGHLY COMPENSATED EMPLOYEE participates in 2 or more cash 21 22 or deferred arrangements having different PLAN YEARS, all cash or deferred arrangements ending with or within the same calendar year are treated as 1 arrangement. Notwithstanding the foregoing, certain plans are treated as separate if mandatorily disaggregated by CODE SECTION 401(k) REGULATIONS. (d) If THIS PLAN satisfies the requirements of CODE SECTIONS 401(k), 401(a)(4), or 410(b) only if aggregated with 1 or more other plans, or if 1 or more other plans satisfy the requirements of such CODE SECTIONS only if aggregated with THIS PLAN, this subsection applies by determining the ADP of EMPLOYEES as if all such plans were 1 plan. Any adjustments to the NON-HIGHLY COMPENSATED EMPLOYEE ADP for the prior year will be according to Notice 98-1 and any superseding guidance, unless the EMPLOYER has elected in the ADOPTION AGREEMENT to use the current year testing method. Plans may be aggregated in order to satisfy CODE SECTION 401(k) only if they have the same PLAN YEAR and use the same ADP testing method. (e) To determine the ADP TEST, EMPLOYEE ELECTIVE DEFERRALS, QUALIFIED NON-ELECTIVE CONTRIBUTIONS and QUALIFIED MATCHING CONTRIBUTIONS are made before the end of the 12-month period immediately following the PLAN YEAR to which such contributions relate. (f) The EMPLOYER maintains records sufficient to demonstrate satisfaction of the ADP TEST and the amount of QUALIFIED NON-ELECTIVE CONTRIBUTIONS or QUALIFIED MATCHING CONTRIBUTIONS, or both, used in such test. 2.12 DISTRIBUTION OF EXCESS CONTRIBUTIONS Notwithstanding any other provision, EXCESS CONTRIBUTIONS, plus any income and minus any loss allocable thereto, are distributed no later than the last day of each PLAN YEAR to the PARTICIPANTS to whose ACCOUNTS such EXCESS CONTRIBUTIONS were allocated for the preceding PLAN YEAR. EXCESS CONTRIBUTIONS are allocated to the HIGHLY COMPENSATED EMPLOYEES with the largest amounts of EMPLOYER CONTRIBUTIONS taken into account in calculating the ADP TEST for the year in which the excess arose, beginning with the HIGHLY COMPENSATED EMPLOYEE with the largest amount of such EMPLOYER CONTRIBUTIONS and continuing in descending order until all the EXCESS CONTRIBUTIONS have been allocated. For the preceding sentence, the "largest amount" is determined after distribution of any EXCESS CONTRIBUTIONS. If such excess amounts are distributed more than 2 " months after the last day of the PLAN YEAR in which such excess amounts arose, a 10% excise tax is imposed on the EMPLOYER as to such amounts. EXCESS CONTRIBUTIONS (including the amounts recharacterized) are treated as ANNUAL ADDITIONS to THIS PLAN. 22 23 EXCESS CONTRIBUTIONS are adjusted for any income or loss up to the date of distribution. The income or loss allocable to EXCESS CONTRIBUTIONS allocated to each PARTICIPANT is the sum of: (i) income or loss allocable to the PARTICIPANT'S ELECTIVE DEFERRAL ACCOUNT (and, if applicable, the QUALIFIED NON-ELECTIVE CONTRIBUTION ACCOUNT or the QUALIFIED MATCHING CONTRIBUTIONS ACCOUNT or both) for the PLAN YEAR multiplied by a fraction, the numerator of which is such PARTICIPANT'S EXCESS CONTRIBUTIONS for the year and the denominator is the PARTICIPANT'S ACCOUNT BALANCE attributable to ELECTIVE DEFERRALS (and QUALIFIED NON-ELECTIVE CONTRIBUTIONS or QUALIFIED MATCHING CONTRIBUTIONS, or both, if any of such contributions are included in the ADP TEST) without regard to any income or loss occurring during such PLAN YEAR; and (ii) 10% of the amount determined in (i) multiplied by the number of whole calendar months between the end of the PLAN YEAR and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. EXCESS CONTRIBUTIONS are distributed from the PARTICIPANT'S ELECTIVE DEFERRAL ACCOUNT, and QUALIFIED MATCHING CONTRIBUTION ACCOUNT (if applicable) in proportion to the PARTICIPANT'S ELECTIVE DEFERRALS and QUALIFIED MATCHING CONTRIBUTIONS (to the extent used in the ADP test) for the PLAN YEAR. EXCESS CONTRIBUTIONS are distributed from the PARTICIPANT'S QUALIFIED NON-ELECTIVE CONTRIBUTION ACCOUNT only to the extent that such EXCESS CONTRIBUTIONS exceed the balance in the PARTICIPANT'S ELECTIVE DEFERRAL ACCOUNT and QUALIFIED MATCHING CONTRIBUTION ACCOUNT. 2.13 RECHARACTERIZATION A PARTICIPANT may recharacterize his or her EXCESS CONTRIBUTIONS as an amount distributed to the PARTICIPANT and then contributed by the PARTICIPANT to THIS PLAN. Recharacterized amounts remain nonforfeitable. Amounts may not be recharacterized by a HIGHLY COMPENSATED EMPLOYEE to the extent that such amount, in combination with other EMPLOYEE CONTRIBUTIONS made by that EMPLOYEE, exceed any stated limit in THIS PLAN for EMPLOYEE CONTRIBUTIONS. Recharacterization must occur no later than 2 " months after the last day of the PLAN YEAR in which such EXCESS CONTRIBUTIONS arose and is deemed to occur no earlier than the date the last HIGHLY COMPENSATED EMPLOYEE is informed in writing of the amount recharacterized and the consequences thereof. Recharacterized amounts are taxable to the PARTICIPANT for the PARTICIPANT'S tax year in which the PARTICIPANT would have received them in cash. 2.14 MATCHING CONTRIBUTIONS If the EMPLOYER elects in the ADOPTION AGREEMENT, the EMPLOYER makes MATCHING CONTRIBUTIONS to THIS PLAN. (a) Forfeitures and Vesting of MATCHING CONTRIBUTIONS 23 24 MATCHING CONTRIBUTIONS are vested by ADOPTION AGREEMENT Section 2. MATCHING CONTRIBUTIONS are fully vested at NORMAL RETIREMENT AGE, on complete or partial termination, or on complete discontinuance of EMPLOYER CONTRIBUTIONS. FORFEITURES of MATCHING CONTRIBUTIONS, other than EXCESS AGGREGATE CONTRIBUTIONS, are made by Section 2. (b) QUALIFIED MATCHING CONTRIBUTIONS If elected by the EMPLOYER in the ADOPTION AGREEMENT, the EMPLOYER makes QUALIFIED MATCHING CONTRIBUTIONS to THIS PLAN. 2.15 LIMITATIONS ON EMPLOYEE CONTRIBUTIONS AND MATCHING CONTRIBUTIONS PRIOR YEAR TESTING (a) The AVERAGE CONTRIBUTION PERCENTAGE ("ACP") for a PLAN YEAR for PARTICIPANTS who are HIGHLY COMPENSATED EMPLOYEES for each PLAN YEAR and the prior year's ACP for PARTICIPANTS who were NON-HIGHLY COMPENSATED EMPLOYEES for the same PLAN YEAR satisfy 1 of the following tests ("ACP TEST"): (1) The ACP for a PLAN YEAR for PARTICIPANTS who are HIGHLY COMPENSATED EMPLOYEES for the PLAN YEAR do not exceed the prior year's ACP for PARTICIPANTS who were NON-HIGHLY COMPENSATED EMPLOYEES for the prior PLAN YEAR multiplied by 1.25; or (2) The ACP for a PLAN YEAR for PARTICIPANTS who are HIGHLY COMPENSATED EMPLOYEES for the PLAN YEAR do not exceed the prior year's ACP for PARTICIPANTS who were NON-HIGHLY COMPENSATED EMPLOYEES for the prior PLAN YEAR multiplied by 2, provided that the ACP for PARTICIPANTS who are HIGHLY COMPENSATED EMPLOYEES does not exceed the ACP for Participants who were NON-HIGHLY COMPENSATED EMPLOYEES in the prior PLAN YEAR by more than 2 percentage points. For the first PLAN YEAR THIS PLAN permits any PARTICIPANT to make EMPLOYEE CONTRIBUTIONS, provides for MATCHING CONTRIBUTIONS or both, and this is not a successor plan, for purposes of the foregoing tests, the prior year's NON-HIGHLY COMPENSATED EMPLOYEES' ACP shall be 3% unless the EMPLOYER has elected to use the PLAN YEAR'S ACP for these PARTICIPANTS. 24 25 CURRENT YEAR TESTING If elected by the EMPLOYER, the ACP Tests in (1) and (2), above, will be applied by comparing the current year's ACP for PARTICIPANTS who are HIGHLY COMPENSATED EMPLOYEES for each PLAN YEAR with the current PLAN YEAR'S ACP for PARTICIPANTS who are NON-HIGHLY COMPENSATED EMPLOYEES. Once made, this election can only be undone if THIS PLAN meets the requirements for changing to prior year testing set forth in Notice 98-1 (or superseding guidance). 25 26 SPECIAL RULES: (c) If 1 or more HIGHLY COMPENSATED EMPLOYEES participate in both a CODA and a plan subject to the ACP TEST maintained by the EMPLOYER and the sum of the ADP and ACP of those HIGHLY COMPENSATED EMPLOYEES subject to either or both tests exceeds the AGGREGATE LIMIT, the ACP of those HIGHLY COMPENSATED EMPLOYEES who also participate in a CODA will be reduced in the manner described in subsection 2.17 so that such limit is not exceeded. The amount by which each HIGHLY COMPENSATED EMPLOYEE'S CONTRIBUTION PERCENTAGE AMOUNTS is reduced is treated as an EXCESS AGGREGATE CONTRIBUTION. The ADP and ACP of the HIGHLY COMPENSATED EMPLOYEES are determined after any corrections required to meet the ADP and ACP Tests and are deemed to be the maximum permitted by such tests for the PLAN YEAR. Multiple use does not occur if either the ADP or ACP of the HIGHLY COMPENSATED EMPLOYEES does not exceed 1.25 multiplied by the ADP and ACP of the NON-HIGHLY COMPENSATED EMPLOYEES. (d) The CONTRIBUTION PERCENTAGE for any PARTICIPANT who is a HIGHLY COMPENSATED EMPLOYEE and who is eligible to have CONTRIBUTION PERCENTAGE AMOUNTS allocated to his or her account under 2 or more plans described in CODE SECTION 401(a), or arrangements described in CODE SECTION 401(k) maintained by the EMPLOYER, are determined as if the total of such CONTRIBUTION PERCENTAGE AMOUNTS was made to each plan. If a HIGHLY COMPENSATED EMPLOYEE participates in 2 or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year are treated as 1 arrangement. Notwithstanding the foregoing, certain plans are treated as separate if mandatorily disaggregated by CODE SECTION 401(m) REGULATIONS. (e) If THIS PLAN satisfies CODE SECTIONS 401(m), 401(a)(4) or 410(b) only if aggregated with 1 or more other plans, or if 1 or more other plans satisfy such CODE SECTIONS only if aggregated with THIS PLAN, this Section is applied by determining the CONTRIBUTION PERCENTAGE of EMPLOYEES as if all such plans were 1 plan. Any adjustments to the NON-HIGHLY COMPENSATED EMPLOYEE ACP for the prior year will be according to Notice 98-1 and any superseding guidance, unless the EMPLOYER has elected to use the current year testing method. Plans may be aggregated to satisfy CODE SECTION 401(m) only if they have the same PLAN YEAR and use the same ACP testing method. (f) To determine the CONTRIBUTION PERCENTAGE test, EMPLOYEE CONTRIBUTIONS are considered to have been made in the PLAN YEAR in which contributed to the TRUST. MATCHING CONTRIBUTIONS and QUALIFIED NON-ELECTIVE CONTRIBUTIONS are considered made for a PLAN YEAR if made no later than the end of the 12-month period beginning on the day after the close of the PLAN YEAR. 26 27 (g) The EMPLOYER maintains records sufficient to demonstrate satisfaction of the ACP TEST and the amount of QUALIFIED NON-ELECTIVE CONTRIBUTIONS or QUALIFIED MATCHING CONTRIBUTIONS, or both, used in such test. 2.16 DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS Notwithstanding any other provision, EXCESS AGGREGATE CONTRIBUTIONS, plus any income and minus any loss allocable thereto, are forfeited, if forfeitable, or if not forfeitable, distributed no later than the last day of each PLAN YEAR to PARTICIPANTS to whose ACCOUNTS such EXCESS AGGREGATE CONTRIBUTIONS were allocated for the preceding PLAN YEAR. EXCESS AGGREGATE CONTRIBUTIONS are allocated to the HIGHLY COMPENSATED EMPLOYEES with the largest contribution percentage amounts taken into account in calculating the ACP TEST for the year in which the excess arose, beginning with the HIGHLY COMPENSATED EMPLOYEE with the largest amount of such contribution percentage amounts and continuing in descending order until all the EXCESS AGGREGATE CONTRIBUTIONS have been allocated. For the preceding sentence, the "largest amount" is determined after distribution of any EXCESS AGGREGATE CONTRIBUTIONS. If such EXCESS AGGREGATE CONTRIBUTIONS are distributed more than 2 " months after the last day of the PLAN YEAR in which such excess amounts arose, a 10% excise tax is imposed on the EMPLOYER as to those amounts. EXCESS AGGREGATE CONTRIBUTIONS are treated as ANNUAL ADDITIONS to THIS PLAN. EXCESS AGGREGATE CONTRIBUTIONS are adjusted for any income or loss up to the date of distribution. The income or loss allocable to EXCESS AGGREGATE CONTRIBUTIONS allocated to each PARTICIPANT is the sum of: (i) income or loss allocable to the PARTICIPANT'S EMPLOYEE CONTRIBUTION ACCOUNT, MATCHING CONTRIBUTION ACCOUNT, QUALIFIED MATCHING CONTRIBUTION ACCOUNT (if any, and if all amounts therein are not used in the ADP test) and, if applicable, QUALIFIED NON-ELECTIVE CONTRIBUTION ACCOUNT and ELECTIVE DEFERRAL ACCOUNT for the PLAN YEAR multiplied by a fraction, the numerator of which is such PARTICIPANT'S EXCESS AGGREGATE CONTRIBUTIONS for the year and the denominator is the PARTICIPANT'S ACCOUNT BALANCE(S) attributable to CONTRIBUTION PERCENTAGE AMOUNTS without regard to any income or loss occurring during such PLAN YEAR; and (ii) 10% of the amount determined in (i) multiplied by the number of whole calendar months between the end of the PLAN YEAR and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. 2.17 QUALIFIED NON-ELECTIVE CONTRIBUTIONS The EMPLOYER may make QUALIFIED NON-ELECTIVE CONTRIBUTIONS to THIS PLAN as elected in the ADOPTION AGREEMENT. In addition, if the Employer has elected to use the current year testing method, in lieu of distributing EXCESS CONTRIBUTIONS in subsection 2.12, or EXCESS AGGREGATE CONTRIBUTIONS as provided in 27 28 subsection 2.16, and to the extent elected by the EMPLOYER in the ADOPTION AGREEMENT, the EMPLOYER may make QUALIFIED NON-ELECTIVE CONTRIBUTIONS for NON-HIGHLY COMPENSATED EMPLOYEES sufficient to satisfy either the AVERAGE DEFERRAL PERCENTAGE test or the ACTUAL CONTRIBUTION PERCENTAGE test, or both, pursuant to REGULATIONS. 2.18 FORFEITURES OF EXCESS AGGREGATE CONTRIBUTIONS FORFEITURES of EXCESS AGGREGATE CONTRIBUTIONS may either be reallocated to the ACCOUNTS of NON-HIGHLY COMPENSATED EMPLOYEES or applied to reduce EMPLOYER CONTRIBUTIONS, as elected in ADOPTION AGREEMENT Section 2. EXCESS AGGREGATE CONTRIBUTIONS are forfeited, if forfeitable, or distributed on a pro-rata basis from the PARTICIPANT'S EMPLOYEE CONTRIBUTION ACCOUNT, MATCHING CONTRIBUTION ACCOUNT, and QUALIFIED MATCHING CONTRIBUTION ACCOUNT (and, if applicable, the PARTICIPANT'S QUALIFIED NON-ELECTIVE CONTRIBUTION ACCOUNT or ELECTIVE DEFERRAL ACCOUNT, or both). 2.19 NONFORFEITABILITY AND VESTING The PARTICIPANT'S ACCRUED BENEFIT derived from ELECTIVE DEFERRALS, QUALIFIED NON-ELECTIVE CONTRIBUTIONS, EMPLOYEE NONDEDUCTIBLE CONTRIBUTIONS, and QUALIFIED MATCHING CONTRIBUTIONS is nonforfeitable. Separate ACCOUNTS for ELECTIVE DEFERRALS, QUALIFIED NON-ELECTIVE CONTRIBUTIONS, EMPLOYEE NONDEDUCTIBLE CONTRIBUTIONS, MATCHING CONTRIBUTIONS, and QUALIFIED MATCHING CONTRIBUTIONS are maintained for each PARTICIPANT. Each ACCOUNT is credited with the applicable contributions and earnings thereon. DEFINITIONS 2.20 COMPENSATION (a) "COMPENSATION" is compensation as that term is defined in this subsection 2.20(a). For any SELF-EMPLOYED INDIVIDUAL in THIS PLAN, COMPENSATION is EARNED INCOME. COMPENSATION includes only that compensation which is actually paid to the PARTICIPANT during the determination period. Except as provided elsewhere in THIS PLAN, the determination period is the period elected by the EMPLOYER in the ADOPTION AGREEMENT. If the EMPLOYER makes no election, the determination period is the PLAN YEAR. Notwithstanding the above, if elected by the EMPLOYER in the ADOPTION AGREEMENT, COMPENSATION includes any amount contributed by the EMPLOYER by a salary reduction agreement and not includible in the gross income of the EMPLOYEE in CODE SECTIONS 125, 402(e)(3), 402(h)(1)(B) or 403(b). 28 29 In addition, the EMPLOYER may elect in the ADOPTION AGREEMENT for COMPENSATION and 414(s) COMPENSATION to not include gross income from CODE SECTIONS 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457(b). For PLAN YEARS beginning on or after January 1, 1989, and before January 1, 1994, The annual COMPENSATION of each PARTICIPANT to determine all benefits in THIS PLAN for any PLAN YEAR does not exceed $200,000, adjusted at the same time and in the same manner as in CODE SECTION 415(d), except that the dollar increase in effect on January 1 of any calendar year is effective for PLAN YEARS beginning in such calendar year and the first adjustment to the $200,000 limitation is effective on January 1, 1990. For PLAN YEARS beginning on or after January 1, 1994, the annual COMPENSATION of each PARTICIPANT to determine all benefits in THIS PLAN for any PLAN YEAR does not exceed $150,000, as adjusted for increases in the cost-of-living by CODE SECTION 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any determination period beginning in such calendar year. If a determination period consists of fewer than 12 months the annual COMPENSATION limit is an amount equal to the otherwise applicable annual COMPENSATION limit multiplied by a fraction, the numerator of which is the number of months in the short determination period, and the denominator of which is 12. If COMPENSATION for any prior determination period is taken into account to determine a PARTICIPANT'S allocations for the current PLAN YEAR, the COMPENSATION for such prior determination period is subject to the applicable annual COMPENSATION limit in effect for that prior period. For this purpose, in determining allocations in PLAN YEARS beginning on or after January 1, 1989, the annual COMPENSATION limit in effect for determination periods beginning before that date is $200,000. (b) "EARNED INCOME" is the net earnings from self-employment in the trade or business for which THIS PLAN is established, for which personal services of the individual are a material income-producing factor. Net earnings are determined without 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 by CODE SECTION 404. Net earnings are determined with the deduction allowed to the taxpayer by CODE SECTION 164(f) for taxable years beginning after December 31, 1989. (c) "PLAN YEAR" is the 12-consecutive month period elected by the EMPLOYER in the ADOPTION AGREEMENT. 29 30 (d) "DISABILITY" means inability to engage in any substantial gainful activity because 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 permanence and degree of such impairment are to be supported by medical evidence. If elected by the EMPLOYER in the ADOPTION AGREEMENT, nonforfeitable contributions are made to THIS PLAN on behalf of each disabled PARTICIPANT (who is not a HIGHLY COMPENSATED EMPLOYEE within the meaning of subsection 2.22(i)). (e) "OWNER-EMPLOYEE" is an individual who is a sole proprietor, or who is a partner owning more than 10% of either the capital or profits interest of the partnership. (f) "SELF-EMPLOYED INDIVIDUAL" is an individual who has earned income for the taxable year from the trade or business for which THIS PLAN is established; 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. (g) "COMPENSATION" is 1 of the following as elected by the EMPLOYER in the ADOPTION AGREEMENT: (1) Information required to be reported by CODE SECTIONS 6041, 6051, and 6052 (Wages, tips and other compensation as reported on Form W-2). COMPENSATION is defined as wages in CODE 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 by CODE SECTIONS 6041(d), 6051(a)(3), and 6052. COMPENSATION is determined without any rules in CODE 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 CODE SECTION 3401(a)(2)). (2) Section 3401(a) wages. COMPENSATION is defined as wages by CODE SECTION 3401(a) for income tax withholding at the source but determined without 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 CODE SECTION 3401(a)(2)). (3) 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 THIS 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, 30 31 tips, bonuses, fringe benefits, and reimbursements or other expense allowances in a nonaccountable plan (as described in REGULATIONS 1.62-2(c)), and excluding the following: 31 32 (A) EMPLOYER contributions to a plan of deferred compensation not includible in the EMPLOYEE'S gross income for the taxable year in which contributed, or EMPLOYER CONTRIBUTIONS by a simplified employee pension plan, or any distributions from a plan of deferred compensation; (B) 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; (C) Amounts realized from the sale, exchange or other disposition of stock acquired by a qualified stock option; and (D) other amounts which received special tax benefits, or contributions made by the EMPLOYER (whether or not under a salary reduction agreement) towards the purchase of an annuity contract in CODE SECTION 403(b) (whether or not the contributions are actually excludable from the gross income of the EMPLOYEE). For any SELF-EMPLOYED INDIVIDUAL, "Compensation" is EARNED INCOME. (1) For limitation years beginning after December 31, 1991, applying the limitations of this article, COMPENSATION for a LIMITATION YEAR is the COMPENSATION actually paid or made available in gross income during such LIMITATION YEAR. (2) Notwithstanding the preceding sentence, COMPENSATION for a PARTICIPANT in a defined contribution plan who is permanently and totally disabled (in CODE SECTION 22(e)(3)) 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; for limitation years beginning before January 1, 1997, but not for limitation years beginning after December 31, 1996, such imputed COMPENSATION for the disabled PARTICIPANT may be taken into account only if the PARTICIPANT is not a HIGHLY COMPENSATED EMPLOYEE (in subsection 2.22(i)) and contributions made on behalf of such PARTICIPANT are nonforfeitable when made. For limitation years beginning after December 31, 1997, to apply the limitations of this Section, COMPENSATION paid or made available during such limitation year shall include any elective deferral (in CODE SECTION 32 33 402(g)(3)), and any amount contributed or deferred by the EMPLOYER at the election of the EMPLOYEE and not includible in the gross income of the EMPLOYEE by CODE SECTION 125 or 457. (h) "ACCOUNT" is the separate account maintained for each EMPLOYEE. Separate accounts for ELECTIVE DEFERRALS, QUALIFIED NON-ELECTIVE CONTRIBUTIONS, QUALIFIED MATCHING CONTRIBUTIONS, MATCHING CONTRIBUTIONS, NON-ELECTIVE EMPLOYER CONTRIBUTIONS, NONDEDUCTIBLE EMPLOYEE CONTRIBUTIONS and EMPLOYEE ROLLOVER CONTRIBUTIONS are maintained for each PARTICIPANT. Each ACCOUNT is credited with the applicable contributions, net earnings and losses, and distributions. 2.21 MAXIMUM ANNUAL ADDITIONS (a) "ANNUAL ADDITION" is the sum of the following amounts credited to a PARTICIPANT'S ACCOUNT for the LIMITATION YEAR: (1) EMPLOYER CONTRIBUTIONS which include EMPLOYEE ELECTIVE DEFERRALS, QUALIFIED NON-ELECTIVE CONTRIBUTIONS, QUALIFIED MATCHING CONTRIBUTIONS, MATCHING CONTRIBUTIONS, and NON-ELECTIVE EMPLOYER CONTRIBUTIONS; (2) EMPLOYEE NONDEDUCTIBLE CONTRIBUTIONS; (3) FORFEITURES; (4) amounts allocated, after March 31, 1984, to an individual medical account, in CODE SECTION 415(1)(2), which is part of a pension or annuity plan maintained by the EMPLOYER are treated as ANNUAL ADDITIONS to a defined contribution plan. Also amounts from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, attributable to post-retirement medical benefits, allocated to the separate account of a KEY EMPLOYEE, in CODE SECTION 419A(d)(3) of the Code, under a welfare benefit fund, in CODE SECTION 419(e), maintained by the EMPLOYER are treated as ANNUAL ADDITIONS to a defined contribution plan; and (5) allocations by a simplified employee pension. For this purpose, any EXCESS AMOUNT applied by subsections 2.4(d) or 2.4(j) in the LIMITATION YEAR to reduce EMPLOYER CONTRIBUTIONS are considered ANNUAL ADDITIONS for such LIMITATION YEAR. (b) "DEFINED CONTRIBUTION DOLLAR LIMITATION" is the limit in CODE SECTION 415(c) as adjusted by CODE SECTION 415(d) as in effect for the LIMITATION YEAR. 33 34 (c) EMPLOYER includes all members of a controlled group of corporations (in CODE SECTION 414(b) as modified by CODE SECTION 415(h)), all commonly controlled trades or businesses (in CODE SECTION 414(c) as modified by CODE SECTION 415(h)) or affiliated service groups (in CODE SECTION 414(m)) of which the EMPLOYER is a part, and any other entity required to be aggregated with the EMPLOYER in CODE SECTION 414(o) and its REGULATIONS. (d) "EXCESS AMOUNT" is the excess of the PARTICIPANT'S ANNUAL ADDITIONS for the LIMITATION YEAR over the MAXIMUM PERMISSIBLE AMOUNT. (e) "HIGHEST AVERAGE COMPENSATION" is a PARTICIPANT'S average COMPENSATION for the 3 consecutive YEARS OF SERVICE with the EMPLOYER that produces the highest average. (f) "LIMITATION YEAR" is a calendar year, or the 12-consecutive month period the EMPLOYER elects in ADOPTION AGREEMENT Section 2. 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. "MASTER OR PROTOTYPE PLAN" is a plan the form of which is the subject of a favorable opinion letter from the Internal Revenue Service. (g) "MAXIMUM PERMISSIBLE AMOUNT" is the maximum ANNUAL ADDITION that may be contributed or allocated to a PARTICIPANT'S ACCOUNT in THIS PLAN for any LIMITATION YEAR which shall not exceed the lesser of: (1) the DEFINED CONTRIBUTION DOLLAR LIMITATION or (2) 25% of the PARTICIPANT'S COMPENSATION for the LIMITATION YEAR. The compensation limitation referred to in 2.20(a) does not apply to any contribution for medical benefits (in CODE SECTION 401(h) or 419A(f)(2)) which is otherwise treated as an ANNUAL ADDITION in CODE SECTION 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 34 35 PERMISSIBLE AMOUNT does not exceed the DEFINED CONTRIBUTION DOLLAR LIMITATION multiplied by the following fraction: NUMBER OF MONTHS IN THE SHORT LIMITATION YEAR DIVIDED BY 12 "PROJECTED ANNUAL BENEFIT" is the annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or QUALIFIED JOINT AND SURVIVOR ANNUITY) to which the PARTICIPANT would be entitled by THIS PLAN assuming: (1) the PARTICIPANT continues employment until NORMAL RETIREMENT AGE in THIS PLAN (or current age, if later), and (2) the PARTICIPANT'S COMPENSATION for the current LIMITATION YEAR and all other relevant factors used to determine benefits under THIS PLAN remain constant for all future LIMITATION YEARS. 2.22 TOP-HEAVY (a) "KEY EMPLOYEE" is any EMPLOYEE or former EMPLOYEE (and the BENEFICIARIES of such EMPLOYEE) who at any time during the determination period was an officer of the EMPLOYER if such individual's ANNUAL COMPENSATION exceeds 50% of the dollar limitation in CODE SECTION 415(b)(1)(A), an owner (or considered an owner under CODE SECTION 318) of 1 of the 10 largest interests in the EMPLOYER if such individual's compensation exceeds 100% of the dollar limitation under CODE Section 415(c)(1)(A), a 5% OWNER of the EMPLOYER, or a 1% OWNER of the EMPLOYER who has an ANNUAL COMPENSATION of more than $150,000. "NON-KEY EMPLOYEE" is an EMPLOYEE who is not a KEY EMPLOYEE. "ANNUAL COMPENSATION" is compensation as defined in ADOPTION AGREEMENT Section 2, but including amounts contributed by the EMPLOYER by a salary reduction agreement which are excludable from the EMPLOYEE'S gross income in CODE SECTION 125, 402(e)(3), 402(h)(1)(B) or 403(b). The "Determination Period" is the PLAN YEAR containing the determination date and the 4 preceding PLAN YEARS. To determine who is a KEY EMPLOYEE is made by CODE SECTION 416(i)(1) and its REGULATIONS. (b) "Top-Heavy Plan" is any PLAN YEAR beginning after December 31, 1983, THIS PLAN if any of the following conditions exists: 35 36 (1) If the TOP-HEAVY RATIO for THIS PLAN exceeds 60% and THIS PLAN is not part of any REQUIRED AGGREGATION GROUP or PERMISSIVE AGGREGATION GROUP of plans. (2) If THIS PLAN is a part of a REQUIRED AGGREGATION GROUP of plans but not part of a PERMISSIVE AGGREGATION GROUP and the TOP-HEAVY RATIO for the group of plans exceeds 60%. (3) If THIS PLAN is a part of a REQUIRED AGGREGATION GROUP and part of a PERMISSIVE AGGREGATION GROUP of plans and the TOP-HEAVY RATIO for the PERMISSIVE AGGREGATION GROUP exceeds 60%. (c) "TOP-HEAVY RATIO" is (1) If the EMPLOYER maintains 1 or more defined contribution plans (including any Simplified Employee Pension Plan) and the EMPLOYER has not maintained any defined benefit plan which during the 5-year period ending on the DETERMINATION DATE(S) has or has had accrued benefits, the TOP-HEAVY RATIO for THIS PLAN alone or for the REQUIRED OR PERMISSIVE AGGREGATION GROUP as appropriate is a fraction, the numerator of which is the sum of the ACCOUNT BALANCES of all KEY EMPLOYEES as of the DETERMINATION DATE(S) (including any part of any ACCOUNT BALANCE distributed in the 5-year period ending on the DETERMINATION DATE(S)), and the denominator of which is the sum of all ACCOUNT BALANCES (including any part of any account balance distributed in the 5-year period ending on the DETERMINATION DATE(S)), both computed by CODE SECTION 416 and its REGULATIONS. Both the numerator and denominator of the TOP-HEAVY RATIO are increased to reflect any contribution not actually made as of the DETERMINATION DATE, but which is required to be taken into account on that date by CODE SECTION 416 and its REGULATIONS. (2) If the EMPLOYER maintains 1 or more defined contribution plans (including any Simplified Employee Pension Plan) and the EMPLOYER maintains or has maintained 1 or more defined benefit plans which during the 5-year period ending on the DETERMINATION DATE(S) has or has had any accrued benefits, the TOP-HEAVY RATIO for any REQUIRED OR PERMISSIVE AGGREGATION GROUP as appropriate is a fraction, the numerator of which is the sum of ACCOUNT BALANCES in the aggregated defined contribution plan or plans for all KEY EMPLOYEES, determined by (1) above, and 36 37 the present value of accrued benefits under the aggregated defined benefit plan or plans for all KEY EMPLOYEES as of the DETERMINATION DATE(S), and the denominator of which is the sum of the ACCOUNT BALANCES under the aggregated defined contribution plan or plans for all PARTICIPANTS, determined by (1) above, and the present value of accrued benefits in the defined benefit plan or plans for all PARTICIPANTS as of the DETERMINATION DATE(S), all determined by CODE SECTION 416 and its REGULATIONS. The accrued benefits under a defined benefit plan in both the numerator and denominator of the TOP-HEAVY RATIO are increased for any distribution of an accrued benefit made in the 5-year period ending on the DETERMINATION DATE. (3) For (1) and (2) above the value of ACCOUNT BALANCES and the PRESENT Value of accrued benefits are 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 its REGULATIONS for the first and second PLAN YEARS of a defined benefit plan. The ACCOUNT BALANCES and accrued benefits of a PARTICIPANT (i) who is not a KEY EMPLOYEE but who was a KEY EMPLOYEE in a prior year, or (ii) who has not been credited with at least 1 HOUR OF SERVICE with any EMPLOYER maintaining THIS PLAN at any time during the 5-year period ending on the DETERMINATION DATE is disregarded. The calculation of the TOP-HEAVY RATIO, and the extent to which distributions, rollovers, and transfers are taken into account are made in accordance with CODE Section 416 and its REGULATIONS. DEDUCTIBLE EMPLOYEE CONTRIBUTIONS are not be taken into account to compute the TOP-HEAVY RATIO. When aggregating plans the value of ACCOUNT BALANCES and accrued benefits are calculated with reference to the DETERMINATION DATES within the same calendar year. The accrued benefit of a PARTICIPANT other than a KEY EMPLOYEE is determined by (i) the method, if any, that uniformly applies for accrual purposes in all defined benefit plans maintained by the EMPLOYER or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of CODE SECTION 411(b)(1)(C). (4) The EMPLOYER shall not maintain THIS PLAN at any time when the TOP-HEAVY RATIO exceeds 90%. (d) "PERMISSIVE AGGREGATION GROUP" is the required aggregation group of plans plus any other plan or plans of the EMPLOYER which, when considered as a group with the required aggregation group, continues to satisfy CODE SECTIONS 401(a)(4) and 410. (e) "REQUIRED AGGREGATION GROUP" is (i) each qualified plan of the EMPLOYER in which at least 1 KEY EMPLOYEE participates or participated at any time during the determination period (regardless of whether the plan has terminated), and (ii) any other qualified plan of the EMPLOYER which enables a plan described in (i) to satisfy 37 38 CODE SECTIONS 401(a)(4) or 410. (f) "DETERMINATION DATE" is, for any plan year subsequent to the first plan year, the last day of the preceding plan year. For the first plan year of the plan, it is the last day of that year. (g) "VALUATION DATE" is the date the EMPLOYER elects in the ADOPTION AGREEMENT as of which ACCOUNT BALANCES or accrued benefits are valued for calculating the TOP-HEAVY RATIO. (h) "PRESENT VALUE" is based only on the interest and mortality rates specified in the ADOPTION AGREEMENT. (i) Effective for years beginning after December 31, 1996, "HIGHLY COMPENSATED EMPLOYEE" is any employee who: - was a 5% OWNER at any time during the year or the preceding year, or - for the preceding year had compensation from the EMPLOYER in excess of $80,000 and, if the EMPLOYER so elects, was in the top-paid group for the preceding year. The $80,000 amount is adjusted at the same time and in the same manner as in CODE SECTION 415(d), except that the base period is the calendar quarter ending September 30, 1996. The applicable year for which a determination is being made is called a "DETERMINATION YEAR" and the preceding 12-month period is called a "LOOK-BACK YEAR". A highly compensated former employee is based on the rules applicable to determining HIGHLY COMPENSATED EMPLOYEE status as in effect for that DETERMINATION YEAR, according to Temp. Regs. 1.414(q)-1T, A-4 and Notice 97-45. To determine whether an EMPLOYEE is a HIGHLY COMPENSATED EMPLOYEE for years beginning in 1997, the amendments to Section 414(q) stated above are treated as having been in effect for years beginning in 1996. For this subsection, COMPENSATION has the meaning in subsection 2.20(g), including amounts contributed by the Employer pursuant to salary reduction agreements which are excludable from the Employee"s gross income in Code Section 125, 402(e)(3), 402 (h)(1)(b) or 403(b). 38 39 2.23 ELECTIVE DEFERRALS (a) "EMPLOYEE ELECTIVE DEFERRAL" is any EMPLOYER CONTRIBUTION to THIS PLAN at the election of the PARTICIPANT after December 31, 1996, in lieu of cash compensation, and includes contributions made pursuant to a salary reduction agreement or other deferral mechanism. As to any taxable year, a PARTICIPANT'S ELECTIVE DEFERRAL is the sum of all EMPLOYER CONTRIBUTIONS made for such PARTICIPANT by an election to defer by any qualified CODA in CODE SECTION 401(k), any salary reduction simplified employee pension cash or deferred arrangement in CODE SECTION 408(k)(6), any eligible deferred compensation plan in CODE SECTION 457, any plan in CODE SECTION 501(c)(18), and any EMPLOYER CONTRIBUTIONS made for a PARTICIPANT for the purchase of an annuity contract in CODE SECTION 403(b) by a salary reduction agreement. ELECTIVE DEFERRALS do not include any deferrals properly distributed as EXCESS ANNUAL ADDITIONS. (b) "EXCESS ELECTIVE DEFERRALS" are those Elective Deferrals includible in a PARTICIPANT'S gross income in CODE SECTION 402(g) to the extent such Participant's ELECTIVE DEFERRALS for a taxable year exceed the dollar limitation in such CODE SECTION. EXCESS ELECTIVE DEFERRALS are treated as ANNUAL ADDITIONS in THIS PLAN, unless such amounts are distributed no later than the first April 15 following the close of the PARTICIPANT'S taxable year. (c) "ACTUAL DEFERRAL PERCENTAGE" is, for a specified group of PARTICIPANTS for a PLAN YEAR, the average of the ratios (calculated separately for each PARTICIPANT in such group) of (i) the amount of EMPLOYER CONTRIBUTIONS actually paid to the TRUST for such PARTICIPANT for the PLAN YEAR to (ii) the PARTICIPANT'S COMPENSATION for such PLAN YEAR. EMPLOYER CONTRIBUTIONS for any PARTICIPANT include: (i) any ELECTIVE DEFERRALS made from the PARTICIPANT'S deferral election (including EXCESS ELECTIVE DEFERRALS of HIGHLY COMPENSATED EMPLOYEES), but excluding (a) EXCESS ELECTIVE DEFERRALS of NON-HIGHLY COMPENSATED EMPLOYEES that arise solely from ELECTIVE DEFERRALS made to the plan or plans of the EMPLOYER and (b) ELECTIVE DEFERRALS taken into account in the Contribution Percentage test (if the ADP test is satisfied both with and without exclusion of these ELECTIVE DEFERRALS); and (ii), at the election of the EMPLOYER, QUALIFIED NON-ELECTIVE CONTRIBUTIONS and QUALIFIED MATCHING CONTRIBUTIONS. To compute AVERAGE DEFERRAL PERCENTAGES, an EMPLOYEE who would be a PARTICIPANT but for the failure to make ELECTIVE DEFERRALS are treated as a PARTICIPANT on whose behalf no ELECTIVE DEFERRALS are made. (d) "EXCESS CONTRIBUTION" is, as to any PLAN YEAR, the excess of: (1) The aggregate amount of EMPLOYER CONTRIBUTIONS actually used in computing the ADP of HIGHLY COMPENSATED EMPLOYEES for such PLAN YEAR, over (2) The maximum amount of such contributions permitted by the ADP test (determined by reducing contributions made for HIGHLY COMPENSATED EMPLOYEES in order of the ADPs, beginning with the highest of such percentages). 39 40 (e) "QUALIFIED MATCHING CONTRIBUTION" is MATCHING CONTRIBUTION subject to the distribution and nonforfeitability requirements in CODE SECTION 401(k) when made. (f) "AGGREGATE LIMIT" is the sum of (i) 125% of the greater of the ADP of the NON-HIGHLY COMPENSATED EMPLOYEES for the prior PLAN YEAR or the ACP of NON-HIGHLY COMPENSATED EMPLOYEES in the plan subject to CODE SECTION 401(m) for the PLAN YEAR beginning with or within the prior PLAN YEAR of the CODA and (ii) the lesser of 200% or 2 plus the lesser of such ADP or ACP. "Lesser" is substituted for "greater" in "(i)", above, and "greater" is substituted for "lesser" after "2 plus the" in "(ii)" if it results in a larger AGGREGATE LIMIT. If the EMPLOYER has elected to use the current year testing method, then, in calculating the AGGREGATE LIMIT for a particular PLAN YEAR, the NON-HIGHLY COMPENSATED EMPLOYEES' ADP and ACP for that PLAN YEAR, instead of for the prior PLAN YEAR is used. (g) "ELIGIBLE PARTICIPANT" is any EMPLOYEE who is eligible to make an EMPLOYEE NONDEDUCTIBLE CONTRIBUTION, or an ELECTIVE DEFERRAL (if the EMPLOYER takes such contributions into account in the calculation of the CONTRIBUTION PERCENTAGE), or to receive a MATCHING CONTRIBUTION (including FORFEITURES) or a QUALIFIED MATCHING CONTRIBUTION. If an EMPLOYEE CONTRIBUTION is required as a condition of participation in THIS PLAN, any EMPLOYEE who would be a PARTICIPANT in THIS PLAN if such EMPLOYEE made such a contribution is treated as an ELIGIBLE PARTICIPANT on behalf of whom no EMPLOYEE CONTRIBUTIONS are made. 2.24 CONTRIBUTION PERCENTAGE (a) "AVERAGE CONTRIBUTION PERCENTAGE" is the average of the CONTRIBUTION PERCENTAGES of the Eligible PARTICIPANTS in a group. (b) "CONTRIBUTION PERCENTAGE" is the ratio (expressed as a percentage) of the PARTICIPANT'S CONTRIBUTION PERCENTAGE AMOUNTS to the PARTICIPANT'S COMPENSATION for the PLAN YEAR (whether or not the EMPLOYEE was a PARTICIPANT for the entire PLAN YEAR). (c) "CONTRIBUTION PERCENTAGE AMOUNT" is the sum of the EMPLOYEE Contributions, MATCHING CONTRIBUTIONS, and QUALIFIED MATCHING CONTRIBUTIONS (to the extent not taken into account for the ADP test) to THIS PLAN for the PARTICIPANT for the PLAN YEAR. Such CONTRIBUTION PERCENTAGE AMOUNTS do not include MATCHING CONTRIBUTIONS that are forfeited either to correct EXCESS AGGREGATE CONTRIBUTIONS or because the contributions to which they relate are EXCESS DEFERRALS, EXCESS CONTRIBUTIONS, or EXCESS AGGREGATE CONTRIBUTIONS. If so elected in the ADOPTION AGREEMENT the EMPLOYER may include QUALIFIED NON-ELECTIVE CONTRIBUTIONS in the CONTRIBUTION PERCENTAGE AMOUNTS. The EMPLOYER also may elect to use ELECTIVE 40 41 DEFERRALS in the CONTRIBUTION PERCENTAGE AMOUNTS as long as the ADP test is met before the ELECTIVE DEFERRALS are used in the ACP test and continues to be met following the exclusion of those ELECTIVE DEFERRALS used to meet the ACP test. (d) "EMPLOYEE NONDEDUCTIBLE CONTRIBUTION" is any contribution to THIS PLAN by or on behalf of a PARTICIPANT included in the PARTICIPANT'S gross income in the year in which made and that is maintained in a separate ACCOUNT to which earnings and losses are allocated. (e) "MATCHING CONTRIBUTION" is an EMPLOYER CONTRIBUTION to this or any other defined contribution plan for a PARTICIPANT for an EMPLOYEE NONDEDUCTIBLE CONTRIBUTION made by such PARTICIPANT, or for a PARTICIPANT'S ELECTIVE DEFERRAL, in a plan maintained by the EMPLOYER. (f) "EXCESS AGGREGATE CONTRIBUTION" is, as to any PLAN YEAR, the excess of: (1) The aggregate CONTRIBUTION PERCENTAGE AMOUNTS in computing the numerator of the CONTRIBUTION PERCENTAGE actually made on behalf of HIGHLY COMPENSATED EMPLOYEES for such PLAN YEAR, over (2) The maximum CONTRIBUTION PERCENTAGE AMOUNTS permitted by the ACP test (determined by reducing contributions for HIGHLY COMPENSATED EMPLOYEES in order of their CONTRIBUTION PERCENTAGES beginning with the highest of such percentages). Such determination is made after first determining EXCESS ELECTIVE DEFERRALS by subsection 2.23(b) and then determining EXCESS Contributions by subsection 2.23(d). (g) "QUALIFIED NON-ELECTIVE CONTRIBUTION" is a contribution (other than a MATCHING CONTRIBUTION or QUALIFIED MATCHING CONTRIBUTION) made by the EMPLOYER and allocated to a PARTICIPANT'S ACCOUNT that the PARTICIPANT may not elect to receive in cash until distributed from THIS PLAN; that are nonforfeitable when made; and that are distributable only with the distribution provisions applicable to ELECTIVE DEFERRALS and QUALIFIED MATCHING CONTRIBUTIONS (but not as a hardship distribution). SECTION 3. BENEFITS ================================================================================ 3.1 BENEFITING A PARTICIPANT is treated as benefiting in THIS PLAN for any PLAN YEAR during which the PARTICIPANT receives or is deemed to receive an allocation by REGULATION 1.410(b)-3(a). 41 42 3.2 JOINT AND SURVIVOR ANNUITY AND PRERETIREMENT SURVIVOR ANNUITY (a) This Section applies to any PARTICIPANT who is credited with at least 1 HOUR OF SERVICE with the EMPLOYER on or after August 23, 1984, and such other PARTICIPANTS as provided in subparagraph (f) below. (b) Qualified Joint and Survivor Annuity. If the EMPLOYER elects in the ADOPTION AGREEMENT to provide benefits which satisfy this subsection 3.2 and unless an optional form of benefit is selected by a QUALIFIED ELECTION within the 90-day period ending on the ANNUITY STARTING DATE, a married PARTICIPANT'S VESTED ACCOUNT BALANCE is paid in the form of a QUALIFIED JOINT AND SURVIVOR ANNUITY and an unmarried PARTICIPANT'S VESTED ACCOUNT BALANCE is paid in the form of a LIFE ANNUITY. The PARTICIPANT may elect to have such annuity distributed on attainment of the EARLIEST RETIREMENT AGE in THIS PLAN. (c) Qualified Preretirement Survivor Annuity. Unless an optional form of benefit is selected within the ELECTION Period by a QUALIFIED ELECTION, if a PARTICIPANT dies before the ANNUITY STARTING DATE the PARTICIPANT'S VESTED ACCOUNT BALANCE is applied to provide an annuity for the life of the SURVIVING SPOUSE. The SURVIVING SPOUSE may elect to have such annuity distributed within a reasonable period after the PARTICIPANT'S death. (d) Notice Requirements. (1) For a QUALIFIED JOINT AND SURVIVOR ANNUITY, the ADMINISTRATOR, no less than 30 days and no more than 90 days prior to the ANNUITY STARTING DATE, provides each PARTICIPANT a written explanation of: (i) the terms and conditions of a QUALIFIED JOINT AND SURVIVOR ANNUITY; (ii) the PARTICIPANT'S right to make and the effect of an election to waive the QUALIFIED JOINT AND SURVIVOR ANNUITY form of benefit; (iii) the rights of a PARTICIPANT'S SPOUSE; and (iv) the right to make, and the effect of, a revocation of a previous election to waive the QUALIFIED JOINT AND SURVIVOR ANNUITY. The ANNUITY STARTING DATE for a distribution in a form other than a QUALIFIED JOINT AND SURVIVOR ANNUITY may be less than 30 days after receipt of the written explanation described in the preceding paragraph if: (a) the PARTICIPANT has been provided with information that clearly indicates that the PARTICIPANT has at least 30 days to consider whether to waive the QUALIFIED JOINT AND SURVIVOR ANNUITY and elect (with spousal consent) to a form of distribution other than a QUALIFIED JOINT AND SURVIVOR ANNUITY; (b) the PARTICIPANT is permitted to revoke any affirmative distribution election at 42 43 least until the ANNUITY STARTING DATE or, if later, at any time prior to the expiration of the 7-day period that begins the day after the explanation of the QUALIFIED JOINT AND SURVIVOR ANNUITY is provided to the PARTICIPANT; and (c) the ANNUITY STARTING DATE is a date after the date that the written explanation was provided to the PARTICIPANT. (2) For a QUALIFIED PRERETIREMENT SURVIVOR ANNUITY, the ADMINISTRATOR provides each PARTICIPANT within the applicable period for such PARTICIPANT a written explanation of the QUALIFIED PRERETIREMENT SURVIVOR ANNUITY in such terms and in such manner as would be comparable to the explanation provided for meeting the requirements of paragraph (1) above for a QUALIFIED JOINT AND SURVIVOR ANNUITY. The applicable period for this subparagraph is whichever of the following periods ends last: (i) 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; (ii) a reasonable period ending after the individual becomes a PARTICIPANT; (iii) a reasonable period ending after paragraph (3) below ceases to apply to the PARTICIPANT; (iv) a reasonable period ending after this Section first applies to the PARTICIPANT. Notwithstanding the foregoing, notice is provided within a reasonable period ending after separation from SERVICE for a PARTICIPANT who separates from SERVICE before attaining age 35. To apply the preceding paragraph, a reasonable period ending after the enumerated events described in (ii), (iii) and (iv) is the end of the 2-year period beginning 1 year prior to the date the applicable event occurs, and ending 1 year after that date. For a PARTICIPANT who separates from SERVICE before the PLAN YEAR in which he or she attains age 35, notice is provided within the 2-year period beginning 1 year prior to separation and ending 1 year after separation. If such a PARTICIPANT thereafter returns to employment with the EMPLOYER, the applicable period for such PARTICIPANT is redetermined. (3) Notwithstanding the other requirements of paragraph (1) above, the respective notices prescribed by this Section need not be given to a PARTICIPANT if (i) THIS PLAN "fully subsidizes" the costs of a QUALIFIED JOINT AND SURVIVOR ANNUITY or QUALIFIED PRERETIREMENT SURVIVOR ANNUITY, and (ii) THIS PLAN does not allow the PARTICIPANT to waive the QUALIFIED JOINT AND SURVIVOR ANNUITY or QUALIFIED PRERETIREMENT SURVIVOR ANNUITY and does not allow a married PARTICIPANT to designate a nonspouse beneficiary. THIS PLAN fully subsidizes the costs of a benefit if no increase in cost, or decrease in benefits, to the PARTICIPANT results from the PARTICIPANT'S failure to elect another benefit. 43 44 (e) Safe harbor rules. (1) This Section applies to a PARTICIPANT in a 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 by a separate account attributable solely to accumulated DEDUCTIBLE EMPLOYEE CONTRIBUTIONS, in CODE SECTION 72(o)(5)(B), and maintained on behalf of a PARTICIPANT in a money purchase pension plan, (including a target benefit plan) if the following conditions are satisfied: (i) the PARTICIPANT does not or cannot elect payments in the form of a life annuity and (ii) on the PARTICIPANT'S death, the PARTICIPANT'S VESTED ACCOUNT BALANCE is paid to the PARTICIPANT'S SURVIVING SPOUSE, but if there is no SURVIVING SPOUSE, or if the SURVIVING SPOUSE has consented in a manner conforming to a QUALIFIED ELECTION, to the PARTICIPANT'S designated BENEFICIARY. The SURVIVING SPOUSE may elect to have distribution of the VESTED ACCOUNT BALANCE begin within the 90-day period following the date of the PARTICIPANT'S death. The ACCOUNT BALANCE is adjusted for gains or losses occurring after the Participant's death by the provisions of THIS PLAN governing the adjustment of ACCOUNT BALANCES for other types of distributions. This Section is not operative for a PARTICIPANT in a profit-sharing plan if the plan is a direct or indirect transferee of a defined benefit plan, money purchase plan, a target benefit plan, stock bonus, or profit-sharing plan which is subject to the survivor annuity requirements of CODE SECTION 401(a)(11) and 417. If this paragraph (e) is operative, the provisions of this subsection, other than paragraph (f), are inoperative. (2) The PARTICIPANT may waive the spousal death benefit described in this subsection at any time; however, no such waiver is effective unless it satisfies the conditions of subsection 3.15(e) (other than the notification requirement referred to therein) that would apply to the PARTICIPANT'S waiver of the QUALIFIED PRERETIREMENT SURVIVOR ANNUITY. (3) For this Section, "VESTED ACCOUNT BALANCE" is, for a money purchase pension plan or a target benefit plan, the PARTICIPANT'S separate ACCOUNT BALANCE attributable solely to accumulated DEDUCTIBLE EMPLOYEE CONTRIBUTIONS in CODE SECTION 72(o)(5)(B). For a profit-sharing plan, VESTED ACCOUNT BALANCE has the same meaning as in subsection 3.15. (f) Transitional Rules. (1) Any living PARTICIPANT not receiving benefits on August 23, 1984, who would otherwise not receive the benefits prescribed by the previous subsections is given the opportunity to elect to have the prior subsections apply if such 44 45 PARTICIPANT is credited with at least 1 HOUR OF SERVICE in THIS PLAN or a predecessor plan in a PLAN YEAR beginning on or after January 1, 1976, and such PARTICIPANT had at least 10 years of vesting SERVICE when he or she separated from SERVICE. (2) Any living PARTICIPANT not receiving benefits on August 23, 1984, who was credited with at least 1 HOUR OF SERVICE in THIS PLAN or a predecessor plan on or after September 2, 1974, and who is not otherwise credited with any SERVICE in a PLAN YEAR beginning on or after January 1, 1976, is given the opportunity to have his or her benefits paid by subsection 3.15. (3) The respective opportunities to elect (as described in subsections 3.2(f)(1) and 3.2(f)(2) H are afforded to the appropriate PARTICIPANTS during the period beginning on August 23, 1984, and ending on the date benefits would otherwise begin to PARTICIPANTS. (4) Any PARTICIPANT who elects by subsection 3.2(f)(2) and any PARTICIPANT who does not elect by subsection 3.2(f)(1) or who meets the requirements of subsection 3.2(f)(1) except that such PARTICIPANT does not have at least 10 years of vesting SERVICE when he or she separates from SERVICE, has his or her benefits distributed by all of the following requirements if benefits would have been payable in the form of a LIFE ANNUITY: (A) Automatic joint and survivor annuity. If benefits in the form of a LIFE ANNUITY become payable to a married PARTICIPANT who: (i) begins to receive payments under THIS PLAN on or after NORMAL RETIREMENT AGE; or (ii) dies on or after NORMAL RETIREMENT AGE while still working for the EMPLOYER; or (iii) begins to receive payments on or after the QUALIFIED EARLY RETIREMENT AGE; or (iv) separates from SERVICE on or after attaining NORMAL RETIREMENT AGE (or the QUALIFIED EARLY RETIREMENT AGE) and after satisfying the eligibility requirements for the payment of benefits by THIS PLAN and thereafter dies before beginning to receive such benefits; such benefits are received from THIS PLAN in the form of a QUALIFIED JOINT AND SURVIVOR ANNUITY, unless the PARTICIPANT elects otherwise during the election period. The ELECTION PERIOD begins at least 6 months before the PARTICIPANT attains QUALIFIED EARLY RETIREMENT AGE and 45 46 ends not more than 90 days before benefits begin. Any election hereunder is in writing and may be changed by the PARTICIPANT at any time. (B) Election of early survivor annuity. A PARTICIPANT employed after attaining QUALIFIED EARLY RETIREMENT AGE is given the opportunity to elect, during the ELECTION PERIOD, to have a survivor annuity payable on death. If the PARTICIPANT elects the survivor annuity, payments of such annuity are not less than the payments which would have been made to the SPOUSE by the QUALIFIED JOINT AND SURVIVOR ANNUITY if the PARTICIPANT had retired on the day before his or her death. Any election by this provision is in writing and may be changed by the PARTICIPANT at any time. The ELECTION PERIOD begins on the later of (i) the 90th day before the PARTICIPANT attains the QUALIFIED EARLY RETIREMENT AGE, or (ii) the date on which participation begins, and ends on the date the PARTICIPANT terminates employment. (C) For this subsection 3.2(f): QUALIFIED EARLY RETIREMENT AGE is the latest of: (i) the earliest date, in THIS PLAN, on which the PARTICIPANT may elect to receive retirement benefits, (ii) the first day of the 120th month beginning before the PARTICIPANT reaches NORMAL RETIREMENT AGE, or (iii) the date the PARTICIPANT begins participation. 3.3 RESTRICTIONS ON IMMEDIATE DISTRIBUTIONS. (a) If the value of a PARTICIPANT'S VESTED ACCOUNT BALANCE from EMPLOYER and EMPLOYEE CONTRIBUTIONS exceeds (or at the time of any prior distribution (i) in PLAN YEARS beginning before August 6, 1997, exceeded $3,500, or (ii) in PLAN Years beginning after August 5, 1997, exceeded) $5,000, and the ACCOUNT BALANCE is immediately distributable, the PARTICIPANT and the PARTICIPANT'S SPOUSE (or where either the PARTICIPANT or the SPOUSE has died, the survivor) has to consent to any distribution of such ACCOUNT BALANCE. The consent of the PARTICIPANT and the PARTICIPANT'S SPOUSE has to be in writing within the 90-day period ending on the ANNUITY STARTING DATE. The ANNUITY STARTING DATE is the first day of the first period for which an amount is paid as an 46 47 annuity or any other form. The ADMINISTRATOR notifies the PARTICIPANT and the PARTICIPANT'S SPOUSE of the right to defer any distribution until the PARTICIPANT'S ACCOUNT balance is no longer immediately distributable. Such notification includes a general description of the material features, and an explanation of the relative values of, the optional forms of benefit in THIS PLAN in a manner that satisfies the notice requirements of CODE SECTION 417(a)(3), and is provided no less than 30 days and no more than 90 days prior to the ANNUITY STARTING DATE. However, distribution may begin less than 30 days after the notice described in the preceding sentence is given, if the distribution is one to which CODE SECTIONS 401(a)(11) and 417 do not apply, the ADMINISTRATOR clearly informs the Participant that the PARTICIPANT has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and the PARTICIPANT, after receiving the notice, affirmatively elects a distribution. Notwithstanding the foregoing, only the PARTICIPANT need consent to the beginning of a distribution in the form of a QUALIFIED JOINT AND SURVIVOR ANNUITY while the ACCOUNT balance is immediately distributable. (Furthermore, if payment in the form of a QUALIFIED JOINT AND SURVIVOR ANNUITY is not required for the Participant by subsection 3.2, only the PARTICIPANT need consent to the distribution of an ACCOUNT balance that is immediately distributable). Neither the consent of the PARTICIPANT nor the PARTICIPANT'S SPOUSE is required to the extent that a distribution is required to satisfy CODE SECTION 401(a)(9) or 415. In addition, on termination of THIS PLAN if THIS PLAN does not offer an annuity option (purchased from a commercial provider) and if the EMPLOYER or any entity within the same controlled group as the EMPLOYER does not maintain another defined contribution plan (other than an employee stock ownership plan in CODE SECTION 4975(e)(7)), the PARTICIPANT'S ACCOUNT BALANCE is, without the PARTICIPANT'S consent, distributed to the PARTICIPANT. However, if any entity within the same controlled group as the EMPLOYER maintains another defined contribution plan (other than an employee stock ownership plan in CODE SECTION 4975(e)(7)) the PARTICIPANT'S ACCOUNT balance is transferred, without the PARTICIPANT'S consent, to the other plan if the PARTICIPANT does not consent to an immediate distribution. An ACCOUNT BALANCE is immediately distributable if any part of the ACCOUNT Balance could be distributed to the PARTICIPANT (or SURVIVING SPOUSE) before the PARTICIPANT attains or would have attained if not deceased) the later of NORMAL RETIREMENT AGE or age 62. (b) To determine the applicability of the foregoing consent requirements for distributions made before the first day of the first PLAN YEAR beginning after December 31, 1988, the PARTICIPANT'S VESTED ACCOUNT BALANCE does not include amounts attributable to 47 48 accumulated DEDUCTIBLE EMPLOYEE CONTRIBUTIONS in CODE SECTION 72(o)(5)(B). 3.4 WHEN BENEFITS BEGIN. Unless the PARTICIPANT elects otherwise, distribution of benefits begin no later than the 60th day after the latest of the close of the PLAN YEAR in which: (a) the PARTICIPANT attains age 65 (or NORMAL RETIREMENT AGE, if earlier); (b) occurs the 10th anniversary of the year in which the PARTICIPANT began participation in THIS PLAN; or, (c) the PARTICIPANT separates from SERVICE with the EMPLOYER. Notwithstanding the foregoing, the failure of a PARTICIPANT and SPOUSE to consent to a distribution while a benefit is immediately distributable, in subsection 3.3, is deemed an election to defer beginning of payment of any benefit sufficient to satisfy this Section. 3.5 EARLY RETIREMENT BENEFIT. If a PARTICIPANT separates from SERVICE before satisfying the age requirement for early retirement, but has satisfied the SERVICE requirement, the PARTICIPANT is entitled to elect an early retirement benefit upon satisfaction of such age requirement. 3.6 NONTRANSFERABILITY OF ANNUITIES. Any annuity contract distributed by THIS PLAN is nontransferable. 3.7 CONFLICTS WITH ANNUITY CONTRACTS. The terms of any annuity contract purchased and distributed by THIS PLAN to a PARTICIPANT or Spouse comply with the requirements of THIS PLAN. 3.8 TIMING AND MODES OF DISTRIBUTION. (a) General Rules. Subject to subsection 3.2, Joint and Survivor Annuity Requirements, the requirements of this Section apply to any distribution of a PARTICIPANT'S interest and take precedence over any inconsistent provisions of THIS PLAN. Unless otherwise specified, the provisions of this Section apply to calendar years beginning after December 31, 1984. 48 49 All distributions required by this Section are determined and made in accordance with the proposed CODE SECTION 401(a)(9) REGULATIONS, including the minimum distribution incidental benefit requirement of Proposed REGULATIONS 1.401(a)(9)-2. (b) Required Beginning Date. The entire interest of a PARTICIPANT are distributed or begin to be distributed no later than the PARTICIPANT'S REQUIRED BEGINNING DATE. (c) Limits on Distribution Periods. As of the first distribution calendar year, distributions, if not made in a single-sum, may only be made over 1 of the following periods (or a combination thereof): (1) the life of the PARTICIPANT, (2) the life of the PARTICIPANT and a designated BENEFICIARY, (3) a period certain not extending beyond the life expectancy of the PARTICIPANT, or (4) a period certain not extending beyond the joint and last survivor expectancy of the PARTICIPANT and a designated BENEFICIARY. (d) Determination of amount to be distributed each year. If the PARTICIPANT'S interest is to be distributed in other than a single sum, the following minimum distribution rules apply on or after the REQUIRED BEGINNING DATE: (1) Individual account. (A) If a PARTICIPANT'S benefit is to be distributed over (i) a period not extending beyond the life expectancy of the PARTICIPANT or the joint life and last survivor expectancy of the PARTICIPANT and the PARTICIPANT'S designated BENEFICIARY or (ii) a period not extending beyond the life expectancy of the designated BENEFICIARY, the amount required to be distributed for each calendar year, beginning with distributions for the first distribution calendar year, is at least equal the quotient obtained by dividing the PARTICIPANT'S BENEFIT by the APPLICABLE LIFE EXPECTANCY. (B) For calendar years beginning before January 1, 1989, if the PARTICIPANT'S SPOUSE is not the designated BENEFICIARY, the method 49 50 of distribution selected assures that at least 50% of the present value of the amount available for distribution is paid within the life expectancy of the PARTICIPANT. (C) For calendar years beginning after December 31, 1988, the amount to be distributed each year, beginning with distributions for the first distribution calendar year is not less than the quotient obtained by dividing the PARTICIPANT'S BENEFIT by the lesser of (i) the APPLICABLE LIFE EXPECTANCY or (ii) if the PARTICIPANT'S SPOUSE is not the designated BENEFICIARY, the applicable divisor determined from the table set forth in Q&A-4 of Proposed REGULATIONS 1.401(a)(9)-2. Distributions after the death of the PARTICIPANT are distributed using the applicable life expectancy in subsection 3.8(a) above as the relevant divisor without Proposed REGULATIONS 1.401(a)(9)-2. (D) The minimum distribution required for the PARTICIPANT'S first distribution calendar year are made on or before the PARTICIPANT'S REQUIRED BEGINNING DATE. The minimum distribution for other calendar years, including the minimum distribution for the distribution calendar year in which the EMPLOYEE'S REQUIRED BEGINNING DATE occurs, are made on or before December 31 of that distribution calendar year. (2) Other forms. If the PARTICIPANT'S BENEFIT is distributed in the form of an annuity purchased from an insurance company, distributions thereunder are made in accordance with the requirements of CODE SECTION 401(a)(9) and its Proposed REGULATIONS. (e) Death Distribution Provisions. (1) Distribution beginning before death. If the PARTICIPANT dies after distribution of his or her interest begins, the remaining portion of such interest continues to be distributed at least as rapidly as under the method of distribution being used prior to the PARTICIPANT'S death. (2) Distribution beginning after death. If the PARTICIPANT dies before distribution of his or her interest begins, distribution of the PARTICIPANT'S entire interest is completed by December 31 of the calendar year containing the 5th anniversary of the PARTICIPANT'S death except to the extent that an election is made to receive distributions by (A) or (B) below: 50 51 (A) If any portion of the PARTICIPANT'S interest is payable to a designated BENEFICIARY, distributions may be made over the life or over a period certain not greater than the life expectancy of the designated BENEFICIARY beginning on or before December 31 of the calendar year immediately following the calendar year in which the PARTICIPANT died; (B) If the designated BENEFICIARY is the PARTICIPANT'S SURVIVING SPOUSE, the date distributions are to begin by (A) above are not earlier than the later of (i) December 31 of the calendar year immediately following the calendar year in which the PARTICIPANT died and (ii) December 31 of the calendar year in which the PARTICIPANT would have attained age 70". If the PARTICIPANT does not make an election by this subsection 3.8 by the time of his or her death, the PARTICIPANT'S designated BENEFICIARY elects the method of distribution no later than the earlier of (i) December 31 of the calendar year in which distributions would be required to begin under this subsection, or (ii) December 31 of the calendar year which contains the 5th anniversary of the date of death of the PARTICIPANT. If the PARTICIPANT has no designated BENEFICIARY, or if the designated BENEFICIARY does not elect a method of distribution, distribution of the PARTICIPANT'S entire interest is completed by December 31 of the calendar year containing the 5th anniversary of the PARTICIPANT'S death. (3) For this subsection 3.8, if the SURVIVING SPOUSE dies after the PARTICIPANT, but before payments to such SPOUSE begin, subsection 3.8, with the exception of paragraph (B), is applied as if the SURVIVING SPOUSE were the PARTICIPANT. (4) For this subsection 3.8, distribution of a Participant's interest is considered to begin on the PARTICIPANT'S REQUIRED BEGINNING DATE (or, if subsection 3.8(d)(3) above is applicable, the date distribution is required to begin to the SURVIVING SPOUSE in subsection 3.8(d)(2)). If distribution in the form of an annuity irrevocably begins to the PARTICIPANT before the REQUIRED BEGINNING DATE, the date distribution is considered to begin is the date distribution actually begins. (f) Transitional Rule (1) Notwithstanding the other requirements of this Section and subject to the requirements of subsection 3.2, Joint and Survivor Annuity Requirements, 51 52 distribution for any EMPLOYEE, including a 5% OR MORE OWNER, are made by all of the following requirements (regardless of when such distribution begins): (A) The distribution by THIS PLAN is one which would not have disqualified THIS PLAN by CODE SECTION 401(a)(9) as in effect prior to amendment by the Deficit Reduction Act of 1984. (B) The distribution is by a method of distribution designated by the EMPLOYEE whose interest in THIS PLAN is being distributed or, if the EMPLOYEE is deceased, by a BENEFICIARY of such EMPLOYEE. (C) Such designation was in writing, was signed by the EMPLOYEE or the BENEFICIARY, and was made before January 1, 1984. (D) The EMPLOYEE had accrued a benefit in THIS PLAN as of December 31, 1983. (E) The method of distribution designated by the EMPLOYEE or the BENEFICIARY specifies the time at which distribution begins, the period over which distributions are made, and, in the case of any distribution upon the EMPLOYEE'S death, the Beneficiaries of the EMPLOYEE listed in order of priority. (2) A distribution upon death is not covered by this transitional rule unless the information in the designation contains the required information described above as to the distributions to be made at the EMPLOYEE'S death. (3) For any distribution which begins before January 1, 1984, but continues after December 31, 1983, the EMPLOYEE, or the BENEFICIARY, to whom such distribution is being made, is presumed to have designated the method of distribution for which the distribution is made if the method of distribution is specified in writing and the distribution satisfies the requirements in subsections 3.8(f)(1)(A) and (E). (4) If a designation is revoked, any subsequent distribution has to satisfy the requirements of CODE SECTION 401(a)(9) and its Proposed REGULATIONS. If a designation is revoked subsequent to the date distributions are required to begin, THIS PLAN has to distribute by the end of the calendar year following the calendar year in which the revocation occurs the total amount not yet distributed which would have been required to have been distributed to satisfy Proposed REGULATIONS 401(a)(9), but for the Section 242(b)(2) election. 52 53 For calendar years beginning after December 31, 1988, such distributions has to meet the minimum distribution incidental benefit requirements in Proposed REGULATIONS 1.401(a)(9)-2. Any changes in the designation are considered a revocation of the designation. However, the mere substitution or addition of another BENEFICIARY (one not named in the designation) by the designation is not considered to be a revocation of the designation, as long as such substitution or addition does not alter the period over which distributions are to be made by the designation, directly or indirectly (for example, by altering the relevant measuring life). When an amount is transferred or rolled over from one plan to another plan, the rules in Q&A J-2 and Q&A J-3 apply. (g) Optional forms of benefit may be elected by the EMPLOYER in the ADOPTION Agreement. 3.9 DIRECT ROLLOVERS. This subsection applies to distributions made on or after January 1, 1993. Notwithstanding any provision of THIS PLAN to the contrary that would otherwise limit a DISTRIBUTEE'S election in this part, a DISTRIBUTEE may elect, at the time and in the manner prescribed by the ADMINISTRATOR, to have any portion of an ELIGIBLE ROLLOVER DISTRIBUTION equal to at least $500 be paid directly to an ELIGIBLE RETIREMENT PLAN specified by the DISTRIBUTEE in a DIRECT ROLLOVER. 3.10 LIFE INSURANCE If the EMPLOYER elects in the ADOPTION AGREEMENT, THIS PLAN may purchase insurance on the life of PARTICIPANTS. INCIDENTAL DEATH BENEFITS FOR PLANS OTHER THAN MONEY PURCHASE PENSION PLANS AND TARGET BENEFIT PLANS: (a) Ordinary life - For these incidental insurance provisions, ordinary life insurance contracts are contracts with both nondecreasing death benefits and nonincreasing premiums. If such contracts are purchased, (i) less than 50% of the aggregate EMPLOYER CONTRIBUTIONS accumulated in the PARTICIPANT'S ACCOUNT for at least 2 years (measured from the ALLOCATION DATE of CONTRIBUTION) or (ii) up to 100% of the aggregate EMPLOYER CONTRIBUTIONS (other than EMPLOYEE ELECTIVE DEFERRALS) accumulated in the PARTICIPANT'S ACCOUNT for at least 2 years (measured from the ALLOCATION DATE of CONTRIBUTION) are used to pay premiums attributable to them. (b) Term and universal life - No more than 25% of the aggregate EMPLOYER Contributions allocated to any PARTICIPANT is used to pay the premiums on term life insurance contracts, universal life insurance contracts, and all other life insurance contracts which are not ordinary life. 53 54 (c) Combination - The sum of 50% of the ordinary life insurance premiums and all other life insurance premiums cannot exceed 25% of the aggregate EMPLOYER CONTRIBUTIONS allocated to any PARTICIPANT. (d) Direct Rollovers - 100% of DIRECT ROLLOVERS may be used to pay premiums for life insurance. INCIDENTAL DEATH BENEFITS FOR MONEY PURCHASE PENSION PLANS AND TARGET BENEFIT PLANS: No more than 25% of the aggregate EMPLOYER CONTRIBUTIONS allocated to any PARTICIPANT may be used to pay life insurance premiums. DISTRIBUTION OF INSURANCE CONTRACTS: Subject to subsection 3.2, Joint and Survivor Annuity Requirements, the contracts on a Participant's life are converted to cash or an annuity or distributed to the PARTICIPANT at the beginning of benefits. CONFLICT WITH INSURANCE CONTRACTS: The TRUSTEE applies for and is the owner of any insurance contract purchased by THIS PLAN. The insurance contract(s) have to provide that proceeds are payable to the TRUSTEE; however, the Trustee is required to pay over all proceeds of the contract(s) to the PARTICIPANT'S DESIGNATED BENEFICIARY by the distribution provisions of THIS PLAN. A PARTICIPANT'S SPOUSE is the DESIGNATED BENEFICIARY of the proceeds in all circumstances unless a QUALIFIED ELECTION is made by subsection 3.15(e), Joint and Survivor Annuity Requirements, if applicable. Under no circumstances shall the TRUST retain any part of the proceeds. On any conflict between the terms of THIS PLAN and the terms of any insurance contract purchased by THIS PLAN, THIS PLAN'S provisions shall control. TRANSACTIONS WITH LIFE INSURANCE POLICIES: Incidental life insurance and annuity contracts may be transferred - (a) to THIS PLAN as permitted by Department of Labor PTE 77-7, as amended by PTE 92-5; and (b) from THIS PLAN as permitted by Department of Labor PTE 77-8, as amended by PTE 92-6. 3.11 LOANS TO PARTICIPANTS. If the EMPLOYER elects in the ADOPTION AGREEMENT to permit PARTICIPANT loans, 54 55 (a) Loans shall be made available to all PARTICIPANTS and BENEFICIARIES on a reasonably equivalent basis. (b) Loans shall not be made available to HIGHLY COMPENSATED EMPLOYEES in an amount greater than the amount made available to other EMPLOYEES. (c) Loans must be adequately secured and bear a reasonable interest rate. (d) No PARTICIPANT loan shall exceed 50% of the PRESENT VALUE of the PARTICIPANT'S VESTED ACCRUED BENEFIT as of THIS PLAN'S most recent VALUATION DATE. (e) A PARTICIPANT must obtain the consent of his or her SPOUSE, if any, to use of the ACCOUNT BALANCE as security for the loan. SPOUSAL consent shall be obtained no earlier than the beginning of the 90-day period that ends on the date on which the loan is to be so secured. The consent must be in writing, must acknowledge the effect of the loan, and must be witnessed by a PLAN REPRESENTATIVE or NOTARY PUBLIC. Such consent shall thereafter be binding as to the consenting SPOUSE or any subsequent SPOUSE as to that loan. A new consent shall be required if the ACCOUNT BALANCE is used for renegotiation, extension, renewal, or other revision of the loan. (f) On default, foreclosure on the note and attachment of security will not occur until a distributable event occurs in THIS PLAN. (g) No loans will be made to any SHAREHOLDER-EMPLOYEE or OWNER-EMPLOYEE. For this requirement, a SHAREHOLDER-EMPLOYEE means an EMPLOYEE or officer of an electing small business (Subchapter S) corporation who owns (or is considered as owning in CODE SECTION 318(a)(1)), on any day during the taxable year of such corporation, more than 5% of the outstanding stock of the corporation. If a valid SPOUSAL consent has been obtained in accordance with (e) above, notwithstanding any other provision of THIS PLAN, the portion of the PARTICIPANT'S VESTED ACCOUNT BALANCE used as a security interest held by THIS Plan for a loan outstanding to the PARTICIPANT shall be taken into account to determine the amount of the ACCOUNT BALANCE payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. If less than 100% of the PARTICIPANT'S VESTED ACCOUNT BALANCE (determined without the preceding sentence) is payable to the SURVIVING SPOUSE, the ACCOUNT BALANCE shall be adjusted by first reducing the vested ACCOUNT BALANCE by the amount of the security used as repayment of the loan, and then determining the benefit payable to the SURVIVING SPOUSE. No loan to any PARTICIPANT or BENEFICIARY can be made to the extent that such loan when added to the outstanding balance of all other loans to the PARTICIPANT or BENEFICIARY would exceed the lesser of (a) $50,000 reduced by the excess (if any) of 55 56 the highest outstanding balance of loans during the 1 year period ending on the day before the loan is made, over the outstanding balance of loans from THIS PLAN on the date the loan is made, or (b) 50% of the PRESENT Value of the nonforfeitable accrued benefit of the PARTICIPANT. For the above limitation, all loans from all plans of the EMPLOYER and other members of a group of EMPLOYERS described in CODE SECTIONS 414(b), 414(c), and 414(m) are aggregated. Furthermore, any loan shall by its terms require that repayment (principal and interest) be amortized in level payments, not less frequently than quarterly, over a period not extending beyond 5 years from the date of the loan, unless such loan is used to acquire a dwelling unit which within a reasonable time (determined at the time the loan is made) will be used as the principal residence of the PARTICIPANT. An assignment or pledge of any portion of the PARTICIPANT'S interest in THIS PLAN and a loan, pledge, or assignment as to any insurance contract purchased under THIS PLAN, will be treated as a loan in this paragraph. The loan amortization period may not extend past the NORMAL RETIREMENT AGE stated in the ADOPTION AGREEMENT. 3.12 DISTRIBUTION REQUIREMENTS ELECTIVE DEFERRALS, QUALIFIED NON-ELECTIVE CONTRIBUTIONS, and QUALIFIED MATCHING CONTRIBUTIONS, and income allocable to each are not distributable to a PARTICIPANT or his or her BENEFICIARY, by such PARTICIPANT'S or BENEFICIARY'S election, earlier than upon separation from SERVICE, death, or disability. Such amounts may also be distributed upon: (a) Termination of THIS PLAN without the establishment of another defined contribution plan other than an employee stock ownership plan (in CODE SECTION 4975(e)(7), a simplified employee pension plan in CODE SECTION 408(k) or a simple IRA plan (defined in CODE SECTION 408(p)). (b) The disposition by a corporation to an unrelated corporation of substantially all of the assets (within the meaning of CODE SECTION 409(d)(2)) used in a trade or business of such corporation if such corporation continues to maintain THIS PLAN after the disposition, but only as to EMPLOYEES who continue employment with the corporation acquiring such assets. (c) The disposition by a corporation to an unrelated entity of such corporation's interest in a subsidiary (within the meaning of CODE SECTION 409(d)(3)) if such corporation continues to maintain THIS PLAN, but only as to EMPLOYEES who continue employment with such subsidiary. (d) The attainment of age 59 " in the case of a profit-sharing plan. 56 57 (e) The hardship of the PARTICIPANT as described in subsection 3.13. (f) All distributions that may be made by 1 or more of the foregoing distributable events are subject to the SPOUSAL and PARTICIPANT consent requirements (if applicable) contained in CODE SECTIONS 411(a)(11) and 417. In addition, distributions after March 31, 1988, that are triggered by any of (a), (b) or (c), above, must be made in a lump sum. 3.13 HARDSHIP DISTRIBUTION If the EMPLOYER elects in the ADOPTION AGREEMENT, THIS PLAN may provide hardship distributions. (a) Distribution of ELECTIVE DEFERRALS (and any earnings credited to a PARTICIPANT'S ACCOUNT as of the later of December 31, 1988, and the end of the last PLAN YEAR ending before July 1, 1989) may be made to a PARTICIPANT for hardship. For this subsection, hardship is defined as an immediate and heavy financial need of the EMPLOYEE where such EMPLOYEE lacks other available resources. Hardship distributions are subject to the SPOUSAL consent requirements contained in CODE SECTIONS 401(a)(11) and 417. Special Rules: (b) The following are the only financial needs considered immediate and heavy: expenses incurred or necessary for medical care, in CODE SECTION 213(d), of the EMPLOYEE, the EMPLOYEE'S SPOUSE, children, or dependents; the purchase (excluding mortgage payments) of a principal residence for the EMPLOYEE; payment of tuition and related educational fees for the next 12 months of post-secondary education for the EMPLOYEE, the EMPLOYEE'S SPOUSE, children or dependents; or the need to prevent the eviction of the EMPLOYEE from, or a foreclosure on the mortgage of, the EMPLOYEE'S principal residence. (c) A distribution will be considered as necessary to satisfy an immediate and heavy financial need of the EMPLOYEE only if: (1) The EMPLOYEE has obtained all distributions, other than hardship distributions, and all nontaxable loans under all plans maintained by the EMPLOYER; (2) All plans maintained by the EMPLOYER provide that the EMPLOYEE'S ELECTIVE DEFERRALS (and EMPLOYEE CONTRIBUTIONS) will be suspended for 12 months after the receipt of the hardship distribution; (3) The distribution is not in excess of the amount of an immediate and heavy financial need (including amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution); and 57 58 (4) All plans maintained by the EMPLOYER provide that the EMPLOYEE may not make ELECTIVE DEFERRALS for the EMPLOYEE'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 taxable year less the amount of such EMPLOYEE'S ELECTIVE DEFERRALS for the taxable year of the hardship distribution. 3.14 REINSTATEMENT OF BENEFIT. If a benefit is forfeited because the PARTICIPANT or BENEFICIARY cannot be found, such benefit will be reinstated if a claim is made by the PARTICIPANT or BENEFICIARY. DEFINITIONS The following are definitions for this SECTION and THIS PLAN: 3.15 JOINT AND SURVIVOR AND PRE-RETIREMENT SURVIVOR ANNUITIES. (a) "NORMAL RETIREMENT AGE" is the age selected in the ADOPTION AGREEMENT. If the EMPLOYER enforces a mandatory retirement age, the NORMAL RETIREMENT AGE is the lesser of that mandatory age or the age specified in the ADOPTION AGREEMENT. (b) "ELECTION PERIOD" is the period which begins on the first day of the PLAN YEAR in which the PARTICIPANT attains age 35 and ends on the date of the PARTICIPANT'S death. If a PARTICIPANT separates from SERVICE prior to the first day of the PLAN YEAR in which age 35 is attained, as to the ACCOUNT BALANCE as of the date of separation, the ELECTION PERIOD shall begin on the date of separation. (c) Pre-age 35 waiver: A PARTICIPANT who will not yet attain age 35 as of the end of any current PLAN YEAR may make a special QUALIFIED ELECTION to waive the QUALIFIED PRERETIREMENT SURVIVOR ANNUITY for the period beginning on the date of such election and ending on the first day of the PLAN YEAR in which the PARTICIPANT attains age 35. Such election shall not be valid unless the PARTICIPANT receives a written explanation of the QUALIFIED PRERETIREMENT SURVIVOR ANNUITY in such terms as are comparable to the explanation required under subsection 3.2(d)(1). QUALIFIED PRERETIREMENT SURVIVOR ANNUITY coverage will be automatically reinstated as of the first day of the PLAN YEAR in which the PARTICIPANT attains age 35. Any new waiver on or after such date shall be subject to the full requirements of this subsection. (d) "EARLIEST RETIREMENT AGE" is the earliest date on which, by THIS PLAN, the PARTICIPANT can elect to receive retirement benefits. "EARLY RETIREMENT AGE" is the age selected by the EMPLOYER in the ADOPTION AGREEMENT. 58 59 (e) "QUALIFIED ELECTION" is a waiver of a QUALIFIED JOINT AND SURVIVOR ANNUITY or a QUALIFIED PRERETIREMENT SURVIVOR ANNUITY. Any waiver of a QUALIFIED JOINT AND SURVIVOR ANNUITY or a QUALIFIED PRERETIREMENT SURVIVOR ANNUITY shall not be effective unless: (i) the PARTICIPANT'S SPOUSE consents in writing to the election; (ii) the election designates a specific BENEFICIARY, including any class of BENEFICIARIES or any contingent BENEFICIARIES, which may not be changed without SPOUSAL consent (or the SPOUSE expressly permits designations by the PARTICIPANT without any further SPOUSAL consent); (iii) the SPOUSE'S consent acknowledges the effect of the election; and (d) the SPOUSE'S consent is witnessed by a PLAN REPRESENTATIVE or NOTARY PUBLIC. Additionally, a PARTICIPANT'S waiver of the QUALIFIED JOINT AND SURVIVOR ANNUITY shall not be effective unless the election designates a form of benefit payment which may not be changed without SPOUSAL consent (or the SPOUSE expressly permits designations by the PARTICIPANT without any further SPOUSAL consent). If it is established to the satisfaction of a PLAN REPRESENTATIVE that there is no SPOUSE or that the SPOUSE cannot be located, a waiver will be deemed a QUALIFIED ELECTION. Any consent by a SPOUSE obtained by this provision (or establishment that the consent of a SPOUSE may not be obtained) shall be effective only as to such Spouse. A consent that permits designations by the PARTICIPANT without any requirement of further consent by such SPOUSE must acknowledge that the SPOUSE has the right to limit consent to a specific BENEFICIARY, and a specific form of benefit where applicable, and that the SPOUSE voluntarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a PARTICIPANT without the consent of the SPOUSE at any time before the beginning of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the PARTICIPANT has received notice as provided in subsection 3.2(d). (f) "QUALIFIED JOINT AND SURVIVOR ANNUITY" is an immediate annuity for the life of the PARTICIPANT with a survivor annuity for the life of the SPOUSE which is not less than 50% and not more than 100% of the amount of the annuity which is payable during the joint lives of the PARTICIPANT and the SPOUSE and which is the amount of benefit which can be purchased with the PARTICIPANT'S VESTED ACCOUNT BALANCE. The percentage of the survivor annuity in THIS PLAN shall be 50% (unless a different percentage is elected by the EMPLOYER in the ADOPTION AGREEMENT). (g) "SPOUSE (SURVIVING SPOUSE)" is the PARTICIPANT'S SPOUSE or SURVIVING SPOUSE, provided that a former SPOUSE will be treated as the SPOUSE or SURVIVING SPOUSE and a current SPOUSE will not be treated as the SPOUSE or SURVIVING SPOUSE to the extent provided by a QUALIFIED DOMESTIC RELATIONS ORDER in CODE SECTION 414(p). 59 60 (h) "ANNUITY STARTING DATE" is the first day of the first period for which an amount is paid as an annuity or any other form. (i) "VESTED ACCOUNT BALANCE" is the aggregate value of the PARTICIPANT'S VESTED ACCOUNT BALANCES derived from EMPLOYER and EMPLOYEE CONTRIBUTIONS (including ROLLOVERS), whether vested before or upon death, including the proceeds of insurance contracts, if any, on the PARTICIPANT'S life. This Section shall apply to a PARTICIPANT who is vested in amounts attributable to EMPLOYER CONTRIBUTIONS, EMPLOYEE CONTRIBUTIONS (or both) at the time of death or distribution. (j) Any PARTICIPANT who has elected by subsection 3.2(f)(4) and any PARTICIPANT who does not elect by subsection 3.2(f)(4) or who meets the requirements of subsection 3.2(f)(4) except that such PARTICIPANT does not have at least 10 years of vesting SERVICE when he or she separates from SERVICE, shall have his or her benefits distributed by all of the following requirements if benefits would have been payable in the form of a LIFE ANNUITY: (1) Automatic joint and survivor annuity. If benefits in the form of a LIFE ANNUITY become payable to a married PARTICIPANT who: (A) begins to receive payments by THIS PLAN on or after NORMAL RETIREMENT AGE; or (B) dies on or after NORMAL RETIREMENT AGE while still working for the EMPLOYER; or (C) begins to receive payments on or after the QUALIFIED EARLY RETIREMENT AGE; or (D) separates from SERVICE on or after attaining NORMAL RETIREMENT AGE (or the QUALIFIED EARLY RETIREMENT AGE) and after satisfying the eligibility requirements for the payment of h benefits by THIS PLAN and thereafter dies before beginning to receive such benefits; such benefits shall be paid from THIS PLAN in the form of a QUALIFIED JOINT AND SURVIVOR ANNUITY, unless the PARTICIPANT elects otherwise during the ELECTION PERIOD. The ELECTION PERIOD must begin at least 6 months before the PARTICIPANT attains QUALIFIED EARLY RETIREMENT AGE and end not more than 90 days before the beginning of benefit payments. Any election shall will be in writing and may be changed by the PARTICIPANT at any time. (2) Election of early survivor annuity. 60 61 A PARTICIPANT who is employed after attaining the QUALIFIED EARLY RETIREMENT AGE will be given the opportunity to elect, during the ELECTION PERIOD, to have a survivor annuity payable on death. If the PARTICIPANT elects the survivor annuity, payments of such annuity must not be less than the payments which would have been made to the SPOUSE by the QUALIFIED JOINT AND SURVIVOR ANNUITY if the PARTICIPANT had retired on the day before his or her death. Any election in this Section shall be in writing and may be changed by the PARTICIPANT at any time. The ELECTION PERIOD begins on the later of (i) the 90th day before the PARTICIPANT attains the QUALIFIED EARLY RETIREMENT AGE, or (ii) the date on which participation begins, and ends on the date the PARTICIPANT terminates employment. (3) For subsection 3.2: (A) "QUALIFIED EARLY RETIREMENT AGE" is the latest of: (i) the earliest date, under THIS PLAN, on which the PARTICIPANT may elect to receive retirement benefits, (ii) the first day of the 120th month beginning before the PARTICIPANT reaches NORMAL RETIREMENT AGE, or (iii) the date the PARTICIPANT begins participation. (B) "QUALIFIED JOINT AND SURVIVOR ANNUITY" is an annuity for the life of the PARTICIPANT with an survivor annuity for the life of the SPOUSE as described in subsection 3.15(f). (k) "APPLICABLE LIFE EXPECTANCY" is the life expectancy (or joint and last survivor expectancy) calculated using the attained age of the PARTICIPANT (or DESIGNATED BENEFICIARY) as of the PARTICIPANT'S (or DESIGNATED BENEFICIARY'S) birthday in the applicable calendar year reduced by 1 for each calendar year which has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the applicable life expectancy shall be the life expectancy as so recalculated. The applicable calendar year shall be the first distribution calendar year, and if life expectancy is being recalculated such succeeding calendar year. (l) "STRAIGHT LIFE ANNUITY" is an annuity payable in equal installments for the life of the PARTICIPANT that terminates on the PARTICIPANT'S death. 3.16 MINIMUM DISTRIBUTION. (a) "DESIGNATED BENEFICIARY" is the individual who is designated as the beneficiary in THIS PLAN in CODE SECTION 401(a)(9) and its Proposed REGULATIONS. 61 62 (b) "DISTRIBUTION CALENDAR YEAR" is a calendar year for which a minimum distribution is required. For distributions beginning before the PARTICIPANT'S death, the first DISTRIBUTION CALENDAR YEAR is the calendar year immediately preceding the calendar year which contains the PARTICIPANT'S REQUIRED BEGINNING DATE. For distributions beginning after the PARTICIPANT'S death, the first DISTRIBUTION CALENDAR YEAR is the calendar year in which distributions are required to begin by subsection 3.8. (c) "LIFE EXPECTANCY" is the life expectancy and joint and last survivor expectancy computed by use of the expected return multiples in Tables V and VI of Regulations 1.72-9. Unless otherwise elected by the PARTICIPANT (or SPOUSE, for distributions described in subsection 3.2(b)) by the time distributions are required to begin, life expectancies shall be recalculated annually. Such election shall be irrevocable as to the PARTICIPANT (or SPOUSE) and shall apply to all subsequent years. The life expectancy of a nonspouse BENEFICIARY may not be recalculated. (d) "PARTICIPANT'S BENEFIT" is (1) The ACCOUNT BALANCE as of the last valuation date in the calendar year immediately preceding the DISTRIBUTION CALENDAR YEAR (valuation calendar year) increased by the amount of any contributions or FORFEITURES allocated to the ACCOUNT BALANCE as of dates in the valuation calendar year after the VALUATION DATE and decreased by distributions made in the valuation calendar year after the VALUATION DATE. (2) Exception for the second DISTRIBUTION CALENDAR YEAR. For paragraph (1) above, if any portion of the minimum distribution for the first DISTRIBUTION CALENDAR YEAR is made in the second DISTRIBUTION CALENDAR YEAR on or before the REQUIRED BEGINNING DATE, the amount of the minimum distribution made in the second DISTRIBUTION CALENDAR YEAR shall be treated as if it had been made in the immediately preceding DISTRIBUTION CALENDAR YEAR. (e) As elected by the EMPLOYER in the ADOPTION AGREEMENT, "REQUIRED BEGINNING DATE" is (1) The REQUIRED BEGINNING DATE of a PARTICIPANT is the first day of April of the calendar year following the calendar year in which the Participant attains age 70 1/2. (2) The REQUIRED BEGINNING DATE of a PARTICIPANT is the first day of April of the calendar year following the calendar year in which the Participant attains age 62 63 70 1/2, except that benefit distributions to a PARTICIPANT (other than a 5% OWNER) for benefits accrued after the later of the adoption or effective date of the amendment to THIS PLAN must begin by the later of the April 1 of the calendar year following the calendar year in which the PARTICIPANT attains age 70 1/2 or retires. (3) The REQUIRED BEGINNING DATE of a PARTICIPANT is the later of the April 1 of the calendar year following the calendar year in which the Participant attains age 70 1/2 or retires except that benefit distributions to a 5% OWNER must begin by the April 1 of the calendar year following the calendar year in which the PARTICIPANT attains age 70 1/2. (A) Any PARTICIPANT attaining age 70 1/2 after 1995 may elect by April 1 of the calendar year following the year in which the PARTICIPANT attained age 70 1/2 (or by December 31, 1997 for a PARTICIPANT attaining age 70 1/2 in 1996) to defer distributions until the calendar year following the calendar year in which the PARTICIPANT retires. If no such election is made, the PARTICIPANT will begin receiving distributions by the April 1 of the calendar year following the year in which the PARTICIPANT attained age 70 1/2 (or by December 31, 1997 for a PARTICIPANT attaining age 70 1/2 in 1996). (B) Any PARTICIPANT attaining age 70 1/2 before 1997 may elect to stop distributions and begin distribution by the April 1 of the calendar year following the year in which the PARTICIPANT retires. There is either (as elected in the ADOPTION AGREEMENT) (i) a new ANNUITY STARTING DATE when distributions begin, or (ii) no new ANNUITY STARTING DATE when distributions begin. (C) The preretirement age 70 1/2 distribution option is only eliminated for EMPLOYEES who reach age 70 1/2 in or after a calendar year that begins after the later of December 31, 1998, or the adoption date of the amendment. The preretirement age 70 1/2 distribution option is an optional form of benefit for benefits payable in a particular distribution form (including any modifications that may be elected after benefit begins) begun at a time during the period that begins 63 64 on or after January 1 of the calendar year in which an EMPLOYEE attains age 70 1/2 and ends April 1 of the immediately following calendar year. 5% OWNER. A PARTICIPANT treated as a 5% OWNER for this subsection is a 5% OWNER in CODE SECTION 416 at any time during the PLAN YEAR ending with or within the calendar year in which such 5% OWNER attains age 70 1/2 . Once distributions begin to a 5% OWNER in this subsection, they must continue to be distributed, even if the PARTICIPANT ceases to be a 5% OWNER in a subsequent year. 3.17 ROLLOVERS. (a) "ELIGIBLE ROLLOVER DISTRIBUTION" is any distribution of all or any portion of the balance to the credit of the DISTRIBUTEE, except that an ELIGIBLE ROLLOVER DISTRIBUTION does not include: any distribution that is 1 of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the DISTRIBUTEE or the joint lives (or joint life expectancies) of the DISTRIBUTEE and the DISTRIBUTEE'S designated Beneficiary, or for a specified period of 10 years or more; any distribution to the extent such distribution is required under CODE SECTION 401(a)(9); the portion of any other distribution(s) that is not includible in gross income (without the exclusion for net unrealized appreciation as to employer securities); any other distribution(s) that is reasonably expected to total less than $500 during a year; and (for distributions made after December 31, 1998) a hardship distribution in subsection 3.13. (b) "ELIGIBLE RETIREMENT PLAN" is an individual retirement account in CODE SECTION 408(a), an individual retirement annuity in CODE SECTION 408(b), an annuity plan in CODE SECTION 403(a), or a qualified plan in CODE SECTION 401(a), that accepts the DISTRIBUTEE'S ELIGIBLE ROLLOVER DISTRIBUTION. However, for an ELIGIBLE ROLLOVER DISTRIBUTION to the SURVIVING SPOUSE, an ELIGIBLE RETIREMENT PLAN is an individual retirement account or individual retirement annuity. (c) "DISTRIBUTEE" includes an EMPLOYEE or former EMPLOYEE. In addition, the EMPLOYEE'S or former EMPLOYEE'S SURVIVING SPOUSE and the EMPLOYEE'S or former EMPLOYEE'S SPOUSE or former SPOUSE who is the ALTERNATE PAYEE under a QUALIFIED DOMESTIC RELATIONS ORDER, in CODE SECTION 414(p), are DISTRIBUTEES as to the interest of the SPOUSE or former SPOUSE. (d) "DIRECT ROLLOVER" is (i) a payment by THIS PLAN to the ELIGIBLE RETIREMENT PLAN specified by the DISTRIBUTEE or (ii) a payment to THIS PLAN of an ELIGIBLE ROLLOVER DISTRIBUTION. 64 65 SECTION 4. OTHER ================================================================================ 4.1 ANNUAL VALUATION OF ASSETS; ALLOCATION OF TRUST NET EARNINGS AND LOSSES. The assets of THIS PLAN will be valued as of the ALLOCATION DATE selected by the EMPLOYER in the ADOPTION AGREEMENT. On the ALLOCATION DATE, the net earnings and losses of THIS PLAN will be allocated as selected by the EMPLOYER in the ADOPTION AGREEMENT. 4.2 TREATMENT OF INSURANCE DIVIDENDS OR CREDITS. Any dividends or credits earned on insurance contracts will be allocated to the PARTICIPANT'S ACCOUNT for whose benefit the contract is held, and any premiums on an insurance contract will be charged to the PARTICIPANT'S ACCOUNT for whose benefit the contract is held. 4.3 DIRECTED INVESTMENTS. If elected by the EMPLOYER in the ADOPTION AGREEMENT, each PARTICIPANT will direct THIS PLAN as to the type of investment (which may only be as traded in a regularly maintained market) to be purchased with the PARTICIPANT'S ACCOUNT, otherwise, each EMPLOYEE will have a ratable interest in all assets in THIS PLAN. Directed Investments will be credited or charged with their separate net earnings and losses. THIS PLAN and the TRUST are intended to constitute a plan described in Section 404(c) of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, and the regulations issued thereunder. As such, and if selected by the EMPLOYER in the ADOPTION AGREEMENT, THIS PLAN and the TRUST shall provide the opportunity for each PARTICIPANT and BENEFICIARY to exercise control over some or all of the assets in his PARTICIPANT'S ACCOUNT and to choose from a broad range of investment alternatives as made available by the TRUSTEE, the manner in which some or all of such assets are invested. Each PARTICIPANT and BENEFICIARY is authorized and empowered, in his sole discretion, to give directions to the TRUSTEE, pursuant to the procedure established by the ADMINISTRATOR and in such form as the TRUSTEE may require, concerning the investment of such PARTICIPANT'S or BENEFICIARY'S PARTICIPANT ACCOUNT. The TRUSTEE shall comply as promptly as practicable with directions given by the PARTICIPANT or BENEFICIARY. The TRUSTEE may refuse to comply with any direction if the Trustee, in his sole and absolute discretion, deems such direction improper by virtue of applicable law. The TRUSTEE and other fiduciaries of THIS PLAN and the TRUST are not liable for any loss, nor for any breach, resulting from a PARTICIPANT'S or BENEFICIARY'S direction of the investment of any part of his PARTICIPANT'S ACCOUNT. 65 66 4.4 PARTICIPATING EMPLOYER A PARTICIPATING EMPLOYER is any employer that has requested its employees be included as PARTICIPANTS in THIS PLAN and participation has been approved on such terms, conditions and requirements as determined by the EMPLOYER, the TRUSTEE, the ADMINISTRATOR, and InWest Pension Management, Inc. 4.5 AMENDMENT BY EMPLOYER. 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 SECTION 415 or 416 because of the required aggregation of multiple plans, and (3) add certain model amendments published by the Internal Revenue Service which do not change THIS PLAN to an individually designed plan. An EMPLOYER that amends THIS PLAN for any other reason, including a waiver of the minimum funding requirement under CODE SECTION 412(d), will no longer participate in the InWest Pension Management, Inc. Regional Prototype Plan and will be considered to have an individually designed plan. 4.6 PLAN MERGER - MAINTENANCE OF BENEFITS. On a merger or consolidation with, or transfer of assets or liabilities of THIS PLAN to any other plan, each PARTICIPANT will receive a benefit immediately after such merger, etc. (if THIS PLAN terminated) which is at least equal to the benefit the PARTICIPANT was entitled to immediately before such merger, etc. (if THIS PLAN had terminated). 4.7 INALIENABILITY OF BENEFITS. No benefit or interest in THIS PLAN will be subject to assignment or alienation, either voluntarily or involuntarily. The preceding sentence shall also apply to the creation, assignment, or recognition of a right to any benefit payable as to a PARTICIPANT by a domestic relations order, unless such order is determined to be a QUALIFIED DOMESTIC RELATIONS ORDER in CODE SECTION 414(p) or any domestic relations order entered before January 1, 1985. 4.8 EXCLUSIVE BENEFIT. The principal or income of the TRUST may not be diverted to or used for other than the exclusive benefit of the PARTICIPANTS or their BENEFICIARIES. Any EMPLOYER CONTRIBUTION made by a mistake of fact must be returned to the EMPLOYER within 1 year of the contribution. If the deduction of an EMPLOYER CONTRIBUTION is disallowed by CODE SECTION 404, such contribution (to the extent disallowed) must be returned to the EMPLOYER within 1 year of the disallowance of the deduction. 66 67 If the Commissioner of Internal Revenue determines that THIS PLAN is not initially qualified, any CONTRIBUTION incident to the initial qualification must be returned to the EMPLOYER within 1 year after the date initial qualification is denied, but only if the application for the qualification is made by the time prescribed by law for filing the EMPLOYER'S federal income tax return for the taxable year in which THIS PLAN is adopted, or such later date as the Secretary of the Treasury may prescribe. No contract is purchased in this Plan unless the insurer provides that: (1) no value of contracts providing benefits in this Plan or credits determined by the insurer (on account of dividends, earnings, or other experience rating credits, or surrender or cancellation credits) for such contract may be paid or returned to the employer or diverted to or used for other than the exclusive benefit of the Participants or their Beneficiaries. However, any Employer contribution made by a mistake of fact must be returned to the Employer within 1 year of the contribution. If this Plan is funded by individual contracts that provide a Participant's benefit, such individual contracts shall constitute the Participant's Account Balance. If this Plan is funded by group contracts, by the group annuity or group insurance contract, premiums or other consideration received by the insurance company must be allocated to Participants' accounts in this Plan. 4.9 FAILURE TO QUALIFY. If the EMPLOYER'S adoption of THIS PLAN fails to attain or retain qualification, such plan will no longer participate in the InWest Pension Management, Inc. Regional Prototype Defined Contribution Plan and will be considered an individually designed plan. 4.10 DISQUALIFICATION OF PLAN. If the EMPLOYER'S adoption of THIS PLAN fails to attain or retain qualification, the funds of such plan will be removed from the TRUST as soon as administratively feasible. 4.11 ADMINISTRATOR (a) Appointment of ADMINISTRATOR. THIS PLAN shall be administered by the ADMINISTRATOR consisting of those persons who shall be appointed by and serve at the pleasure of the EMPLOYER. All usual and reasonable expenses of the ADMINISTRATOR may be paid in whole or in part by the EMPLOYER, and any expenses not paid by the EMPLOYER shall be paid by the TRUSTEE out of the principal or income of the Fund. Any members of the ADMINISTRATOR who are EMPLOYEES shall not receive COMPENSATION for their services for the ADMINISTRATOR. 67 68 (b) Claims Procedure. The ADMINISTRATOR shall make all determinations as to claims for benefits. The ADMINISTRATOR shall give adequate written notice, delivered or mailed, to each Claimant; if such claims are denied, such notice shall state: (1) Specific reasons for the denial and (2) A description of the procedure necessary for appeal by the Claimant. (c) Records and Reports. The ADMINISTRATOR shall exercise such authority and responsibility as it deems appropriate in order to comply with the ACT and REGULATIONS issued thereunder for records of a PARTICIPANT'S SERVICE, benefits and the percentage of such benefits which are nonforfeitable under THIS PLAN, notifications to PARTICIPANTS, annual registration with the Internal Revenue Service, annual reports to the Department of Labor, and any other reports required by law. (d) Other ADMINISTRATOR Powers and Duties. The ADMINISTRATOR shall have the power to: (1) Construe and interpret THIS PLAN, decide all questions of eligibility and determine the amount, manner and time of payment of any benefits hereunder; (2) Prescribe procedures to be followed by PARTICIPANTS or BENEFICIARIES filing applications for benefits; (3) Prepare and distribute, in such manner as the ADMINISTRATOR determines to be appropriate, information explaining THIS PLAN; (4) Receive from the EMPLOYER and from PARTICIPANTS such information as shall be necessary for the proper administration of THIS PLAN; (5) Furnish the EMPLOYER, upon request, such annual reports for the administration of THIS PLAN as are reasonable and appropriate; (6) Receive, review and keep on file (as it deems convenient or appropriate), reports of the financial condition, and of the receipts and disbursements, of the Fund from the TRUSTEE and any valuations of THIS PLAN; 68 69 (7) Appoint or employ individuals to assist in the administration of THIS PLAN and any other agents it deems advisable, including legal and actuarial counsel. (8) Establish and carry out a funding policy consistent with the purposes of THIS PLAN and the requirements of applicable law, as they may be appropriate from time to time, and, as a part of such funding policy, direct the TRUSTEE to exercise its investment discretion so as to provide sufficient assets in an amount determined under the funding policy then in effect necessary to meet the liquidity requirements for administration of THIS PLAN and payment of benefits. (9) Exercise all rights, except payment receipts, in qualified employer securities in the Fund. The ADMINISTRATOR shall have no power to add to, subtract or modify any of the terms of THIS PLAN, or to change or add any benefits provided by THIS PLAN, or to waive or fail to apply any requirements of eligibility for a benefit under THIS PLAN. (e) Rules and Decisions. The ADMINISTRATOR may adopt such rules as it deems necessary, desirable or appropriate. All rules and decisions of the ADMINISTRATOR shall be applied in a nondiscriminatory, consistent, and uniform manner as to all PARTICIPANTS in similar circumstances. When making a determination or calculation, the ADMINISTRATOR shall be entitled to rely upon information furnished by a PARTICIPANT or BENEFICIARY, EMPLOYER, the legal counsel of the EMPLOYER, or the TRUSTEE, or any other official of THIS PLAN. (f) ADMINISTRATOR Procedures. The ADMINISTRATOR may act at a meeting or in writing without a meeting. The ADMINISTRATOR shall elect one of its members as chairman, appoint a secretary, who may or may not be a ADMINISTRATOR member, and advise the TRUSTEE of such actions in writing. The secretary shall keep a record of all meetings and forward all necessary communications to the EMPLOYER, the TRUSTEE, or any other official of THIS PLAN. The ADMINISTRATOR may adopt such bylaws and REGULATIONS as it deems desirable for the conduct of its affairs. All decisions of the ADMINISTRATOR shall be made by the vote of the majority, except actions in writing taken without a meeting which shall be unanimous. A dissenting ADMINISTRATOR member who, within a reasonable time after he has knowledge of any action or failure to act by the majority, registers his dissent in writing delivered to the other ADMINISTRATOR members, the EMPLOYER and the TRUSTEE shall not be responsible for any such act or failure to act. No ADMINISTRATOR member shall vote on any matter that directly and personally concerns him. 69 70 (g) Authorization of Benefit Payments. The ADMINISTRATOR shall issue directions to the TRUSTEE concerning all benefits which are to be paid from the Fund pursuant to the provisions of THIS PLAN and warrant that all such directions are in accordance with THIS PLAN. (h) Application and Forms for Benefits. The ADMINISTRATOR may require a PARTICIPANT to complete and file with the ADMINISTRATOR an application for a benefit and all other forms approved by the ADMINISTRATOR, and to furnish all information requested by the ADMINISTRATOR. The ADMINISTRATOR may rely upon all such information so furnished it. This subsection is not a condition to payment of benefits. (i) Facility of Payment. When, in the ADMINISTRATOR'S opinion, a person entitled to receive any payment of a benefit or installment thereof hereunder is under a legal disability or is incapacitated in any way as to be unable to manage his financial affairs, the ADMINISTRATOR may direct the TRUSTEE to make such payments to such person or to his legal representative or to a relative or friend of such person for his benefit, or the ADMINISTRATOR may direct the TRUSTEE to apply the payment for the benefit of such person in such manner as the ADMINISTRATOR considers advisable. Any payment of a benefit or installment thereof under this subsection shall be a complete discharge of any liability for the making of such payment under the provisions of THIS PLAN. 4.12 ALLOCATION OF RESPONSIBILITY AMONG FIDUCIARIES Each named Fiduciary has only those specific powers, duties, responsibilities and obligations as are specifically given it by THIS PLAN. The EMPLOYER has the sole responsibility for making EMPLOYER CONTRIBUTIONS and has the sole authority to appoint and remove the TRUSTEE and the ADMINISTRATOR and to amend or terminate, in whole or part, THIS PLAN. The ADMINISTRATOR has the sole responsibility for the administration of THIS PLAN. The TRUSTEE has the sole responsibility for administration and management of the Fund. 70 71 Each named Fiduciary warrants that any directions given, information furnished, or action taken by it shall be according to the terms of THIS PLAN. Furthermore, each named Fiduciary may rely upon any such direction, information or action of another named Fiduciary as being proper under THIS Plan and is not required under THIS PLAN to inquire into the propriety of such direction, information or action. It is intended that each named Fiduciary be responsible for the proper exercise of its own powers, duties, responsibilities and obligations in THIS PLAN and not be responsible for any act or failure to act of another named Fiduciary. No named Fiduciary guarantees the Fund in any manner against investment loss or depreciation in asset value. 4.13 MANAGEMENT OF TRUST (a) Receipt and Title to Assets. The TRUSTEE receives any Contributions paid and delivered to it in cash or in kind as it deems acceptable. The EMPLOYER timely and appropriately makes Contributions to the TRUSTEE. The TRUSTEE is not responsible for the calculation or collection of any Contribution but is responsible only for property it receives for THIS PLAN. The TRUSTEE shall take and keep title to assets delivered to it under THIS PLAN. (b) Principal; Income. The Fund is held, managed and administered by the TRUSTEE by the terms of this Declaration of Trust without distinction between principal and income. (c) Powers. The TRUSTEE has the power to: (1) Sell, lease, exchange, mortgage, pledge, or assign all or part of the trust property and to do all the TRUSTEE thinks necessary or desirable to administer such property; (2) Retain property even if it is underproductive; (3) Invest and reinvest the trust property in any real or personal property, including but not limited to interests in trusts, common trust funds, stocks, bonds, notes, certificates of deposit, and other securities, regardless of class, whether full or undivided interests, whether secured or unsecured, and whether the obligation of individuals, corporations, trusts or governments, either within or outside of the state whose laws are chosen by the EMPLOYER to govern THIS PLAN; (4) Pay to or for the use and benefit of any PARTICIPANT (or, if he is deceased, his BENEFICIARY), the proper proportion of the PARTICIPANT'S ACCOUNT then held by the TRUSTEE; distribute the Fund in cash or investments or both, in full or 71 72 undivided interest, or convert the trust property into money or other property and distribute such converted forms or in any other manner in which property may be distributed by the TRUSTEE; (5) Invest up to 10% of the fair market value of the Fund in qualifying employer securities and/or qualifying employer real property (as defined in the ACT); (6) Maintain a bond that: (A) Protects against losses by acts of fraud or dishonesty of plan fiduciaries and fund managers, directly or through conivance with others; (B) Is in an amount of (i) not less than $1,000 or 10% of the amount of funds handled, whichever is greater, and (ii) not greater than $500,000 for each plan covered, unless otherwise specifically required by the Department of Labor; (C) Is with a corporate surety acceptable for federal bonding purposes by 31 U.S.C.S. Sections 9304-9308; (D) Is not with a party in interest; (E) Has a discovery period of no less than 1 year after termination or cancellation; and (F) Otherwise satisfies ERISA bonding requirements as they may be amended from time to time. (7) Purchase or sell, at its current market price, any asset of the Fund to any other trust or estate of which it is trustee or personal representative. (8) Buy, sell, or retain and vote by proxy or in person any stock or securities, and rights and options thereto, including, but not limited to, its own stock and securities. (9) Act with all of the powers conferred upon a TRUSTEE by the laws chosen by the EMPLOYER to govern THIS PLAN, as amended; provided, such powers are not prohibited specifically by this instrument. (10) Employ, pay for from the Fund and rely on agents and advisors. 72 73 4.14 ACCOUNTING; DISTRIBUTIONS (a) Duties. The TRUSTEE performs the duties required of it in THIS PLAN, especially in Section 3. (b) Records. The TRUSTEE maintains accurate and detailed accounts, books, and records of all investments, receipts, disbursements and other transactions hereunder, which are available at reasonable times for inspection and audit by the EMPLOYER, and by such person or persons as the EMPLOYER designates. (c) Reporting. The TRUSTEE furnishes to the EMPLOYER a statement of the fair market value of the Fund and of PARTICIPANTS' ACCOUNTS as of the end of each PLAN YEAR, including any CONTRIBUTIONS for such PLAN YEAR, as required by the ACT and CODE. Such statements are mailed within 90 days following the end of such PLAN YEAR. In making such statements, the TRUSTEE may rely on any information about any Insurance Contract furnished to the TRUSTEE. The TRUSTEE values all assets at their fair market value as the TRUSTEE in its discretion prescribes but according to a method consistently followed and uniformly applied. The EMPLOYER may approve such statements either by written notice of approval delivered to the TRUSTEE or by failure to express objection to such statements in writing delivered to the TRUSTEE within 90 days from the date the statements were mailed to the EMPLOYER. When written approval of the statements is received or there is passage of such period of time without written objection having been delivered to the TRUSTEE, such statements are deemed approved, and the TRUSTEE is released and discharged as to all such items, matters and things set forth in such statements as if such statements had been jurisdiction in an action or proceeding in which the TRUSTEE, the EMPLOYER and all persons having, or which may have, any interest in the Fund or in THIS PLAN were parties. If the TRUSTEE and the EMPLOYER cannot agree on any act or transaction reported in the statements, the TRUSTEE has the right to have its account settled by judicial proceedings, in which only the TRUSTEE and the EMPLOYER are necessary parties. (d) Distributions. TRUSTEE makes distributions from the Fund to PARTICIPANTS or their BENEFICIARIES with the terms of THIS PLAN as the ADMINISTRATOR directs in writing. The TRUSTEE is fully protected in acting upon any written directions from the ADMINISTRATOR for 73 74 benefit payments and has no duty or responsibility (apart from maintenance of accounts) to see to the application of any such payments, to determine the rights or interests of any person in the TRUST or THIS PLAN, or to ascertain whether the ADMINISTRATOR'S directions comply with THIS PLAN; and the TRUSTEE is not required to pay any sum of money or other benefits to any person except upon the delivery to the TRUSTEE of a receipt in a form satisfactory to the TRUSTEE, together with such evidence of the right of such person to receive such money or other benefits and such authentication or guarantee of the signature on such receipt as the TRUSTEE may require. 4.15 REPLACEMENT/REMOVAL OF TRUSTEE (a) Resignation of TRUSTEE. The TRUSTEE may resign at any time upon giving 60 days prior written notice thereof to the EMPLOYER. The EMPLOYER may remove any TRUSTEE at any time upon giving 60 days prior written notice thereof to such TRUSTEE. The EMPLOYER fills any vacancy in the office of TRUSTEE by written instrument appointing a successor TRUSTEE to be effective as of any date specified in such instrument and upon acceptance thereof by such successor TRUSTEE endorsed thereon. (b) Successor TRUSTEE. Each successor TRUSTEE succeeds to the title of the Fund vested in its predecessor without the signing or filing of any further instrument, but any resigning or removed TRUSTEE must execute all documents and do all acts necessary to vest such title in any successor TRUSTEE, and must promptly turn over to the successor TRUSTEE, copies of all such records pertaining to the Fund and to the PARTICIPANTS in THIS PLAN. (c) Rights, Powers and Duties of Successor TRUSTEE. Each successor TRUSTEE has all the rights, powers and duties conferred upon its predecessor. No successor TRUSTEE is personally liable for any act or failure to act of any predecessor TRUSTEE, and, with the approval of the EMPLOYER, a successor TRUSTEE may accept the statements rendered and the property delivered to it by the predecessor TRUSTEE as full and complete discharge to the predecessor TRUSTEE without incurring any liability or responsibility for so doing. (d) Payment of TRUSTEE'S Expenses. The TRUSTEE may, without the direction or approval of the PARTICIPANTS or the EMPLOYER, reserve from the Fund assets as are necessary for payment of any expenses and compensation then or thereafter due to the TRUSTEE and any sums then 74 75 or thereafter chargeable against the Fund for which the TRUSTEE may be liable, but if the amount so reserved by the TRUSTEE is not sufficient, the TRUSTEE is entitled to reimbursement for any deficiency from the EMPLOYER. 4.16 MISCELLANEOUS (a) Taxes. Any and all taxes levied or assessed upon any part of the TRUST are paid by the EMPLOYER, and, until paid, constitute a charge upon the TRUST. To the extent possible, taxes upon benefits are allocated to the PARTICIPANT'S ACCOUNT from which they are paid. (b) Particular Expenses. Expenses related to a particular PARTICIPANT'S ACCOUNT in the TRUST, including amounts billed to the EMPLOYER, may be charged by the TRUSTEE against such account as if it were a separate trust. (c) Compensation of TRUSTEE. The TRUSTEE is entitled to receive as compensation the customary charges for similar trusts under its regularly adopted schedule of compensation in effect at such time as the services are rendered. The TRUSTEE shall be entitled to receive additional compensation for valuation of the Fund at any time other than the VALUATION DATE. (d) Spendthrift Provision. The interest of each PARTICIPANT and BENEFICIARY in the Fund is held subject to a spendthrift trust unless such interest is subject to a qualified domestic relations order as defined in CODE SECTION 414(p). (e) Separability. If any provision of THIS PLAN is held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions continue to be fully effective. (f) Participant Direction of Investment. A PARTICIPANT, if selected by the EMPLOYER in the ADOPTION AGREEMENT, has the right to direct the TRUSTEE in the investment or re-investment of the assets comprising the PARTICIPANT'S ACCOUNT. To effect participation direction of investment, the TRUSTEE and the PARTICIPANT execute the Participant Direction Investment Form prescribed by 75 76 the ADMINISTRATOR before the TRUSTEE follows any PARTICIPANT direction in the investment or re-investment of any part of the PARTICIPANT'S ACCOUNT. The TRUSTEE is not liable for any loss, resulting from a PARTICIPANT'S direction of the investment or re-investment of any part of the PARTICIPANT'S ACCOUNT. (g) No person is obligated to see to the application of money or property paid or delivered to the TRUSTEE. 4.17 TRUSTEE, NAMED FIDUCIARY The TRUSTEE as a named Fiduciary is only responsible for the management and control of the TRUST. By execution of THIS PLAN the TRUSTEE accepts the TRUST created in THIS PLAN and agrees to perform the obligations imposed on it by THIS PLAN. 76 77 ADOPTION AGREEMENT FOR INWEST PENSION MANAGEMENT, INC. NON-STANDARDIZED 401(K) PROFIT SHARING PLAN AND TRUST The undersigned Employer adopts the InWest Pension Management, Inc. Non-Standardized 401(k) Profit Sharing Plan and Trust for those Employees who shall qualify as Participants hereunder, to be known as the A1 Sauer Drilling Company 401(k) Plan ---------------------------------- (Enter Plan Name) It shall be effective as of the date specified below. The Employer hereby selects the following Plan specifications: CAUTION: The failure to properly fill out this Adoption Agreement may result in disqualification of the Plan. EMPLOYER INFORMATION B1 Name of Employer Sauer Drilling Company ------------------------------------- ------------------------------------- B2 Address 5710 West Yellowstone ---------------------------------------------- Casper, WY 82604-1924 ----------------------- ------- ------------ City State Zip Telephone (307) 472-7020 -------------------------------------------- B3 Employer Identification Number 83-0320012 ----------- B4 Date Business Commenced ------------------ B5 TYPE OF ENTITY a. ( ) S Corporation b. ( ) Professional Service Corporation c. (X) Corporation d. ( ) Sole Proprietorship e. ( ) Partnership f. ( ) Other AND, is the Employer a member of... g. a controlled group? ( ) Yes (X) No h. an affiliated service group? ( ) Yes (X) No Copyright 1999-R InWest Pension Management, Inc. 1 78 B6 NAME(S) OF TRUSTEE(S) a. Bruce De Boer -------------------------------------------------------------------- -------------------------------------------------------------------- -------------------------------------------------------------------- d. Kim Harris -------------------------------------------------------------------- e. Jack Reed -------------------------------------------------------------------- B7 TRUSTEES' ADDRESS a. ( ) Use Employer Address b. (X) 508 W. Wall, Ste. 500 ------------------------------------------------------------ Street Midland, Texas 79701 ---------- ------------- ------- City State Zip B8 LOCATION OF EMPLOYER'S PRINCIPAL OFFICE: a. (X) State b. ( ) Commonwealth of c. Texas and this Plan and Trust shall be governed under the same. B9 EMPLOYER FISCAL YEAR means the 12 consecutive month period: Commencing on a. January 1 (e.g., January 1st) and ------------- month day ending on b. December 31. -------------- month day 2 79 PLAN INFORMATION C1 EFFECTIVE DATE This Adoption Agreement of the InWest Pension Management, Inc. Non-Standardized 401(k) Profit Sharing Plan and Trust shall: a. (X) establish a new Plan and Trust effective as of January 1, 1999 (hereinafter called the "Effective Date"). b. ( ) constitute an amendment and restatement in its entirety of a previously established qualified Plan and Trust of the Employer which was effective ____ (hereinafter called the "Effective Date"). Except as specifically provided in the Plan, the effective date of this amendment and restatement is ____ (For TRA '86 amendments, enter the first day of the first Plan Year beginning in 1989). C2 PLAN YEAR means the 12 consecutive month period: Commencing on a. January 1 (e.g., January 1st) and ending on b. December 31. IS THERE A SHORT PLAN YEAR? c. (X) No d. ( ) Yes, beginning ____ and ending __________________________. C3 ANNIVERSARY DATE of Plan (Annual Valuation Date) a. December 31 ------------- month day C4 PLAN NUMBER assigned by the Employer (select one) a. (X) 001 b. ( ) 002 c. ( ) 003 d. ( ) Other _______ 3 80 C5 NAME OF PLAN ADMINISTRATOR (Document provides for the Employer to appoint an Administrator. If none is named, the Employer will become the Administrator.) a. (X) Employer (Use Employer Address) b. ( ) Name _____________________________________ Address ( ) Use Employer Address ----------------------------------- , ----------------- ------- -------- City State Zip Telephone -------------------------------- Administrator's I.D. Number -------------- C6 PLAN'S AGENT FOR SERVICE OF LEGAL PROCESS a. (X) Employer (Use Employer Address) b. ( ) Name ------------------------------------- Address ----------------------------------- ----------------------------------- 4 81 ELIGIBILITY, VESTING AND RETIREMENT AGE D1 ELIGIBLE EMPLOYEES (Plan Section 1.15) shall mean: a. ( ) all Employees who have satisfied the eligibility requirements. b. (X) all Employees who have satisfied the eligibility requirements except those checked below: 1. ( ) Employees paid by commissions only. 2. ( ) Employees hourly paid. 3. ( ) Employees paid by salary. 4. (X) Employees whose employment is governed by a collective bargaining agreement between the Employer and "employee representatives" under which retirement benefits were the subject of good faith bargaining. For this purpose, the term "employee representatives" does not include any organization more than half of whose members are employees who are owners, officers, or executives of the Employer. 5. ( ) Highly Compensated Employees. 6. (X) Employees who are non-resident aliens who received no earned income (within the meaning of Code Section 911(d)(2)) from the Employer which constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3)). 7. ( ) Other NOTE: For purposes of this section, the term Employee shall include all Employees of this Employer and any leased employees deemed to be Employees under Code Section 414(n) or 414(o). D2 EMPLOYEES OF AFFILIATED EMPLOYERS (Plan Section 1.16) Employees of Affiliated Employers: a. (X) will not or N/A b. ( ) will be treated as Employees of the Employer adopting the Plan. NOTE: If D2b is elected, each Affiliated Employer should execute this Adoption Agreement as a Participating Employer. 5 82 D3 HOURS OF SERVICE (Plan Section 1.31) will be determined on the basis of the method selected below. Only one method may be selected. The method selected will be applied to all Employees covered under the Plan. a. (X) On the basis of actual hours for which an Employee is paid or entitled to payment. b. ( ) On the basis of days worked. An Employee will be credited with ten (10) Hours of Service if under the Plan such Employee would be credited with at least one (1) Hour of Service during the day. c. ( ) On the basis of weeks worked. An Employee will be credited forty-five (45) Hours of Service if under the Plan such Employee would be credited with at least one (1) Hour of Service during the week. d. ( ) On the basis of semi-monthly payroll periods. An Employee will be credited ninety-five (95) Hours of Service if under the Plan such Employee would be credited with at least one (1) Hour of Service during the semi-monthly payroll period. e. ( ) On the basis of months worked. An Employee will be credited one hundred ninety (190) Hours of Service if under the Plan such Employee would be credited with at least one (1) Hour of Service during the month. 6 83 D4 CONDITIONS OF ELIGIBILITY (Plan Section 3.1) (Check either a OR b and c, and if applicable, d) Any Eligible Employee will be eligible to participate in the Plan if such Eligible Employee has satisfied the service and age requirements, if any, specified below: a. ( ) NO AGE OR SERVICE REQUIRED. b. (X) SERVICE REQUIREMENT. (may not exceed 1 year) 1. ( ) None 2. ( ) 1/2 Year of Service 3. ( ) 1 Year of Service 4. (X) Other 6 Months of Service NOTE: If the Year(s) of Service selected is or includes a fractional year, an Employee will not be required to complete any specified number of Hours of Service to receive credit for such fractional year. If expressed in Months of Service, an Employee will not be required to complete any specified number of Hours of Service in a particular month. c. (X) AGE REQUIREMENT (may not exceed 21) 1. ( ) N/A - No Age Requirement. 2. ( ) 20 1/2 3. (X) 21 4. ( ) Other d. ( ) FOR NEW PLANS ONLY - Regardless of any of the above age or service requirements, any Eligible Employee who was employed on the Effective Date of the Plan shall be eligible to participate hereunder and shall enter the Plan as of such date. 7 84 D5 EFFECTIVE DATE OF PARTICIPATION (Plan Section 3.2) An Eligible Employee shall become a Participant as of: a. ( ) the first day of the Plan Year in which he met the requirements. b. ( ) the first day of the Plan Year in which he met the requirements, if he met the requirements in the first 6 months of the Plan Year, or as of the first day of the next succeeding Plan Year if he met the requirements in the last 6 months of the Plan Year. c. ( ) the earlier of the first day of the seventh month or the first day of the Plan Year coinciding with or next following the date on which he met the requirements. d. ( ) the first day of the Plan Year next following the date on which he met the requirements. (Eligibility must be 1/2 Year of Service or less or 1 1/2 Years of Service or less if 100% immediate vesting is selected and age 20 1/2 or less.) e. (X) the first day of the quarter coinciding with or next following the date on which he met the requirements. f. ( ) Other: _____________________, provided that an Employee who has satisfied the maximum age and service requirements that are permissible in Section D4 above and who is otherwise entitled to participate, shall commence participation no later than the earlier of (a) 6 months after such requirements are satisfied, or (b) the first day of the first Plan Year after such requirements are satisfied, unless the Employee separates from service before such participation date. 8 85 D6 VESTING OF PARTICIPANT'S INTEREST (Plan Section 6.4(b)) The vesting schedule, based on number of Years of Service, shall be as follows: a. ( ) 100% upon entering Plan. (Required if eligibility requirement is greater than one (1) Year of Service.) b. ( ) 0-2 years 0% c. ( ) 0-4 years 0% 3 year 100% 5 years 100% d. ( ) 0-1 year 0% e. ( ) 1 year 25% 2 years 20% 2 years 50% 3 years 40% 3 years 75% 4 years 60% 4 years 100% 5 years 80% 6 years 100% f. (X) 1 year 20% g. ( ) 0-2 years 0% 2 years 40% 3 years 20% 3 years 60% 4 years 40% 4 years 80% 5 years 60% 5 years 100% 6 years 80% 7 years 100% h. ( ) Other - Must be at least as liberal as either c. or g. above.
Years of Service Percentage ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- D7 FOR AMENDED PLANS (Plan Section 6.4(f)) If the vesting schedule has been amended to a less favorable schedule, enter the pre-amended schedule below: a. ( ) Vesting schedule has not been amended or amended schedule is more favorable in all years. b. ( ) Years of Service Percentage ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- 9 86 D8 TOP HEAVY VESTING (Plan Section 6.4(c)) If this Plan becomes a Top Heavy Plan, the following vesting schedule, based on number of Years of Service, for such Plan Year and each succeeding Plan Year, whether or not the Plan is a Top Heavy Plan, shall apply and shall be treated as a Plan amendment pursuant to this Plan. Once effective, this schedule shall also apply to any contributions made prior to the effective date of Code Section 416 and/or before the Plan became a Top Heavy Plan. a. (X) N/A (D6a, b, d, e or f was selected) b. ( ) 0-1 year 0% c. ( ) 0-2 years 0% 2 years 20% 3 years 100% 3 years 40% 4 years 60% 5 years 80% 6 years 100% NOTE: This section does not apply to the Account balances of any Participant who does not have an Hour of Service after the Plan has initially become top heavy. Such Participant's Account balance attributable to Employer contributions and Forfeitures will be determined without regard to this section. D9 VESTING (Plan Section 6.4(h)) In determining Years of Service for vesting purposes, Years of Service attributable to the following shall be EXCLUDED: a. ( ) Service prior to the Effective Date of the Plan or a predecessor plan. b. (X) N/A. c. (X) Service prior to the time an Employee attained age 18. d. ( ) N/A. D10 PLAN SHALL RECOGNIZE SERVICE WITH PREDECESSOR EMPLOYER a. (X) No. b. ( ) Yes: Years of Service with ____ shall be recognized for the purpose of this Plan. NOTE: If the predecessor Employer maintained this qualified Plan, then Years of Service with such predecessor Employer shall be recognized pursuant to Section 1.74 and b. must be marked. D11 NORMAL RETIREMENT AGE ("NRA") (Plan Section 1.42) means: a. (X) the date a Participant attains his 65 birthday. (not to exceed 65th) b. ( ) the later of the date a Participant attains his __ birthday (not to exceed 65th) or the c. ____ (not to exceed 5th) anniversary of the first day of the Plan Year in which participation in the Plan commenced. 10 87 D12 NORMAL RETIREMENT DATE (Plan Section 1.43) shall commence: a. ( ) as of the Participant's "NRA." OR (must select b. or c. AND 1. or 2.) b. (X) as of the first day of the month... c. ( ) as of the Anniversary Date... 1. (X) coinciding with or next following the Participant's "NRA." 2. ( ) nearest the Participant's "NRA." D13 EARLY RETIREMENT DATE (Plan Section 1.12) means the: a. (X) No Early Retirement provision provided. b. ( ) date on which a Participant... c. ( ) first day of the month coinciding with or next following the date on which a Participant... d. ( ) Anniversary Date coinciding with or next following the date on which a Participant... AND, if b., c. or d. was selected... 1. ( ) attains his ____ birthday and has 2. ( ) completed at least ____ Years of Service. 11 88 CONTRIBUTIONS, ALLOCATIONS AND DISTRIBUTIONS E1 a. COMPENSATION (Plan Section 1.9) with respect to any Participant means: 1. ( ) "415 Compensation." 2. (X) Compensation reportable as wages on Form W-2. b. COMPENSATION shall be 1. (X) actually paid (must be selected if Plan is integrated) 2. ( ) accrued c. HOWEVER, FOR NON-INTEGRATED PLANS, Compensation shall exclude (select all that apply): 1. (X) N/A. No exclusions 2. ( ) overtime 3. ( ) bonuses 4. ( ) commissions 5. ( ) other ____ d. FOR PURPOSES OF THIS SECTION E1, Compensation shall be based on: 1. (X) the Plan Year. 2. ( ) the Fiscal Year coinciding with or ending within the Plan Year. 3. ( ) the Calendar Year coinciding with or ending within the Plan Year. NOTE: The Limitation Year shall be the same as the year on which Compensation is based. e. HOWEVER, for an Employee's first year of participation, Compensation shall be recognized as of: 1. ( ) the first day of the Plan Year. 2. (X) the date the Participant entered the Plan. f. IN ADDITION, COMPENSATION and "414(s) Compensation" 1. (X) shall 2. ( ) shall not include compensation which is not currently includible 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). 12 89 E2 SALARY REDUCTION ARRANGEMENT - ELECTIVE CONTRIBUTION (Plan Section 11.2) Each Employee may elect to have his Compensation reduced by: a. ( ) ____% b. ( ) up to ____% c. ( ) from ____% to ____% d. (X) up to the maximum percentage allowable not to exceed the limits of Code Sections 401(k), 404 and 415. AND... e. (X) A Participant may elect to commence salary reductions as of the first day of the Plan Year Quarter coinciding with or next following date eligibility requirements were met (ENTER AT LEAST ONE DATE OR PERIOD). A Participant may modify the amount of salary reductions as of the first day of each Plan Year Quarter (ENTER AT LEAST ONE DATE OR PERIOD). AND... Shall cash bonuses paid within 2 1/2 months after the end of the Plan Year be subject to the salary reduction election? f. ( ) Yes g. (X) No 13 90 E3 FORMULA FOR DETERMINING EMPLOYER'S MATCHING CONTRIBUTION (Plan Section 11.1(b)) a. ( ) N/A. There shall be no matching contributions. b. ( ) The Employer shall make matching contributions equal to ____% (e.g. 50%) of the Participant's salary reductions. c. (X) The Employer may make matching contributions equal to a discretionary percentage, to be determined by the Employer, of the Participant's salary reductions. d. ( ) The Employer shall make matching contributions equal to the sum of ____% of the portion of the Participant's salary reduction which does not exceed ____% of the Participant's Compensation plus ____% of the portion of the Participant's salary reduction which exceeds ____% of the Participant's Compensation, but does not exceed ____% of the Participant's Compensation. e. ( ) The Employer shall make matching contributions equal to the percentage determined under the following schedule: Participant's Total Matching Percentage Years of Service --------- -------- --------- -------- --------- -------- 14 91 FOR PLANS WITH MATCHING CONTRIBUTIONS f. (X) Matching contributions g. ( ) shall h. (X) shall not be used in satisfying the deferral percentage tests. (If used, full vesting and restrictions on withdrawals will apply and the match will be deemed to be an Elective Contribution). i. (X) Shall a Year of Service be required in order to share in the matching contribution? With respect to Plan Years beginning after 1989... 1. ( ) Yes (Could cause Plan to violate minimum participation and coverage requirements under Code Sections 401(a)(26) and 410) 2. (X) No With respect to Plan Years beginning before 1990... 1. (X) N/A, new Plan, or same as years beginning after 1989 2. ( ) Yes 3. ( ) No j. ( ) In determining matching contributions, only salary reductions up to ____% of a Participant's Compensation will be matched. k. (X) N/A l. ( ) The matching contribution made on behalf of a Participant for any Plan Year shall not exceed $____. m. (X) N/A n. (X) Matching contributions shall be made on behalf of 1. (X) all Participants. 2. ( ) only Non-Highly Compensated Employees. 15 92 E4 WILL A DISCRETIONARY EMPLOYER CONTRIBUTION BE PROVIDED (OTHER THAN A DISCRETIONARY MATCHING OR QUALIFIED NON-ELECTIVE CONTRIBUTION) (Plan Section 11.1(c))? a. ( ) No. b. ( ) Yes, the Employer may make a discretionary contribution out of its current or accumulated Net Profit. c. (X) Yes, the Employer may make a discretionary contribution which is not limited to its current or accumulated Net Profit. IF YES (b. or c. is selected above), the Employer's discretionary contribution shall be allocated as follows: d. (X) FOR A NON-INTEGRATED PLAN The Employer discretionary contribution for the Plan Year shall be allocated in the same ratio as each Participant's Compensation bears to the total of such Compensation of all Participants. e. ( ) FOR AN INTEGRATED PLAN The Employer discretionary contribution for the Plan Year shall be allocated in accordance with Plan Section 4.3(b)(2) based on a Participant's Compensation in excess of: f. ( ) The Taxable Wage Base. g. ( ) The greater of $10,000 or 20% of the Taxable Wage Base. h. ( ) ____% of the Taxable Wage Base. (See Note below) i. ( ) $____. (see Note below) NOTE: The integration percentage of 5.7% shall be reduced to: 1. 4.3% if h. or i. above is more than 20% and less than or equal to 80% of the Taxable Wage Base. 2. 5.4% if h. or i. above is less than 100% and more than 80% of the Taxable Wage Base. E5 QUALIFIED NON-ELECTIVE CONTRIBUTIONS (Plan Section 11.1(d)) a. ( ) N/A. There shall be no Qualified Non-Elective Contributions except as provided in Sections 11.5(b) and 11.7(h). b. ( ) The Employer shall make a Qualified Non-Elective Contribution equal to ____% of the total Compensation of all Participants eligible to share in the allocations. c. (X) The Employer may make a Qualified Non-Elective Contribution in an amount to be determined by the Employer. 16 93 E6 FORFEITURES (Plan Section 4.3(e)) a. Forfeitures of contributions other than matching contributions shall be... 1. ( ) added to the Employer's contribution under the Plan. 2. (X) allocated to all Participants eligible to share in the allocations in the same proportion that each Participant's Compensation for the year bears to the Compensation of all Participants for such year. b. Forfeitures of matching contributions shall be... 1. ( ) N/A. No matching contributions or match is fully vested. 2. (X) used to reduce the Employer's matching contribution. 3. ( ) allocated to all Participants eligible to share in the allocations in proportion to each such Participant's Compensation for the year. 4. ( ) allocated to all Non-Highly Compensated Employee's eligible to share in the allocations in proportion to each such Participant's Compensation for the year. E7 ALLOCATIONS TO ACTIVE PARTICIPANTS (Plan Section 4.3) With respect to Plan Years beginning after 1989, a Participant... a. ( ) shall (Plan may become discriminatory) b. (X) shall not be required to complete a Year of Service in order to share in any Non-Elective Contributions (other than matching contributions) or Qualified Non-Elective Contributions. For Plan Years beginning before 1990, the Plan provides that a Participant must complete a Year of Service to share in the allocations. 17 94 E8 ALLOCATIONS TO TERMINATED PARTICIPANTS (Plan Section 4.3(k)) Any Participant who terminated employment during the Plan Year (i.e. not actively employed on the last day of the Plan Year) for reasons other than death, Total and Permanent Disability or retirement: a. With respect to Employer Non-Elective Contributions (other than matching), Qualified Non-Elective Contributions, and Forfeitures: 1. For Plan Years beginning after 1989, i. ( ) N/A, Plan does not provide for such contributions. ii. ( ) shall share in the allocations provided such Participant completed more than 500 Hours of Service. iii. ( ) shall share in such allocations provided such Participant completed a Year of Service. iv. (X) shall not share in such allocations, regardless of Hours of Service. 2. For Plan Years beginning before 1990, i. (X) N/A, new Plan, or same as for Plan Years beginning after 1989. ii. ( ) shall share in such allocations provided such Participant completed a Year of Service. iii. ( ) shall not share in such allocations, regardless of Hours of Service. NOTE: If a.1.iii or iv is selected, the Plan could violate minimum participation and coverage requirements under Code Sections 401(a)(26) and 410. 18 95 b. With respect to the allocation of Employer Matching Contributions, a Participant: 1. For Plan Years beginning after 1989, i. ( ) N/A, Plan does not provide for matching contributions. ii. (X) shall share in the allocations, regardless of Hours of Service. iii. ( ) shall share in the allocations provided such Participant completed more than 500 Hours of Service. iv. ( ) shall share in such allocations provided such Participant completed a Year of Service. v. ( ) shall not share in such allocations, regardless of Hours of Service. 2. For Plan Years beginning before 1990, i. (X) N/A, new Plan, or same as years beginning after 1989. ii. ( ) shall share in the allocations, regardless of Hours of Service. iii. ( ) shall share in such allocations provided such Participant completed a Year of Service. iv. ( ) shall not share in such allocations, regardless of Hours of Service. NOTE: If b.1.iv or v is selected, the Plan could violate minimum participation and coverage requirements under Code Section 401(a)(26) and 410. E9 ALLOCATIONS OF EARNINGS (Plan Section 4.3(c)) Allocations of earnings with respect to amounts contributed to the Plan after the previous Anniversary Date or other valuation date shall be determined... a. ( ) by using a weighted average. b. (X) by treating one-half of all such contributions as being a part of the Participant's nonsegregated account balance as of the previous Anniversary Date or valuation date. c. ( ) by using the method specified in Section 4.3(c). d. ( ) other 19 96 E10 LIMITATIONS ON ALLOCATIONS (Plan Section 4.4) a. If any Participant is or was covered under another qualified defined contribution plan maintained by the Employer, or if the Employer maintains a welfare benefit fund, as defined in Code Section 419(e), or an individual medical account, as defined in Code Section 415(l)(2), under which amounts are treated as Annual Additions with respect to any Participant in this Plan: 1. (X) N/A. 2. ( ) The provisions of Section 4.4(b) of the Plan will apply. 3. ( ) Provide the method under which the Plans will limit total Annual Additions to the Maximum Permissible Amount, and will properly reduce any Excess Amounts, in a manner that precludes Employer discretion. b. If any Participant is or ever has been a Participant in a defined benefit plan maintained by the Employer: 1. (X) N/A. 2. ( ) In any Limitation Year, the Annual Additions credited to the Participant under this Plan may not cause the sum of the Defined Benefit Plan Fraction and the Defined Contribution Fraction to exceed 1.0. If the Employer's contribution that would otherwise be made on the Participant's behalf during the limitation year would cause the 1.0 limitation to be exceeded, the rate of contribution under this Plan will be reduced so that the sum of the fractions equals 1.0. If the 1.0 limitation is exceeded because of an Excess Amount, such Excess Amount will be reduced in accordance with Section 4.4(a)(4) of the Plan. 3. ( ) Provide the method under which the Plans involved will satisfy the 1.0 limitation in a manner that precludes Employer discretion. E11 DISTRIBUTIONS UPON DEATH (Plan Section 6.6(h)) Distributions upon the death of a Participant prior to receiving any benefits shall... a. (X) be made pursuant to the election of the Participant or beneficiary. b. ( ) begin within 1 year of death for a designated beneficiary and be payable over the life (or over a period not exceeding the life expectancy) of such beneficiary, except that if the beneficiary is the Participant's spouse, begin within the time the Participant would have attained age 70 1/2. c. ( ) be made within 5 years of death for all beneficiaries. d. ( ) other ____ 20 97 E12 LIFE EXPECTANCIES (Plan Section 6.5(f)) for minimum distributions required pursuant to Code Section 401(a)(9) shall... a. (X) be recalculated at the Participant's election. b. ( ) be recalculated. c. ( ) not be recalculated. E13 CONDITIONS FOR DISTRIBUTIONS UPON TERMINATION Distributions upon termination of employment pursuant to Section 6.4(a) of the Plan shall not be made unless the following conditions have been satisfied: a. ( ) N/A. Immediate distributions may be made at Participant's election. b. ( ) The Participant has incurred ____ 1-Year Break(s) in Service. c. ( ) The Participant has reached his or her Early or Normal Retirement Age. d. (X) Distributions may be made at the Participant's election on or after the Anniversary Date following termination of employment. e. ( ) Other ____ E14 FORM OF DISTRIBUTIONS (Plan Sections 6.5 and 6.6) Distributions under the Plan may be made... a. 1. (X) in lump sums. 2. ( ) in lump sums or installments. b. AND, pursuant to Plan Section 6.13, 1. (X) no annuities are allowed (avoids Joint and Survivor rules). 2. ( ) annuities are allowed (Plan Section 6.13 shall not apply). NOTE: b.1. above may not be elected if this is an amendment to a plan which permitted annuities as a form of distribution or if this Plan has accepted a plan to plan transfer of assets from a plan which permitted annuities as a form of distribution. c. AND, may be made in... 1. ( ) cash only (except for insurance or annuity contracts). 2. (X) cash or property. 21 98 TOP HEAVY REQUIREMENTS F1 TOP HEAVY DUPLICATIONS (Plan Section 4.3(i)): When a Non-Key Employee is a Participant in this Plan and a Defined Benefit Plan maintained by the Employer, indicate which method shall be utilized to avoid duplication of top heavy minimum benefits. a. (X) The Employer does not maintain a Defined Benefit Plan. b. ( ) A minimum, non-integrated contribution of 5% of each Non-Key Employee's total Compensation shall be provided in this Plan, as specified in Section 4.3(i). (The Defined Benefit and Defined Contribution Fractions will be computed using 100% if this choice is selected.) c. ( ) A minimum, non-integrated contribution of 7 1/2% of each Non-Key Employee's total Compensation shall be provided in this Plan, as specified in Section 4.3(i). (If this choice is selected, the Defined Benefit and Defined Contribution Fractions will be computed using 125% for all Plan Years in which the Plan is Top Heavy, but not Super Top Heavy.) d. ( ) Specify the method under which the Plans will provide top heavy minimum benefits for Non-Key Employees that will preclude Employer discretion and avoid inadvertent omissions, including any adjustments required under Code Section 415(e). F2 PRESENT VALUE OF ACCRUED BENEFIT (Plan Section 2.2) for Top Heavy purposes where the Employer maintains a Defined Benefit Plan in addition to this Plan, shall be based on... a. (X) N/A. The Employer does not maintain a defined benefit plan. b. ( ) Interest Rate: Mortality Table: F3 TOP HEAVY DUPLICATIONS: Employer maintaining two (2) or more Defined Contribution Plans. a. (X) N/A. b. ( ) A minimum, non-integrated contribution of 3% of each Non-Key Employee's total Compensation shall be provided in the Money Purchase Plan (or other plan subject to Code Section 412), where the Employer maintains two (2) or more non-paired Defined Contribution Plans. c. ( ) Specify the method under which the Plans will provide top heavy minimum benefits for Non-Key Employees that will preclude Employer discretion and avoid inadvertent omissions, including any adjustments required under Code Section 415(e). 22 99 MISCELLANEOUS G1 LOANS TO PARTICIPANTS (Plan Section 7.4) a. ( ) Yes, loans may be made up to $50,000 or 1/2 Vested interest. b. (X) No, loans may not be made. If YES, (check all that apply)... c. ( ) loans shall be treated as a Directed Investment. d. ( ) loans shall only be made for hardship or financial necessity. e. ( ) the minimum loan shall be $1,000. f. ( ) $10,000 de minimis loans may be made regardless of Vested interest. (If selected, Plan may need security in addition to Vested interest.) NOTE: Department of Labor Regulations require the adoption of a SEPARATE written loan program setting forth the requirements outlined in Plan Section 7.4. G2 DIRECTED INVESTMENT ACCOUNTS (Plan Section 4.8) are permitted for the interest in any one or more accounts. a. (X) Yes, regardless of the Participant's Vested interest in the Plan. b. ( ) Yes, but only with respect to the Participant's Vested interest in the Plan. c. ( ) Yes, but only with respect to those accounts which are 100% Vested. d. ( ) No directed investments are permitted. G3 TRANSFERS FROM QUALIFIED PLANS (Plan Section 4.6) a. (X) Yes, transfers from qualified plans (and rollovers) will be allowed. b. ( ) No, transfers from qualified plans (and rollovers) will not be allowed. AND, transfers shall be permitted... c. (X) from any Employee, even if not a Participant. d. ( ) from Participants only. G4 EMPLOYEES' VOLUNTARY CONTRIBUTIONS (Plan Section 4.7) a. ( ) Yes, Voluntary Contributions are allowed subject to the limits of Section 4.9. b. (X) No, Voluntary Contributions will not be allowed. NOTE: TRA '86 subjects voluntary contributions to strict discrimination rules. 23 100 G5 HARDSHIP DISTRIBUTIONS (Plan Sections 6.11 and 11.8) a. ( ) Yes, from any accounts which are 100% Vested. b. ( ) Yes, from Participant's Elective Account only. c. ( ) Yes, but limited to the Participant's Account only. d. (X) No. NOTE: Distributions from a Participant's Elective Account are limited to the portion of such account attributable to such Participant's Deferred Compensation and earnings attributable thereto up to December 31, 1988. Also hardship distributions are not permitted from a Participant's Qualified Non-Elective Account. G6 PRE-RETIREMENT DISTRIBUTION (Plan Section 6.10) a. ( ) If a Participant has reached the age of ____, distributions may be made, at the Participant's election, from any accounts which are 100% Vested without requiring the Participant to terminate employment. b. (X) No pre-retirement distribution may be made. NOTE: Distributions from a Participant's Elective Account and Qualified Non-Elective Account are not permitted prior to age 59 1/2. G7 LIFE INSURANCE (Plan Section 7.2(d)) may be purchased with Plan contributions. a. (X) No life insurance may be purchased. b. ( ) Yes, at the option of the Administrator. c. ( ) Yes, at the option of the Participant. AND, the purchase of initial or additional life insurance shall be subject to the following limitations: (select all that apply) d. ( ) N/A, no limitations. e. ( ) each initial Contract shall have a minimum face amount of $____. f. ( ) each additional Contract shall have a minimum face amount of $____. g. ( ) the Participant has completed ____ Years of Service. h. ( ) the Participant has completed ____ Years of Service while a Participant in the Plan. i. ( ) the Participant is under age ____ on the Contract issue date. j. ( ) the maximum amount of all Contracts on behalf of a Participant shall not exceed $____. k. ( ) the maximum face amount of life insurance shall be $____. 24 101 The adopting Employer may not rely on an opinion letter issued by the National Office of the Internal Revenue Service as evidence that the plan is qualified under Code Section 401. In order to obtain reliance with respect to plan qualification, the Employer must apply to the appropriate Key District Office for a determination letter. This Adoption Agreement may be used only in conjunction with basic Plan document 01. This Adoption Agreement and the basic Plan document shall together be known as InWest Pension Management, Inc. Non-Standardized 401(k) Profit Sharing Plan and Trust 01-001. The adoption of this Plan, its qualification by the IRS, and the related tax consequences are the responsibility of the Employer and its independent tax and legal advisors. InWest Pension Management, Inc. will notify the Employer of any amendments made to the Plan or of the discontinuance or abandonment of the Plan provided this Plan has been acknowledged by InWest Pension Management, Inc. or its authorized representative. Furthermore, in order to be eligible to receive such notification, we agree to notify InWest Pension Management, Inc. of any change in address. 25 102 IN WITNESS WHEREOF, the Employer and Trustee hereby cause this Plan to be executed on June 15, 1999. Furthermore, this Plan may not be used unless acknowledged by InWest Pension Management, Inc. or its authorized representative. EMPLOYER: Sauer Drilling Company By: /s/ T.W. DYK --------------------------- T.W. Dyk, President KIM HARRIS - ------------------------------ TRUSTEE JACK REED - ------------------------------ TRUSTEE BRUCE R. DEBOER - ------------------------------ TRUSTEE PARTICIPATING EMPLOYER: N/A . - ------------------------------ (enter name) By: --------------------------- 26 103 This Plan may not be used, and shall not be deemed to be a Regional Prototype Plan, unless an authorized representative of InWest Pension Management, Inc. has acknowledged the use of the Plan. Such acknowledgment is for administerial purposes only. It acknowledges that the Employer is using the Plan but does not represent that this Plan, including the choices selected on the Adoption Agreement, has been reviewed by a representative of the sponsor or constitutes a qualified retirement plan. InWest Pension Management, Inc. By: ----------------------- 27 104 TOM BROWN, INC. 401(k) RETIREMENT PLAN 105 TOM BROWN, INC. 401(k) RETIREMENT PLAN Table of Contents
Section Page - ------- ---- 1. Name of Plan; Effective Date.............................................................................1 2. Definitions..............................................................................................1 2.1 "Anniversary Date"..............................................................................1 2.2 "Code"..........................................................................................1 2.3 "Committee".....................................................................................1 2.4 "Company".......................................................................................1 2.5 "Compensation"..................................................................................1 2.6 "Computation Period"............................................................................2 2.7 "Disability"....................................................................................2 2.8 "Employee"......................................................................................2 2.9 "Employment Beginning Date".....................................................................2 2.10 "Fund" or "Funds"...............................................................................2 2.11 "Highly Compensated Employee"...................................................................2 2.12 "Hour of Service"...............................................................................3 2.13 "Income"........................................................................................4 2.14 "Non-Highly Compensated Employee"...............................................................4 2.15 "Normal Retirement Age".........................................................................4 2.16 "One-Year Break in Service".....................................................................4 2.17 "Participating Employee" and "Participant"......................................................5 2.18 "this Plan".....................................................................................5 2.19 "Plan Year".....................................................................................5 2.20 "Pooled Investment Account".....................................................................5 2.21 "Qualified Non-Elective Contribution"...........................................................5 2.22 "Service".......................................................................................5 2.23 "Trust".........................................................................................5 2.24 "Trustee".......................................................................................5 2.25 "Valuation Date"................................................................................6 2.26 "Vesting Year of Service".......................................................................6 3. Purpose..................................................................................................6 4. Plan Entry Requirements..................................................................................6 5. Contributions............................................................................................7 5.1 Salary Reduction Contributions..................................................................7 5.2 Matching Company Contributions..................................................................8 5.3 Discretionary TOM BROWN, INC. Contributions.....................................................9 5.4 Rollover Contributions..........................................................................9
================================================================================ TOM BROWN, INC. 401(k) Retirement Plan - Table of Contents Page iii of iv 106 6. Withdrawals.............................................................................................10 6.1 Age 59-1/2.....................................................................................10 6.2 Hardship.......................................................................................10 6.3 Conditions for Hardship Distribution...........................................................11 6.4 Available Other Resources......................................................................11 7.1 Actual Deferral Percentage Tests...............................................................11 7.2 Actual Contribution Percentage Tests...........................................................13 A. The "Actual Contribution Percentage"..................................................13 B. The excess of the "Actual Contribution Percentage"....................................13 C. Adjustment to Actual Deferral Percentage Tests........................................14 E. Safe Harbor Nondiscrimination Rules...................................................15 F. Adjustment to Actual Contribution Percentage Tests....................................16 G. Safe Harbor Nondiscrimination Rules...................................................17 (1) Salary Reduction Contribution Safe Harbor....................................17 (2) Matching TOM BROWN, INC. Contribution Safe Harbor............................18 8. Selection of Investments; Employee Accounts and Allocation of Benefits..................................18 8.1 Establishment of Investment Funds..............................................................18 8.2 Selections.....................................................................................19 8.3 Separate Records...............................................................................19 8.4 Allocation of Income and Expenses..............................................................20 8.5 Revaluation of Assets..........................................................................20 8.6 Unit Accounting................................................................................20 8.7 Allocation of Contributions....................................................................21 8.8 Limitation on Annual Additions.................................................................21 8.9 Combination With Other Plans...................................................................22 8.10 Code Section 415 Definitions...................................................................23 A. Annual additions......................................................................23 B. Compensation..........................................................................24 C. Defined benefit fraction..............................................................25 D. Defined contribution dollar limitation................................................25 E. Defined contribution fraction.........................................................25 F. Employer..............................................................................25 G. Excess amount.........................................................................25 H. Highest average compensation..........................................................25 I. Limitation year.......................................................................25 J. Maximum permissible amount............................................................26 K. Projected Annual Benefit..............................................................26 9. Retirement and Severance................................................................................26 9.1 Normal Retirement, Etc.........................................................................26 9.2 Vested Benefits; Termination of Employment.....................................................26 9.3 Restoration of Vesting Service and Forfeited Amounts...........................................27 9.4 Treatment of Forfeitures.......................................................................28 10. Distribution of Benefits................................................................................28
================================================================================ TOM BROWN, INC. 401(k) Retirement Plan - Table of Contents Page iv of iv 107 10.1 Normal Form of Payment.........................................................................28 10.2 Alternative Form of Payment....................................................................29 10.3 Other Rules for Beginning and Duration of Benefits.............................................29 10.4 Death Benefits; Beneficiary Designation; Distribution of Death Benefits........................30 10.5 Small Distributions............................................................................30 10.6 Waiver of Form of Benefit; Notification........................................................30 10.7 Segregated Accounts............................................................................31 10.8 Location of Participant or Beneficiary Unknown.................................................32 10.9 Special Distribution Rules Applicable to Qualified Domestic Relations Order 32 10.10 Direct Rollovers...............................................................................32 A. Eligible rollover distribution........................................................32 B. Eligible retirement plan..............................................................32 C. Distributee...........................................................................33 D. Direct rollover.......................................................................33 11. Loans to Participating Employees........................................................................33 12. Spendthrift Clause......................................................................................34 13. Administration of Plan Trust............................................................................35 14. Administrative Committee................................................................................35 15. Allocation of Responsibilities..........................................................................36 15.1 Administrative Responsibilities................................................................36 15.2 Management of Plan Assets......................................................................36 15.3 Trustee and Investment Managers................................................................37 15.4 Delegation of Fiduciary Responsibilities.......................................................37 16. Amendments..............................................................................................37 17. Termination of Contributions............................................................................37 18. Merger or Consolidation of Plan, Transfer of Plan Assets................................................38 19. Top-Heavy Provisions....................................................................................38 19.1 Determination of Top-Heavy Status..............................................................38 19.2 Minimum Allocations............................................................................39 19.3 Effect on Code Section 415 Limitations.........................................................40 20. Expenses of Administration..............................................................................40 21. Rights of Participants..................................................................................40 22. Claims Procedure........................................................................................40
================================================================================ TOM BROWN, INC. 401(k) Retirement Plan - Table of Contents Page v of iv 108 23. Construction............................................................................................41 24. Defense of Plan.........................................................................................41 25. Governing Law...........................................................................................41 26. Mistaken Contributions, Etc.............................................................................41 27. Plan Administrator; Legal Agent.........................................................................42
================================================================================ TOM BROWN, INC. 401(k) Retirement Plan - Table of Contents Page vi of iv EX-10.19 6 AMENDED SCHEDULE TO SEVERANCE AGREEMENT 1 EXHIBIT 10.19 SEVERANCE AGREEMENTS
OFFICER OR EXECUTIVE MULTIPLE -------------------- -------- Donald L. Evans 2.5 James D. Lightner 2.5 Thomas W. Dyk 2 Peter R. Scherer 2 Bruce R. DeBoer 2 Daniel G. Blanchard 2 Jack F. Harper 2 R. Kim Harris 2 B. Jack Reed 2 Clifford C. Drescher 2 Hilary G. Dussing 2 Rodney G. Mellott 2
EX-21.1 7 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 TOM BROWN, INC. Subsidiaries of Registrant December 31, 1999
Jurisdiction of Percent Name of Subsidiary Incorporation/Organization of Ownership - ------------------ -------------------------- ------------ Retex, Inc. Wyoming 100% Rocno Corporation Texas 100% Wildhorse Energy Partners, L.L.C. Delaware 45% Sauer Drilling Company Delaware 100% TBI West Virginia, Inc. Delaware 100% TBI Pipeline Company Delaware 100% TBI Resources, Ltd. Canadian 100%
EX-23.1 8 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into Tom Brown, Inc.'s previously filed Registration Statements on Form S-8 Nos. 33-42991, 33-44225, 33-60191, 33-60842, 33-13157, 33-30069, 33-42011, 333-56577, 333-69353, 333-31426, 333-89031 and 333-89033. ARTHUR ANDERSEN LLP Houston, Texas March xx, 2000 EX-23.2 9 CONSENT OF WILIAMSON PETROLEUM CONSULTANTS, INC. 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS As independent petroleum engineers, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into Tom Brown, Inc.'s previously filed Registration Statements on Form S-8 Nos. 33-42991, 33-44225, 33-60191, 33-60842, 33-13157, 33-30069, 33-42011, 333-56577, 333-69353, 333-31426, 333-89031, and 333-89033. WILLIAMSON PETROLEUM CONSULTANTS, INC. March xx, 2000 EX-23.3 10 CONSENT OF RYDER SCOTT COMPANY 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS As independent petroleum engineers, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into Tom Brown, Inc.'s previously filed Registration Statements on Form S-8 Nos. 33-42991, 33-44225, 33-60191, 33-60842, 33-13157, 33-30069, 33-42011, 333-56577, 333-69353, 333-31426, 333-89031 and 333-89033. RYDER SCOTT COMPANY March xx, 2000 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 DEC-31-1999 12,510 0 53,646 0 828 68,609 565,145 133,342 536,299 49,252 81,000 0 100 3,531 398,466 536,299 104,431 214,850 125,672 203,800 9,503 0 5,560 11,050 (4,293) 5,007 0 0 0 5,007 .16 .15
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