-----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, Jl0aJ+vdkYSTKmTfdF/3GmWQBnilXxmmg/EDZ1iaiNP+XikBsOWxFCAdMvhik1m4 qP/7jJbaxIw+LBzuAnNexQ== 0000950148-97-002431.txt : 19970929 0000950148-97-002431.hdr.sgml : 19970929 ACCESSION NUMBER: 0000950148-97-002431 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970926 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT CARE CORP CENTRAL INDEX KEY: 0000875192 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 953656297 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19411 FILM NUMBER: 97686336 BUSINESS ADDRESS: STREET 1: 2600 W MAGNOLIA BLVD CITY: BURBANK STATE: CA ZIP: 91505-3031 BUSINESS PHONE: 8189724035 MAIL ADDRESS: STREET 1: 2600 W MAGNOLIA BLVD CITY: BURBANK STATE: CA ZIP: 91505-3031 10-K405 1 FORM 10-K405 1 S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N 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 June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the transition period from _______ to _______ Commission file number 0-19411 S U M M I T C A R E C O R P O R A T I O N (Exact name of Company as specified in its charter) California 95-3656297 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 2600 W. Magnolia Blvd., Burbank, CA 91505-3031 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 841-8750 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange None on which registered None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK (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 Company 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 (Section 229.405 of this chapter) 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. [X] The aggregate market value of Common Stock held by non-affiliates* as of September 11, 1997 was $96,465,000. The number of shares outstanding of Registrant's common stock as of September 11, 1997: 6,776,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's definitive proxy statement for its annual meeting of shareholders to be held on December 11, 1997, which will be filed with the Commission within 120 days of the Company's last fiscal year end, are incorporated by reference in Part III of this Form 10-K. * Without acknowledging that any individual director of the Company is an affiliate, the shares over which they have voting control have been included as owned by affiliates solely for purposes of this computation. The exhibit index is located on Page 42. 1 2 PART I ITEM 1. BUSINESS GENERAL Summit Care Corporation (the "Company") principally operates skilled nursing care centers and assisted living centers located in California, Texas and Arizona. The skilled nursing care centers provide subacute, rehabilitative, specialty medical and skilled nursing care. The assisted living centers provide room and board, social and minor medical services in a secure environment and, in selected situations, provide care to early stage Alzheimer's residents. The Company also operates pharmacies which service skilled nursing care centers, assisted living centers and acute hospitals, both affiliated and non-affiliated in Southern California and Texas. In addition, the Company manages subacute care units in acute hospitals. The Company is incorporated under the laws of the State of California. At June 30, 1997, the Company operated 35 skilled nursing care centers with 4,631 beds. Thirteen centers are in California with 1,515 beds; twenty-one centers are in Texas with 2,966 beds and one center in Arizona with 150 beds. Within its skilled nursing care centers, the Company has established separate units for specialty medical care and subacute: fifteen units are dedicated to Alzheimer's and 35 units for patients requiring services for such complex medical needs as oncology, pulmonary cardiac complications, wounds, respiratory therapy and intensive physical, speech and occupational therapies. At fiscal year end, the Company operated four assisted living centers with 409 beds in California and opened a fifth center with 66 beds on July 1, 1997. Included in three of the centers are units dedicated to the needs of early stage Alzheimer's residents. At June 30, 1997, the Company operated two pharmacies in Southern California and through a joint venture, operates one in Texas. The pharmacies provide pharmaceutical products and services to 86 non-affiliated skilled nursing care centers, assisted living centers and acute hospitals located in Southern California and Texas. The pharmacies also provide products and services to the Company's skilled nursing care and assisted living centers. The Company manages subacute units in three acute hospitals. During fiscal year 1997, the Company opened 261 new beds in two skilled nursing care centers, and on July 1, 1997, opened another 66 new beds in an assisted living center. An existing center in Fresno, California, with 108 beds was expanded to 159 beds in July 1996. This center offers services to Alzheimer's residents in 47 beds and to subacute/skilled nursing residents in 112 beds. In August 1996, 110 beds in a newly constructed skilled nursing care center in Fort Worth, Texas were opened and in June 1997 were increased to 210 beds. The 66 beds opened on July 1, 1997 are in a new assisted living center dedicated to Alzheimer's residents situated on a campus in Orange, California, with a 172-bed skilled nursing care center and an assisted living center with 72 beds. In addition, construction is in progress to open 47 new beds in a skilled nursing care center currently with 114 beds including 26 Alzheimer's beds. It is presently estimated that the new beds will be open in October 1997. 2 3 The growth in the number of centers and beds by acquisition and construction is shown in the following table:
YEAR ENDED JUNE 30, ------------------- 1994 1995 1996 1997 1998* CENTERS Acquired 2 13 -- -- -- Constructed -- 1 1 1 1 --- ----- --- --- --- Total 2 14 1 1 1 === ===== === === === Owned 1 7 1 1 1 Leased- With Option to Purchase -- 7** -- -- -- With No Purchase Option 1 -- -- -- -- --- ----- --- --- --- Total 2 14 1 1 1 === ===== === === === BEDS Acquired 282 1,670 -- -- -- Constructed in New Centers -- 118 108 210 66 Constructed in Existing Centers 24 74 74 51 47 --- ----- --- --- --- Total 306 1,862 182 261 113 === ===== === === === Owned 230 976 182 261 113 Leased- With Option to Purchase -- 812** -- -- -- With No Purchase Option 76 74 -- -- -- --- ----- --- --- --- Total 306 1,862 182 261 113 === ===== === === ===
* Centers and beds planned to open in fiscal 1998. ** One center with 88 beds was purchased in July 1996 upon exercise of an option to purchase and another center with 111 beds was purchased in September 1997 upon exercise of an option to purchase. In April 1994, OrNda HealthCorp ("OrNda") acquired the Company's then majority shareholder, Summit Health, Ltd. ("SHL"). OrNda owned 7.5% Exchangeable Subordinated Notes ("OrNda Notes") exchangeable into all of its equity interest in the Company's common stock, at the option of the holders. In August 1995, OrNda redeemed 100% of the outstanding OrNda Notes in exchange for all of its equity interest in the Company's common stock. OrNda currently has no position in the Company's common stock. In January 1997, OrNda was merged into Tenet Healthcare Corporation ("Tenet"). In December 1995, the Company issued $55 million of Senior Secured Notes ("New Notes") and in July 1996, issued another $15 million of New Notes. The New Notes are payable as follows:
ANNUAL AMOUNT ------------- December 15, 2000 $ 7,000,000 December 15, 2001 5,000,000 December 15, 2003 9,600,000 December 15, 2004 9,600,000 December 15, 2005 9,600,000 December 15, 2006 9,600,000 December 15, 2007 9,600,000 December 15, 2010 10,000,000 ----------- $70,000,000 ===========
3 4 The annual fixed interest rate on each New Note ranges from 7.38% on the earliest maturing New Note to 8.14% on the last New Note to mature and averages 7.8% when weighted. The New Notes are secured by certain real estate in a collateral pool shared, on the basis of dollars committed, with the investors holding the Company's $25 million Senior Secured Notes and the lenders under the Company's $40 million bank line of credit. Proceeds from the New Notes were used to payoff bank debt of $55,000,000, for $12,978,000 in construction of new beds and $2,022,000 for the exercise of a purchase option for a skilled nursing center in July 1996. Concurrent with the issuance of the New Notes, the Company reduced its bank line of credit from $60,000,000 to $40,000,000 at more favorable interest rates and reduced the bank line's repayment period following the revolving commitment from four years to three years. In December 1996, the Company entered into a limited liability company ("LLC") agreement to operate a pharmacy in Austin, Texas. The purchase price for its 50% membership interest was $1,565,000 in cash. The pharmacy is servicing nursing care centers in Texas operated by either the Company, the other LLC member or non-affiliated nursing center owners. SUBSEQUENT EVENTS. The Company exercised its purchase option in a lease of a 111-bed skilled nursing care center in Texas in September 1997 for $1,871,000 in cash. OPERATIONS The Company provides long-term care services at its skilled nursing care centers, assisted living centers and pharmacies, and manages such services at acute hospitals. Long-term care services provided by the Company are of five types. SKILLED NURSING CARE. Skilled nursing care is offered in each of the Company's 35 skilled nursing care centers and at the three hospital-based units managed by the Company. Skilled nursing care services consist of round-the-clock care by registered nurses, licensed practical or vocational nurses and certified aides, room and board, special nutritional programs and related medical or other services that may be prescribed by a physician. Each skilled nursing care center has one or more physicians acting as medical director and has agreements with hospitals for the transfer of patients requiring emergency treatment. Each center also has a licensed administrator responsible for all activities in the skilled nursing center and a director of nursing responsible for nursing services. The Company has a corporate quality assurance department whose licensed nurses, dietitians and medical records technicians supervise services in the skilled nursing care centers. The Company is seeking to become accredited by the Joint Commission on Accreditation of Health Care Organizations in each of its centers. Accreditation has been achieved at the six centers surveyed by the Commission to date and six additional centers are scheduled at this time for survey. The Company believes education, training and development provide tools that enhance the effectiveness of its employees. The Company's administrators, directors of nursing and department supervisors are trained to recruit employees who meet specific standards. All employees attend a 16-hour general orientation. Administrators and department supervisors receive at least 40 hours of training annually. Other personnel receive twelve hours of training annually, primarily in customer service. Clinical training for licensed nurses, including supervision skills, is conducted by the Company to ensure each licensed nurse meets the skill competency standards. An eight-hour quality improvement program is conducted at each center for employees at all levels in the center on a yearly basis. REHABILITATIVE CARE. Rehabilitative care is provided in each of the Company's 35 skilled nursing care centers by outside contractors. Rehabilitative care consists of respiratory, physical, speech and occupational therapies and are provided by therapists generally assigned to each center. The Company provides management and oversight of each center's rehabilitative care through the use of corporate therapists and therapy administration. SUBACUTE AND SPECIALTY MEDICAL SERVICES. The Company continues to focus on extending its specialty and subacute services as a means of increasing revenues and operating margins. Such services are generally reimbursed at rates higher than those for routine skilled nursing care and basic assisted living services. The services allow the Company to treat a greater range of patient acuities, which the Company believes results in increased occupancy at its centers. The Company's goal is to offer care to patients of the highest acuity level permitted by a center's physical plant and employee skill levels. Each skilled nursing care center is certified for participation in the Medicare reimbursement program and contracts with a physician as medical director who has a practice specialty related to the subacute or specialty medical services offered at the center. 4 5 The Company provides wound care, hospice care, oncology services, pulmonary cardiac services, infection control, pain management and infusion, enteral nutrition therapy and other specialty medical services in separate units at all of its skilled nursing care centers. Also, the Company operates units for the care of residents in various stages of Alzheimer's. There currently are eighteen Alzheimer's units (fifteen in skilled nursing care centers and three in assisted living centers) with a total of 617 beds and 35 units with 899 beds providing subacute and specialty medical services. PHARMACEUTICAL PRODUCTS AND SERVICES. The Company provides pharmaceutical products and services through the operation of two pharmacies in Southern California and another in Texas. The pharmacies service 86 non-affiliated skilled nursing care centers, assisted living centers and acute hospitals located in Southern California and Texas, as well as all of the Company's skilled nursing care and assisted living centers. Pharmacists are on call 24 hours a day to ensure the availability of medication whenever it is needed. The pharmacies provide prescription drugs, enteral nutrition therapy services and infusion therapy services, including nutrition, pain management, antibiotic and hydration. ASSISTED LIVING SERVICES. The five assisted living centers operated by the Company are located in California and have 475 beds, with 194 beds in three of the centers dedicated to early stage Alzheimer's. Aside from the Alzheimer's units, assisted living services consist of basic room and board, social activities and assistance with activities of daily living such as dressing and bathing. The Company has purchased vacant land in Texas for future development and operation of assisted living centers. SOURCE OF REVENUE. The Company's skilled nursing care centers receive payment for health care services from federally assisted Medicaid programs, from the federal Medicare program, from programs operated by preferred provider organizations, health maintenance organizations, the Veterans Administration and directly from patients or their responsible parties or insurers. The assisted living centers receive payment entirely from private individuals, some of whom depend upon supplemental Social Security payments as their primary source of income. The following table sets forth for the Company's skilled nursing care and assisted living centers the approximate percentages of gross revenues (excluding revenues from operation of the pharmacies) derived from the various sources of payment for the period indicated.
YEAR ENDED JUNE 30, ------------------- 1997 1996 1995 ---- ---- ---- Private/Managed Care 27.8% 30.2% 32.4% Medicare 41.8 36.5 30.7 ----- ----- ----- Subtotal 69.6 66.7 63.1 Medicaid 30.4 33.3 36.9 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== =====
Changes in the quality mix between Medicaid and either Medicare, managed care or private pay can significantly affect profitability. Quality mix represents revenues from Medicare, managed care and private pay patients as a percentage of gross revenues excluding pharmacy revenues. Medicare, managed care and private pay patients constitute the most profitable categories and Medicaid patients the least profitable. The Company has consistently maintained a high ratio of Medicare, managed care and private pay patients relative to Medicaid patients; however, no assurance can be given that the Company's quality mix will not change. Specialty medical, subacute, rehabilitative and pharmacy revenues generally represent the most profitable types of services because the principal payors for such services are Medicare and managed care and, in the case of pharmacy revenues, the skilled nursing care centers. The following tables set forth the approximate percentages of gross revenues and the amounts for these types of revenues:
YEAR ENDED JUNE 30, ------------------- 1997 1996 1995 ---- ---- ---- Specialty medical, subacute and rehabilitative revenues 48.1% 43.0% 36.8% Pharmacy revenues 7.7 7.9 8.9 ---- ---- ---- 55.8% 50.9% 45.7% ==== ==== ====
5 6
YEAR ENDED JUNE 30, ------------------- 1997 1996 1995 ------------ ------------ ----------- Specialty medical, subacute and rehabilitative revenues $118,139,000 $ 87,829,000 $57,116,000 Pharmacy revenues 18,967,000 16,193,000 13,822,000 ------------ ------------ ----------- $137,106,000 $104,022,000 $70,938,000 ============ ============ ===========
The pharmacy revenues in the above tables exclude revenues from affiliated skilled nursing care and assisted living centers. While the Company has consistently maintained a high percentage of specialty medical, subacute, rehabilitative and pharmacy revenues relative to total gross revenues, no assurance can be given that these high percentages will not change. EMPLOYEES. At June 30, 1997, the Company had approximately 4,200 full-time equivalent employees. None of the Company's employees are covered by collective bargaining agreements and the Company considers the relations with its employees to be good. The Company is subject to both federal and state minimum wage and applicable federal and state wage and hour laws and maintains various employee benefit plans. As a result of increases in the specialty and subacute services provided by the Company (which require greater expenditures for equipment, supplies and independent contractor clinicians than basic nursing services, but which generally yield a higher margin), salaries and related employee benefits as a percentage of operating expenses have decreased during the last three years. Salaries and related employee benefits accounted for approximately 50%, 53% and 56% of the Company's expenses (excluding rental, depreciation and amortization and interest) for fiscal years 1997, 1996 and 1995, respectively. COMPETITION. The Company operates in a highly competitive industry. The Company's skilled nursing care and assisted living centers are located in communities that also are served by similar centers operated by others. Some competing centers provide services not offered by the Company and some are operated by entities having greater financial and other resources than the Company. In addition, some are operated by non-profit organizations or government agencies supported by endowments, charitable contributions, tax revenues and other sources not available to the Company. Furthermore, cost containment efforts, which encourage more efficient utilization of acute care hospital services, have resulted in decreased hospital occupancy in recent years. As a result, a significant number of acute care hospitals have converted portions of their facilities to other purposes, including specialty and subacute units. In California, Texas and Arizona a certificate of need is no longer required in order to build or expand a nursing center, which is another factor increasing competition. However, in Texas, competition is limited by restrictions on the number of beds that can be enrolled in the Medicaid program. The Company's pharmacies also operate in a highly competitive environment and compete with regional and local pharmacies, medical supply companies and pharmacies operated by other long-term care chains. The Company also may encounter competition in acquiring or developing new centers. INSURANCE. The Company maintains general and professional, property, casualty, health, directors and officers, automobile, crime, employee's and workers' compensation coverage that the Company believes is adequate. The Company's workers' compensation insurance for its California and Arizona employees is funded by Company payments to a rental captive insurance company. The funds received by the insurance company pay for claims up to $250,000 per claim and for the purchase of reinsurance coverage for amounts in excess of the per claim limit and for annual aggregate claim amounts in excess of audited premiums. Texas employees are covered by a policy for employer's excess and occupational indemnity for risks in excess of $150,000 up to $1,000,000 per occurrence and no annual aggregate stop loss. The Company pays for claims up to $150,000 per occurrence. The Company's services subject it to liability risk. Malpractice claims may be asserted against the Company if its services are alleged to have resulted in patient injury or other adverse effects, the risk of which is greater for higher acuity patients, such as those treated by the Company's specialty and subacute services, than for traditional long-term care patients. The Company has from time to time been subject to malpractice claims and other litigation in the ordinary course of its business. While the Company believes that the ultimate resolution of all pending legal proceedings will not have a material adverse effect on the Company's business or financial condition, there can be no assurance that future claims will not have such an effect on the Company. Its current policy for general and professional liability coverages is a claims-made policy and has limits of $500,000 per occurrence and $1,000,000 in the aggregate per year and carries a self-insured retention of $100,000 per occurrence and a $600,000 annual aggregate loss limit. In addition, the Company has a claims-made umbrella policy 6 7 which provides additional insurance of $8,500,000 per occurrence and $8,500,000 aggregate per year over its primary general and professional policy, its automobile liability policy and its employer liability policy. Although the Company has not been subject to any judgments or settlements in excess of its insurance limits, there can be no assurance that claims for damages in excess of its coverage limits will not arise in the future. REGULATION LICENSURE. The Company's skilled nursing care centers, assisted living centers and pharmacies are subject to various regulatory and licensing requirements of state and local authorities in California, Texas and Arizona. Each skilled nursing care center is licensed by either the California Department of Health Services, the Texas Department of Human Services or the Arizona Department of Health Services, as applicable. Each assisted living center is licensed by the California Department of Social Services and the pharmacies are licensed by the California Board of Pharmacy. All licenses must be renewed annually, and failure to comply with applicable rules, laws and regulations could lead to loss of licenses. In granting, monitoring and renewing licenses, these agencies consider, among other things, the physical condition of the facility, the qualifications of the administrative and nursing staffs, the quality of care and the compliance with applicable laws and regulations. In addition to a variety of state licensing and other laws governing the storage, handling, sale or dispensing of drugs, and the supervising of a duly licensed pharmacist, the pharmacies are subject to federal regulation under the Food, Drug and Cosmetic Act and the Prescription Drug Marketing Act. Moreover, the Company is required to register its pharmacies with the United States Drug Enforcement Administration, and to comply with requirements imposed by that agency with respect to security and reporting of inventories and transactions. Such regulatory and licensing requirements are subject to change, and there can be no assurance that the Company will continue to be able to maintain necessary licenses or that it will not incur substantial costs in doing so. Failure to comply with licensing requirements could result in the loss of the right to payment by Medicare or Medicaid as well as the right to conduct the business of the licensed entity. REIMBURSEMENT. The Company's skilled nursing care centers are subject to various requirements for participation in government-sponsored health care funding programs, such as Medicare and Medicaid. To receive Medicare and Medicaid payments, each center must also comply with a number of rules regarding charges and claims procedures, the violation of which can result in denial of reimbursement. Medicare is a health insurance program operated by the federal government for the aged and certain chronically disabled individuals. Medicare utilizes a cost-based reimbursement system for free-standing nursing facilities which, subject to limits fixed for the particular geographic area on the costs for routine services (excluding capital related expenses), reimburses nursing facilities for reasonable direct and indirect allowable costs incurred in providing services (as defined by the program). Effective October 1, 1993, nursing facilities are no longer paid a return on equity under Medicare. Allowable costs normally include administrative and general costs, as well as operating costs and rental, depreciation and interest expenses. Reimbursement is subject to retrospective audit adjustment. An interim rate based upon estimated costs is paid by Medicare during the cost reporting period and a cost settlement is made following an audit of the actual costs as reported in the filed cost report. Such adjustments may result in additional payments being made to the Company or in recoupments from the Company. The Company maintains reserves to cover retroactive audit adjustments. To the extent that the Company's costs exceed certain limits known as the Medicare Routine Cost Limits, the Company may submit exception requests seeking reimbursement for such excess costs from Medicare. To date, the Company has filed three exception requests. Approval has been received on two and the other is subject to the government completing their review of a reopened Medicare cost report for fiscal year 1995. There is no assurance the Company will be able to recover such excess costs under the pending request or any future requests. If the Company files exception requests on a regular basis in the future and fails to recover the excess costs covered by such requests, such failure could adversely affect the Company's financial position and results of operations. In addition, the Company purchases respiratory therapy services and physical therapy services and is subject to payment limits for such therapy services imposed by Medicare. To the extent the Company's actual costs exceed such payment limits, the excess costs will be denied. Occupational therapy and speech therapy services are purchased by the Company from third-party vendors and are not subject to specific Medicare payment limits; however, proposed regulations have been issued which, if adopted, may result in the disallowance of a portion of such costs by the Medicare program in the future. To the extent that costs of therapy services exceed payment limits and are disallowed by Medicare, the Company has contractual arrangements with third-party vendors to recover such costs from the vendors. Medicare will reimburse charges for certain products, such as enteral and parenteral nutrition, provided by a pharmacy directly to Medicare beneficiaries who are not eligible for inpatient services based on a fee screen amount. Finally, under proposed legislation and proposed action by the Health Care Financing Administration, Medicare payments to skilled nursing facilities may be changed from cost reimbursement to a prospective payment system. Under proposals currently being considered, each skilled nursing center would receive the same rate for each day of skilled nursing care, subject to adjustments 7 8 for the facility's case mix and the area wage index period. The impact on the Company of payments under a prospective payment system is not known. Medicaid is a medical assistance program for the indigent, operated by individual states with financial participation by the federal government. California, Texas and Arizona each have Medicaid programs. While the California, Texas and Arizona programs differ in certain respects, all are subject to federally imposed requirements. Approximately 50% of the funds available under the California program, approximately 63% of the funds available under the Texas program and approximately 66% of the funds available under the Arizona program are provided by the federal government under a matching program. Under Medi-Cal, California currently provides for reimbursement of most routine and ancillary services at free-standing skilled nursing care centers at a flat daily rate, as determined by the California Department of Health Services, based on median costs of skilled nursing care centers, classified by number of beds and geographic location. Under its Medicaid program, Texas currently provides for reimbursement at a flat daily rate, as determined by the Texas Department of Human Services, based on the combination of the mean costs, median costs and appraised value of assets of skilled nursing care centers, classified by the required level of patient care. The Texas legislature has enacted legislation requiring the Department of Human Services to base its Medicaid payments for long-term care on minimum data sets. It is unclear at the present time how the Department will implement changes from the current Texas Index of Level of Effort (TILE) system to use of minimum data sets. Arizona has adopted a managed care approach to providing skilled nursing and other kinds of care to the indigent. Under the Arizona system, beneficiaries enroll in a managed care plan in their area. That managed care plan, which is responsible for providing 90 days of inpatient skilled nursing care, contracts with nursing facilities to provide varying degrees of care, depending upon the needs of the beneficiaries, at negotiated, per diem rates. After the 90 days of skilled nursing care coverage has been exhausted, the beneficiary is enrolled in a county-operated managed care plan, which also pays skilled nursing care centers based on a negotiated per diem rate for each of two levels of service. California and Texas Medicaid programs reimburse a pharmacy for drugs supplied to patients based on the cost of the drug plus an additional amount which varies depending on the type of drugs supplied. Effective October 1, 1990, the Omnibus Budget Reconciliation Act of 1987 ("OBRA 87") was implemented. Among other things, it eliminated the different certification standards for "skilled" and "intermediate care" nursing facilities under the Medicare and Medicaid programs in favor of a single "nursing facility" standard. OBRA 87 also mandated an increase in the level of services nursing centers must provide in order to participate in Medicare and Medicaid. This change, the cost of which was partially offset by Medicaid rate increases in California, Texas and Arizona and an increase in the routine cost limits under Medicare, thus far has not had a significant impact on the Company. OBRA 87 also requires that substantial additional regulations be promulgated, covering, among other things, licensure requirements for administrators, enforcement policies and procedures and the use of restraints and certain drugs. While the Company believes that it is in substantial compliance with the current requirements of OBRA 87, it is unable to predict how future interpretation and enforcement of regulations promulgated under OBRA by the state and federal governments may affect the Company in the future. Governmental funding for health care programs is subject to statutory and regulatory changes, administrative rulings, interpretations of policy, determinations by intermediaries and governmental funding restrictions, all of which may materially increase or decrease program reimbursement to health care centers. Since 1972, Congress has consistently attempted to curb federal spending on such programs. Recent actions include limitations or freezes on payments to skilled nursing care centers under the Medicare and Medicaid programs. The Company expects that there will continue to be a number of state and federal proposals to limit Medicare and Medicaid reimbursement for health care services. The Company cannot at this time predict whether any of such proposals will be adopted and no assurance can be given that future funding levels of Medicare and Medicaid programs will remain comparable to present levels. Reimbursement limits or other changes in the reimbursement policies as a result of budget cuts or other government action could materially and adversely affect the Company's results of operations. See "Pending Matters That Affect Health Care Operations," discussed below. In addition, in California, the Department of Health Services intends to shift Medi-Cal beneficiaries in selected service areas into managed care plans. If this occurs in the service areas of the Company's centers and if the plans call for covering long-term care, it could have a substantial unfavorable impact on the Company's revenues. In addition, the Company's cash flow could be materially adversely affected by periodic government program funding delays or budgetary shortfalls. The Company received approximately 9% of its revenues during the fiscal year ended June 30, 1997 from Medi-Cal. Medi-Cal delayed payments for approximately 30 days in 1997 and 1991 and nursing center rate 8 9 increases for several months in 1991 and for approximately 30 days in 1992. The Company believes that it will be able to cover any Medi-Cal payment delays that may occur in the future from cash on hand or by borrowing under its $40,000,000 bank line of credit. However, given the percentage of the Company's revenues derived from Medi-Cal, there can be no assurance that rate freezes or future delays in payments from Medi-Cal will not have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." While federal statutes do not provide states with authority to curtail funding of Medicaid reimbursement programs solely due to budget deficiencies, some states nevertheless have curtailed funding for this reason. No assurance can be given that they will not continue to do so or that future funding levels of Medicaid programs will remain comparable to present levels. On June 16, 1990, the United States Supreme Court ruled that health care providers may bring suit in federal court to enforce the Medicaid Act's requirement that the states reimburse skilled nursing care centers at rates adequate to cover the costs of efficiently and economically operated centers. Operators of skilled nursing care centers have used the federal courts to require California and Texas to adequately fund their Medicaid programs. COMPLIANCE. The Company believes that its centers are in substantial compliance with the various applicable regulatory and licensing requirements of state and local authorities in California, Texas and Arizona, and of the Medicare and Medicaid programs. In the ordinary course of its business, however, the Company from time to time receives notices from state and federal agencies of failure to comply with various requirements. The Company endeavors to take prompt corrective action and, in most cases, the Company and the reviewing agency agree on remedial steps. The reviewing agency may also take action against a center, which can include the imposition of fines, denial of payment for new patients at the center, decertification and loss of participation in the Medicare or Medicaid programs and, in extreme circumstances, revocation of a center's license. In certain circumstances, certain egregious failures to comply by one or more centers with program rules may subject the Company's centers to exclusion from participation in the Medicare and Medicaid programs. ANTI-KICKBACK LAWS. The Company is also subject to federal and state laws which govern financial and other arrangements between health care providers. Federal law, as well as the law in California, Texas and Arizona and other states, prohibits direct or indirect payments in some cases or fee-splitting arrangements between health care providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include the federal "Anti-kickback law" which prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, the referral of Medicare and Medicaid patients. A wide array of relationships and arrangements, including ownership interests in a company by persons who refer or are in a position to refer patients, as well as personal service agreements have, under certain circumstances, been alleged or have been found to violate these provisions. Certain arrangements, such as the provision of services for less than fair market value compensation, may also violate such laws. Because of the law's broad reach, the federal government has published regulations, known commonly as "safe harbors," which set forth the requirements under which certain relationships will not be considered to violate the law. One of these safe harbors protects investment interests in certain large publicly traded entities which meet certain requirements regarding the marketing of their securities and the payment of returns on the investment. A second safe harbor protects payments for management services which are set in advance at a fair market rate and which do not vary with the value or volume of services referred, so long as there is a written contract which meets certain requirements. A safe harbor for discounts, which focuses primarily on appropriate disclosure, is also available. A violation of the federal Anti-kickback law and similar state law could result in the loss of eligibility to participate in Medicare or Medicaid, or in criminal penalties. In addition, the federal government and some states restrict certain business relationships between physicians and other providers of health care services. OBRA 93 contained provisions which greatly expanded the then existing federal prohibition on physician referrals to entities with which a physician has a financial relationship. Effective January 1, 1995, OBRA 93 has prohibited any physician with a financial relationship (defined as a direct or indirect ownership or investment interest or compensation arrangement) with an entity from making a referral for a Medicare or Medicaid (along with certain other federal payment programs) "designated health service" to that entity, and prohibits that entity from billing for such services. "Designated health services" do not include skilled nursing services, but do include many services which nursing facilities provide to their patients including therapy and enteral and parenteral nutrition. In addition, exceptions exist for physician ownership in publicly traded companies which at the end of a company's most recent fiscal year end or on average during the past three years have shareholder equity exceeding $75,000,000 and for the payment of fair market compensation for the provision of personal services, so long as various requirements are met. 9 10 California also has a state statute which limits the ability of physicians to refer patients for certain specified services to an entity with which it has a financial interest which includes most ownership or compensation arrangements. A broad exception applies for referrals to certain licensed providers, including nursing centers. Many states, including California, prohibit business corporations and other persons or entities not licensed to practice medicine from providing, or holding themselves out as a provider of, medical care. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs and civil and criminal penalties. These laws, their construction and level of enforcement, vary from state to state. Each of the Company's skilled nursing care centers has at least one medical director who is a licensed physician. The medical directors may from time to time refer their patients to the Company's centers in their independent professional judgment. The physician anti-referral restrictions and prohibitions could, among other things, require the Company to modify its contractual arrangements with its medical directors or prohibit its medical directors from referring patients to the Company. From time to time, the Company has sought guidance as to the interpretation of these laws, and believes that such arrangements are consistent with legal requirements. However, there can be no assurance that such laws will ultimately be interpreted in a manner consistent with the practices of the Company. ENVIRONMENTAL REGULATION. The Company is also subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. Among the types of regulatory requirements faced by health care providers are: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos, polychlorinated biphenyls, and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials and wastes; and certain other requirements. In its role as owner and/or operator of properties or centers, the Company may be subject to liability for investigating and remedying any hazardous substances that have come to be located on the property, including any such substances that may have migrated off, or emitted, discharged, leaked, escaped or been transported from, the property. Ancillary to the Company's operations are, in various combinations, the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants. Such activities may result in damage to individuals, property or the environment; may interrupt operations and/or increase their costs; may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, penalties or other governmental agency actions; and may not be covered by insurance. There can be no assurance that the Company will not encounter such risks in the future, and such risks may result in material adverse consequences to the operations or financial condition of the Company. PENDING MATTERS THAT AFFECT HEALTH CARE OPERATIONS. In recent years, an increasing number of legislative proposals have been introduced in Congress and various state legislatures that would affect major reforms of the health care system. Among the proposals under consideration are insurance market reforms to increase the availability of group health insurance to small businesses, requirements that all businesses offer health insurance coverage to their employees, the provision of federal tax credits to individuals for the purchase of health insurance and the creation of a single government health insurance plan that would cover all citizens. Governors of several states have sought congressional assistance to allow states more flexibility in determining Medicaid payment methods and rates, including payment rates for skilled nursing care. If Congress adopts legislation granting states the power to determine Medicaid payment methods and rates, it could have a substantial adverse impact on the Company. A portion of such Medicare and Medicaid reductions would likely reduce the level of payments received by skilled nursing facilities and could adversely impact revenues received by the Company under the Medicare and Medicaid Programs. Until final legislation is adopted implementing the budget agreement, the scope of such proposed reductions on skilled nursing care centers is unclear. Any reduction in federal Medicaid expenditures would likely result in reductions in state Medicaid expenditures because Medicaid is jointly funded by the federal and state governments. In California, the Department of Health Services has established plans to enroll many Medi-Cal recipients in managed care plans. These plans have the option of covering long-term care in addition to other services, which could materially adversely affect the Company's revenues. Changes in the reimbursement levels under Medicare or Medicaid and changes in applicable governmental regulations could materially adversely affect the Company's results of operations. It is uncertain at this time what health care reform legislation will ultimately be enacted and implemented or whether other changes in the administration or interpretation of the governmental health care programs will occur. There can be no assurance that future health care legislation or other changes in the administration or interpretation of governmental health care programs, if enacted, will not have a material adverse effect on the results of operations of the Company. In August 1996, federal legislation was signed into law that increased minimum wages from $4.25 per hour to $4.75 per hour on October 1, 1996 and to $5.15 per hour on September 1, 1997. An initiative statute entitled "Minimum Wage 10 11 Increase" was adopted in California by the voters on November 5, 1996. The initiative statute increased the then current minimum wages of $4.25 per hour to $5.00 per hour on March 1, 1997 and which will increase to $5.75 per hour on March 1, 1998 for all industries. The initiative statute affects minimum wages for California employees only. The Company believes that these wage increases will not have a material adverse effect on the Company's operations. The growth in health care spending has caused the private sector, Medicare and state Medicaid programs, to reshape the financing of health care services for their beneficiaries. One of the most significant changes to the financing of health care services which the Company anticipates is the shift to managed care. The federal Medicare program, state Medicaid programs and private insurers are anticipated to place greater reliance on managed care alternatives in the future. Providers are generally willing to discount charges for services to managed care plan patients because managed care plans can direct (or strongly influence) the flow of patients. The Company believes that while it is likely that it will service an increasing proportion of managed care enrollees in the future at payment rates which may not be as favorable as those presently in effect, the expansion of managed care may also increase the volume of patients served. 11 12 ITEM 2. PROPERTIES EXISTING FACILITIES As of September 16, 1997, the Company owns or leases 35 skilled nursing care and five assisted living centers. In addition, the Company owns its corporate headquarters and leases space in buildings at which it operates its pharmacy business, located in Pasadena and Yorba Linda, California. The following table sets forth certain information concerning the skilled nursing care centers and assisted living centers currently operated by the Company.
SPECIALTY AND AVERAGE OCCUPANCY TOTAL SUBACUTE FOR F.Y.E. OWNED/ SKILLED NURSING CARE CENTERS: LOCATION BEDS BEDS 6/30/97 LEASED - ----------------------------- -------- ----- ------------- ----------------- ------ California: Woodland Reseda 153 30 87% Leased Royalwood Torrance 108 21 93% Leased Valley Fresno 99 22 93% Owned Villa Maria Santa Maria 85 24 91% Owned Earlwood Torrance 85 20 92% Owned Sharon Los Angeles 85 39 89% Leased(1) Bay Crest Torrance 78 47 93% Leased Fountain Orange 172 53 90% Owned Carehouse Santa Ana 174 40 94% Owned Palm Grove Garden Grove 122 48 90% Leased(1) Anaheim Anaheim 97 22 95% Leased Devonshire Hemet 98 15 95% Owned Willow Creek Fresno 159 101 56% Owned Texas: Coronado Abilene 219 57 83% Owned West Side White Settlement 238 28 87% Owned The Woodlands Houston 212 22 94% Owned Colonial Tyler Tyler 162 20 82% Owned Colonial Manor New Braunfels 152 62 87% Owned Guadalupe Valley Seguin 149 49 88% Leased(2) Town & Country Boerne 124 36 89% Owned Clairmont - Longview Longview 174 46 80% Owned Clairmont - Beaumont Beaumont 148 30 84% Owned Clairmont - Tyler Tyler 116 18 85% Owned Oakland Manor Giddings 114 40 73% Leased(2) Southern Manor Hallettsville 114 40 77% Leased(2) Southwood Austin 112 14 86% Owned Comanche Trail Big Spring 115 36 82% Leased(2) Heritage Oaks Lubbock 114 55 94% Owned Lubbock Lubbock 114 12 94% Owned Monument Hill La Grange 111 17 92% Owned Live Oak George West 100 34 87% Leased(2) Oak Manor Flatonia 80 28 63% Owned Oak Crest Rockport 88 30 88% Owned Cityview Fort Worth 210 92 49% Owned Arizona: Phoenix Living Center Phoenix 150 74 89% Leased(3) ASSISTED LIVING CENTERS: California: Carson Carson 202 80 82% Owned Spring Torrance 51 -- 89% Owned Hemet Hemet 84 48 74% Owned(4) Fountain Orange 72 -- 75% Owned Ashton Court Orange 66 66 --% Owned(5) ----- ----- 5,106 1,516 ===== =====
12 13 (1) The Company's leases for its Sharon and Palm Grove centers require that Tenet guarantee the Company's obligations under each lease. (2) Leased with options to purchase ranging from July 1998 to February 2005. (3) Subleased to the Company by Tenet. (4) Building owned by the Company with real property held under a ground lease extending to June 2030. (5) Center opened July 1, 1997. ITEM 3. LEGAL PROCEEDINGS The Company is subject to malpractice claims and other litigation in the ordinary course of business. In the opinion of its management, the ultimate resolution of all pending legal proceedings will not have a material adverse effect on the Company's business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of its fiscal year ended June 30, 1997. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers, who are not also directors are:
Name Position Age ---- -------- --- David G. Schumacher, Jr. President and Chief Operating Officer 41 Derwin L. Williams Sr. Vice President - Finance, 60 Chief Financial Officer and Treasurer Michael H. Martel Sr. Vice President - Marketing 35 John L. Farber Vice President - Controller, Chief 47 Accounting Officer and Secretary
David G. Schumacher, Jr., has been President and Chief Operating Officer of Summit Care Corporation since January 1, 1997 and previously served as Sr. Vice President - Operations and Chief Operating Officer from January 1, 1996. Prior to joining Summit, Mr. Schumacher was the Vice President of Operations at Arbor Health Care Company. He also spent ten years in various operations capacities at Manor Care. Derwin L. Williams was appointed Vice President - Finance and Chief Financial Officer of the Company on July 1, 1993, Treasurer on May 10, 1994 and Senior Vice President - Finance on December 8, 1995. Previously he has served in the same position at three other nursing home companies: Hallmark Health Service, Inc. from November 1989 to February 1992; Care Enterprises from April 1980 to August 1987; and Flagg Industries, Inc. from June 1978 to March 1980. Mr. Williams has also served in various capacities specializing in Medicare reimbursement for the Company in 1992 and 1993 and for Beverly Enterprises in 1988 and 1989. He is also a certified public accountant. Michael H. Martel was appointed Senior Vice President - Marketing in March 1995. Prior to joining Summit, Mr. Martel was Vice President - Marketing for Arbor Health Care Company from August 1992 to March 1995. Mr. Martel served as Regional Director of Marketing for the acute care rehabilitation division of National Medical Enterprises from April 1988 to August 1992. John L. Farber was appointed Vice President - Controller, Chief Accounting Officer and Secretary on June 2, 1997. Prior to joining Summit, Mr. Farber was Vice President of Finance at FHP Insurance Company and Director of Finance at FHP International Corporation from September 1990 to May 1997. Mr. Farber also served in financial executive positions in two other companies from September 1979 to August 1990. He is also a certified public accountant. 13 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the NASDAQ Stock Market under the symbol SUMC. On September 11, 1997, the Company had approximately 1,600 shareholders of record. The table below sets forth high and low bid prices as reported by the National Association of Securities Dealers, Inc. High and low bid prices reflect inter-dealer prices, without retail markup, markdown or commissions, and may not necessarily represent actual transactions.
COMMON STOCK ------------------------- HIGH LOW ---- --- FISCAL 1997: 1st Quarter $23-1/2 $18-3/4 2nd Quarter 22 12-3/4 3rd Quarter 15-3/4 10-5/8 4th Quarter 15-3/4 12 FISCAL 1996: 1st Quarter $25-1/2 $16-3/4 2nd Quarter 24-1/2 19-3/8 3rd Quarter 24 16-1/2 4th Quarter 25-3/4 19-1/4
No dividends have been paid or are expected to be paid in the foreseeable future on the Company's common stock, as the Company's Board of Directors intends to retain earnings for the use in its business. The Company is restricted from the payment of dividends (other than dividends payable in common stock) or to acquire its common stock by its bank line of credit agreement and senior secured note agreements to the extent that such payments exceed $5,000,000 plus 50% of the Company's net income after June 30, 1995. 14 15 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The following table summarizes certain selected financial data of the Company and should be read in conjunction with the related Consolidated Financial Statements of the Company and accompanying Notes to Consolidated Financial Statements:
1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------- Consolidated Income Statement Data (year ended June 30): Net revenues $197,927 $176,062 $137,026 $97,599 $83,992 Income before provision for income taxes 188 11,761 12,498 10,177 8,247 Net income 69 7,309 7,511 6,167 5,023 Earnings per share(1) 0.01 1.06 1.10 1.20 1.00 Consolidated Balance Sheet Data (at June 30): Total assets 250,516 223,052 184,480 114,915 73,369 Long-term debt (including current portion) 121,452 110,374 89,788 32,025 30,331 Shareholders' equity 81,412 81,286 73,813 66,361 31,337 Other Data: Nursing centers operated: Total beds (at June 30) 4,631 4,472 4,294 2,534 2,228 Average occupancy (year ended June 30) 85.4% 86.7% 86.9% 88.9% 90.3% Assisted living centers operated: Total beds (at June 30) 409(2) 468 468 468 468 Average occupancy (year ended June 30) 79.6% 78.7% 77.9% 73.7% 72.5% Total centers operated: Total beds (at June 30) 5,040(2) 4,940 4,762 3,002 2,696 Average occupancy (year ended June 30) 84.8% 85.9% 85.9% 86.5% 87.2%
(1) Earnings per share are based on the weighted average number of shares of common stock outstanding and common stock equivalents arising from stock options, which were 6,818,247 for the year ended June 30, 1997; 6,895,661 for the year ended June 30, 1996; 6,837,991 for the year ended June 30, 1995; 5,156,780 for the year ended June 30, 1994 and 5,028,936 for the year ended June 30, 1993. The effect of common stock equivalents arising from stock options on the computation of earnings per share is not significant. (2) Does not include 66 beds opened on July 1, 1997 specializing in Alzheimer's patients. 15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) TWELVE MONTHS ENDED JUNE 30, 1997 COMPARED TO TWELVE MONTHS ENDED JUNE 30, 1996 Net revenues increased $21,865 or 12.4% from $176,062 in fiscal 1996 to $197,927 in fiscal 1997. The increase occurred due to the following:
AMOUNT PERCENT ------ ------- 1. Rehabilitative and other specialty services $ 7,553 34.6% 2. New beds opened in fiscal years 1996 and 1997 12,450 56.9 3. Increased census days and revenue rates 5,647 25.8 4. Pharmacy operations 2,315 10.6 5. Special charge to Medicare revenues (6,100) (27.9) ------- ----- $21,865 100.0% ======= =====
The special charge to Medicare revenues reflect the result of adjustments proposed by Medicare in connection with an audit of fiscal 1995, which would have an effect on revenues for that fiscal year, fiscal 1996 and fiscal 1997. Average occupancy was 84.8% in the fiscal year ended June 30, 1997 compared to 85.9% in the fiscal year ended June 30, 1996. Excluding newly constructed beds, the average occupancy was 87.0% in the fiscal year ended June 30, 1997 and 86.4% in the fiscal year ended June 30, 1996. The Company's quality mix (revenues from Medicare, managed care and private pay patients as a percentage of gross revenues excluding pharmacy revenues) was 69.6% in the fiscal year ended June 30, 1997 and 66.7% in the fiscal year ended June 30, 1996. Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other expenses as a percent of net revenues, before the effect of the special charge, increased from 84.6% of net revenues in the fiscal year ended June 30, 1996 to 88.0% in the fiscal year ended June 30, 1997. Total salaries and employee related benefits were 43.9% of net revenues, before the effect of the special charge, in the fiscal year ended June 30, 1997 compared to 44.4% of net revenues in the fiscal year ended June 30, 1996. Purchases of rehabilitative and other specialty services were 25.3% of net revenues, before the effect of the special charge, in the fiscal year ended June 30, 1997 compared to 21.6% of net revenues in the fiscal year ended June 30, 1996. Expenses increased $30,580 or 20.5% from $148,929 in the fiscal year ended June 30, 1996 to $179,509 in the fiscal year ended June 30, 1997 for the following reasons:
AMOUNT PERCENT ------ ------- 1. Rehabilitative and other specialty services $ 8,680 28.4% 2. Expenses relating to new beds opened in fiscal years 1996 and 1997 11,529 37.7 3. Salaries and benefits 6,612 21.6 4. Other expenses 3,759 12.3 ------- ----- $30,580 100.0% ======= =====
Income before rental, depreciation and amortization and interest expense, net of interest income, decreased $8,715 or 32.1% from $27,133 in the fiscal year ended June 30, 1996 to $18,418 in the fiscal year ended June 30, 1997 and was 9.3% of net revenues in the fiscal year ended June 30, 1997 (and 12.0% of net revenues before the special charge to revenues) compared to 15.4% in the fiscal year ended June 30, 1996. Rental, depreciation and amortization and interest expense, net of interest income, increased by $2,858 or 18.6% from $15,372 in the fiscal year ended June 30, 1996 to $18,230 in the fiscal year ended June 30, 1997. The increase was primarily due to depreciation of additions to property and equipment and interest expense related to higher long-term debt. The Company's effective tax rate was 63.3% of income in the fiscal year ended June 30, 1997 compared to 37.9% of income in the fiscal year ended June 30, 1996. The increase in the effective tax rate was primarily due to 16 17 certain permanent differences between book income and taxable income. Net income was $69 for the fiscal year ended June 30, 1997, a decrease of $7,240 or 99.1% from $7,309 for the fiscal year ended June 30, 1996. TWELVE MONTHS ENDED JUNE 30, 1996 COMPARED TO TWELVE MONTHS ENDED JUNE 30, 1995 Net revenues increased $39,036 or 28.5% from $137,026 in fiscal 1995 to $176,062 in the fiscal year 1996. The increase occurred due to the following:
AMOUNT PERCENT 1. Acquisitions in fiscal year 1995 $13,228 33.9% 2. Rehabilitative and other specialty services 11,527 29.5 3. Increased census days and revenue rates 8,017 20.5 4. New beds opened in fiscal years 1995 and 1996 3,614 9.3 5. Pharmacy operations 2,650 6.8 ------- ----- $39,036 100.0% ======= =====
Average occupancy was 85.9% in the fiscal years ended June 30, 1996 and 1995, and new beds were opened in both fiscal years. Excluding acquisitions and newly constructed beds, the average occupancy was 88.4% in the fiscal year ended June 30, 1996 and 89.0% in the fiscal year ended June 30, 1995. The Company's quality mix (revenues from Medicare, managed care and private pay patients as a percentage of gross revenues excluding pharmacy revenues) was 66.7% in the fiscal year ended June 30, 1996 and 63.1% in the fiscal year ended June 30, 1995. Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other as a percent of net revenues increased from 82.0% of net revenues in the fiscal year ended June 30, 1995 to 84.6% in the fiscal year ended June 30, 1996. Total salaries and employee related benefits were 44.4% of net revenues in the fiscal year ended June 30, 1996 compared to 46.1% of net revenues in the fiscal year ended June 30, 1995. Expenses increased $36,552 or 32.5% from $112,377 in the fiscal year ended June 30, 1995 to $148,929 in the fiscal year ended June 30, 1996 for the following reasons:
AMOUNT PERCENT ------ ------- 1. Rehabilitative and other specialty services $10,906 29.8% 2. Acquisitions in fiscal year 1995 10,454 28.6 3. Salaries and benefits 7,592 20.8 4. Expenses relating to new beds opened in fiscal years 1995 and 1996 3,202 8.8 5. Other expenses 4,398 12.0 ------- ----- $36,552 100.0% ======= =====
Income before rental, depreciation and amortization and interest expense, net of interest income, increased $2,484 or 10.1% from $24,649 in the fiscal year ended June 30, 1995 to $27,133 in the fiscal year ended June 30, 1996 and was 15.4% of net revenues in the fiscal year ended June 30, 1996 compared to 18.0% in the fiscal year ended June 30, 1995. Rental, depreciation and amortization and interest expense, net of interest income, increased by $3,221 or 26.5% from $12,151 in the fiscal year ended June 30, 1995 to $15,372 in the fiscal year ended June 30, 1996. Substantially all of this increase was due to depreciation and amortization, rent and interest expense related to acquisitions and newly constructed beds in fiscal years 1995 and 1996. The Company's effective tax rate was 37.9% of income in the fiscal year ended June 30, 1996 and 39.9% of income in the fiscal year ended June 30, 1995. Net income after taxes decreased $202 or 2.7% from $7,511 in the fiscal year ended June 30, 1995 to $7,309 in the fiscal year ended June 30, 1996. 17 18 LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, the Company had $3,994 in cash and cash equivalents and working capital of $12,648. For the fiscal year ended June 30, 1997, the Company's cash and cash equivalents increased by $1,336. Net cash provided by operating activities increased $11,149 from $6,866 for the fiscal year ended June 30, 1996 to $18,015 for the fiscal year ended June 30, 1997. Net cash provided by operating activities, plus proceeds of $15,000 in new long-term debt (see description below) were used principally for capital expenditures of $24,075 for new and existing centers, the net reduction of loans outstanding on the line of credit of $1,000, the purchase of a lease option for $2,022, and the acquisition of a 50% interest in a limited liability company for $1,565. Accounts receivable, less allowance for doubtful accounts, increased $5,819 due to increased total revenues in the fiscal year ended June 30, 1997 compared to the prior year, primarily in Medicare and managed care revenues. At June 30, 1997, the Company's average accounts receivable days outstanding were 41, compared to 39 at June 30, 1996. For the fiscal year ended June 30, 1997, the Company added $24,075 to its property and equipment. These additions were primarily for the completion of a 210 bed skilled nursing facility in Fort Worth, Texas or $2,300, construction of a 66 bed assisted living center in Orange, California, or $3,525, and the renovation of buildings and replacement of furniture and equipment at the remaining centers and the pharmacies, or $18,250. These additions to property and equipment were primarily financed with funds from $15,000 of Senior Secured Notes issued in July 1996 and with cash generated from operations. The $15,000 funding represents the second and last issuance of the $70,000 Senior Secured Notes. The initial funding of $55,000 occurred in December 1995. The Company believes that it has sufficient cash flow from its existing operations and from its bank line of credit to service long-term debt due within one year of $6,997 (the Company intends to borrow this amount against its bank line of credit which has a revolver extending to September 30, 1998 followed by a three-year payment period), to make normal recurring capital replacements, additions and improvements to existing centers of approximately $9,100 planned for the next 12 months, to develop properties costing approximately $3,000 over the next 12 months, to purchase a 111-bed center for $1,871 in accordance with a purchase option in a lease and to meet other long-term working capital needs and obligations. The loans outstanding on the line of credit at June 30, 1997 were $5,000. The Company expects, on a selective basis, to pursue expansion of its existing centers and the acquisition or development of additional centers in markets where demographics and competitive factors are favorable. IMPACT OF INFLATION The health care industry is labor intensive. Wages and other expenses increase more rapidly during periods of inflation and when shortages in the labor market occur. In addition, suppliers pass along rising costs in the form of higher prices. Increases in reimbursement rates under Medicaid generally lag behind actual cost increases, so that the Company may have difficulty covering them in a timely fashion. RECENT ACCOUNTING PRONOUNCEMENTS In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), was issued which, if elected, would require companies to use a new fair value method of valuing stock-based compensation plans. The Company has elected to continue following present accounting rules under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" which uses an intrinsic value method and often results in no compensation expense. In accordance with SFAS 123, the Company has provided in the notes to the accompanying financial statements pro forma disclosure of what net income and earnings per share would have been had the new fair value method been used. 18 19 In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which is effective for fiscal years ending after December 15, 1997, including interim periods. Earlier adoption is not permitted. However, an entity is permitted to disclose pro forma earnings per share amounts computed under SFAS 128 in the notes to the financial statements in periods prior to adoption. The statement requires restatement of all prior-period earnings per share data presented after the effective date. SFAS 128 specifies the computation, presentation, and disclosure requirements for earnings per share and is substantially similar to the standard recently issued by the International Accounting Standards Committee entitled "International Accounting Standards, Earnings per Share." The Company plans to adopt SFAS 128 in fiscal year 1998 and has not determined the impact of adoption. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years ending after December 15, 1997. SFAS 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements. It also requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Under existing accounting standards, the Company has reported its operations as one line of business because substantially all of its revenues have been derived from its skilled nursing care centers and assisted living centers and closely related ancillary services. The Company is presently evaluating the new standard in order to determine its effect, if any, on the way the Company might report its operations in the future. 19 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS The Board of Directors Summit Care Corporation We have audited the accompanying consolidated balance sheets of Summit Care Corporation and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Summit Care Corporation at June 30, 1997 and 1996, and the consolidated results of its operations and cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Los Angeles, California August 22, 1997 20 21 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30, ---------------------------------- 1997 1996 1995 ---------------------------------- Net revenues $197,927 $176,062 $137,026 Expenses: Salaries and benefits 89,577 78,233 63,171 Supplies 20,160 18,071 15,374 Purchased services 51,520 37,963 22,234 Provision for doubtful accounts 2,530 2,241 1,330 Other expenses 15,722 12,421 10,268 Rental 2,864 2,656 1,691 Rental to related parties -- -- 450 Depreciation and amortization 7,393 6,142 5,249 Interest (net of interest income: $645, $522 and $513, respectively) 7,973 6,574 4,761 -------- -------- -------- 197,739 164,301 124,528 -------- -------- -------- Income before provision for income taxes188 11,761 12,498 Provision for income taxes 119 4,452 4,987 -------- -------- -------- Net income $ 69 $ 7,309 $ 7,511 ======== ======== ======== Earnings per share $ .01 $ 1.06 $ 1.10 ======== ======== ========
See accompanying notes 21 22 SUMMIT CARE CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JUNE 30, --------------------- 1997 1996 --------------------- ASSETS Current assets: Cash and cash equivalents $ 3,994 $ 2,658 Accounts receivable, less allowance for doubtful accounts: 1997 - $2,028; 1996 - $2,084 33,749 27,930 Supplies inventory, at cost 2,690 2,058 Other current assets 12,356 13,032 -------- -------- Total current assets 52,789 45,678 Property and equipment, at cost: Land and land improvements 19,513 16,018 Buildings and leasehold improvements 161,080 136,907 Furniture and equipment 23,978 18,668 Construction in progress 5,947 15,043 -------- -------- 210,518 186,636 Less accumulated depreciation and amortization 28,605 21,713 -------- -------- 181,913 164,923 Notes receivable, less allowance for doubtful accounts: 1997 - $322; 1996 - $268 6,859 4,845 Other assets 8,955 7,606 -------- -------- $250,516 $223,052 ======== ========
See accompanying notes 22 23 SUMMIT CARE CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN THOUSANDS)
JUNE 30, --------------------- 1997 1996 --------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Payable to bank $ 4,678 $ 4,165 Accounts payable 29,586 19,895 Employee compensation and benefits 5,877 3,738 Income taxes payable -- 989 Long-term debt due within one year -- 2,985 -------- -------- Total current liabilities 40,141 31,772 Long-term debt 121,452 107,389 Deferred income taxes 7,511 2,605 -------- -------- Total liabilities 169,104 141,766 Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 2,000,000 authorized shares, none issued Common stock, no par value, 100,000,000 authorized shares; 6,776,000 and 6,772,800 issued and outstanding, respectively 51,543 51,486 Retained earnings 29,869 29,800 -------- -------- Total shareholders' equity 81,412 81,286 -------- -------- $250,516 $223,052 ======== ========
See accompanying notes 23 24 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS) THREE YEARS ENDED JUNE 30, 1997
Common Stock ---------------------- Retained Shares Amount Earnings Total --------- -------- -------- -------- Balances at June 30, 1994 6,743,600 $ 51,381 $14,980 $ 66,361 Net income -- -- 7,511 7,511 Exercise of stock options 15,700 192 -- 192 Expenses on sale of common stock -- (251) -- (251) --------- -------- ------- -------- Balances at June 30, 1995 6,759,300 51,322 22,491 73,813 Net income -- -- 7,309 7,309 Exercise of stock options 13,500 164 -- 164 --------- -------- ------- -------- Balances at June 30, 1996 6,772,800 51,486 29,800 81,286 Net income -- -- 69 69 Exercise of stock options 3,200 57 -- 57 --------- -------- ------- -------- Balances at June 30, 1997 6,776,000 $ 51,543 $29,869 $ 81,412 ========= ======== ======= ========
See accompanying notes 24 25 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30, ------------------------------------ 1997 1996 1995 ------------------------------------ Operating activities: Net income $ 69 $ 7,309 $ 7,511 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,393 6,142 5,249 (Increase) in accounts receivable (5,819) (7,594) (6,907) (Increase) decrease in supplies inventory (632) 118 (623) Decrease (increase) in other current assets 1,257 (8,429) (1,740) Increase in accounts payable 9,691 8,923 2,512 Increase (decrease) in employee compensation and benefits 2,139 (270) 478 (Decrease) increase in income taxes payable (989) (72) 577 Increase (decrease) in deferred income taxes 4,906 739 (43) -------- -------- -------- Total adjustments 17,946 (443) (497) -------- -------- -------- Net cash provided by operating activities 18,015 6,866 7,014 -------- -------- -------- Investing activities: Issuance of notes receivable (3,142) (916) (2,089) Principal payments of notes receivable 547 498 962 Additions to property and equipment (24,075) (26,558) (9,004) Acquisitions of nursing centers -- -- (51,178) Additions to other assets (1,657) (2,276) (3,279) -------- -------- -------- Net cash used in investing activities (28,327) (29,252) (64,588) Financing activities: Increase in payable to bank 513 1,193 826 Principal payments on long-term debt (17,922) (49,914) (38,225) Proceeds from long-term debt 29,000 70,500 76,520 Net expenses from sale of common stock -- -- (251) Net proceeds on exercise of stock options 57 164 192 -------- -------- -------- Net cash provided by financing activities 11,648 21,943 39,062 -------- -------- -------- Increase (decrease) in cash and cash equivalents 1,336 (443) (18,512) Cash and cash equivalents at beginning of year 2,658 3,101 21,613 -------- -------- -------- Cash and cash equivalents at end of year $ 3,994 $ 2,658 $ 3,101 ======== ======== ========
See accompanying notes 25 26 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30, -------------------------------- 1997 1996 1995 -------------------------------- Supplemental disclosures of non-cash investing and financing activities: Acquisition notes payable $ -- $ -- $ (2,814) Acquisition of nursing care centers -- -- 2,814 Acquisition of nursing care centers under capital leases -- -- 16,654 Capital lease obligations -- -- (16,654)
See accompanying notes 26 27 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED JUNE 30, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS. Summit Care Corporation ("Company" or "SCC") provides a variety of health care services primarily to the elderly through the operation of subacute, skilled nursing, Alzheimer's and assisted living units in skilled nursing care centers and assisted living centers in California, Texas and Arizona. These services include nursing care, lodging, food and certain specialty medical services, including rehabilitation care, infusion therapy and other ancillary services. The Company also provides specialty pharmaceutical and infusion therapy services to other long-term care providers. In April 1994, OrNda HealthCorp ("OrNda") acquired the Company's then majority shareholder, Summit Health Ltd. ("SHL"). OrNda's 7.5% Exchangeable Subordinated Notes ("OrNda Notes") were exchangeable into its equity interest in the Company's common stock, at the option of the holders. OrNda redeemed 100% of the outstanding OrNda Notes in exchange for its equity interest in the Company's common stock in August 1995. OrNda currently has no position in the Company's common stock. In January 1997, OrNda was merged into Tenet Healthcare Corporation ("Tenet"). BASIS OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated. USE OF ESTIMATES. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out method) or market. REVENUES. Approximately 72 percent, 70 percent and 68 percent of the Company's revenues in the years ended June 30, 1997, 1996 and 1995 were derived from funds under federal and state medical assistance programs, the continuation of which are dependent upon governmental policies. These revenues are based, in certain cases, upon cost reimbursement principles and are subject to audit. Revenues are recorded on an accrual basis as services are performed at their estimated net realizable value. Differences between final settlement and estimated net realizable value accrued in prior years are reported as adjustments to the current year's net revenues. These adjustments decreased net revenues by $4,892 in fiscal 1997. A significant portion of the Company's skilled nursing care center revenues is derived from government sponsored health care programs such as Medicare and Medicaid. These programs are highly regulated and are subject to budgetary and other constraints. While the Company's cash flow could be adversely affected by periodic government program funding delays or shortfalls, management does not believe there are any significant credit risks associated with these government programs. PROPERTY AND EQUIPMENT. Depreciation and amortization (straight-line method) is based on the estimated useful lives of the individual assets as follows: Buildings and improvements 15-40 years Leasehold improvements Shorter of lease term or estimated useful life Furniture and equipment 3-20 years Amortization of capital leases is included in depreciation and amortization expense. For leasehold improvements, where the Company has acquired the right of first refusal to purchase or to renew the lease, amortization is based on the lesser of the estimated useful lives and the period covered by the right. INTANGIBLE ASSETS. Goodwill of $2,321, less accumulated amortization of $182, is included in other assets at June 30, 1997 and is amortized over 35 years using the straight-line method. 27 28 INSURANCE COVERAGE. The Company self insures for certain levels of workers' compensation and general and professional liability coverage. The Company utilizes a captive insurance company for the purpose of providing reinsurance coverage for workers' compensation claims filed by its California and Arizona employees in excess of a $250,000 self insurance retention per occurrence and not subject to an annual aggregate limit. The Company has elected under Texas law to decline to participate in the Texas workers' compensation insurance program and maintains employer's excess and occupational indemnity insurance on claims subject to a $150,000 self insurance retention per occurrence with no annual aggregate limit. The Company maintains general and professional liability insurance on a claims made basis, subject to a $100,000 self insurance retention per occurrence and $600,000 on an annual aggregate basis. Under both self insurance programs, the Company estimates its liability, including potential legal fees and settlement amounts, based on claims filed and estimates of claims incurred but not reported, utilizing historical experience on an undiscounted basis. Differences between the amounts accrued and subsequent settlements are recorded in operations in the year of settlement. EARNINGS PER SHARE. Earnings per share is based on the weighted average number of shares of common stock outstanding and common stock equivalents arising from stock options which were 6,818,247 for the year ended June 30, 1997, 6,895,661 for the year ended June 30, 1996 and 6,837,991 for the year ended June 30, 1995. The effect of common stock equivalents arising from stock options on the computation of earnings per share is not significant. CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid investments with an original maturity of three months or less. The Company places its temporary cash investments with high credit quality financial institutions. CASH MANAGEMENT. The Company utilizes a centralized cash management system. Payable to bank represents checks outstanding. ACCOUNTING FOR THE IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company believes, based on current circumstances, that there are no indicators of impairment to its long-lived assets, and the Company presently has no expectations for disposing of any long-lived assets. RECENT ACCOUNTING PRONOUNCEMENTS. In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), was issued which, if elected, would require companies to use a new fair value method of valuing stock-based compensation plans. The Company has elected to continue following present accounting rules under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" which uses an intrinsic value method and often results in no compensation expense. In accordance with SFAS 123, the Company has provided pro forma disclosure of what net income and earnings per share would have been had the new fair value method been used (see Note 10). In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which is effective for fiscal years ending after December 15, 1997, including interim periods. Earlier adoption is not permitted. However, an entity is permitted to disclose pro forma earnings per share amounts computed under SFAS 128 in the notes to the financial statements in periods prior to adoption. The statement requires restatement of all prior-period earnings per share data presented after the effective date. SFAS 128 specifies the computation, presentation, and disclosure requirements for earnings per share and is substantially similar to the standard recently issued by the International Accounting Standards Committee entitled "International Accounting Standards, Earnings per Share." The Company plans to adopt SFAS 128 in fiscal year 1998 and has not determined the impact of adoption. 28 29 In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years ending after December 15, 1997. SFAS 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements. It also requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Under existing accounting standards, the Company has reported its operations as one line of business because substantially all of its revenues have been derived from its skilled nursing care centers and assisted living centers and closely related ancillary services. The Company is presently evaluating the new standard in order to determine its effect, if any, on the way the Company might report its operations in the future. RECLASSIFICATIONS. Certain amounts have been reclassified to conform with 1997 presentations. 2. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair market value disclosures. CASH AND CASH EQUIVALENTS. The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. NOTES RECEIVABLE (INCLUDING CURRENT PORTION). The carrying amount, before the allowance for doubtful accounts, is $8,434. The fair value of $8,400 is estimated using discounted cash flow analyses, based on interest rates currently being offered for notes with similar terms to borrowers of similar credit quality. LONG-TERM DEBT (INCLUDING CURRENT PORTION). The carrying value of $121,452 of long-term debt is based on the original face value (issue amount). The fair value of $120,300 is estimated based on the present value of the underlying cash flows discounted at the Company's incremental borrowing rate. 3. MATERIAL TRANSACTIONS WITH RELATED ENTITIES TENET HEALTHCARE CORPORATION, ORNDA HEALTHCORP AND SUMMIT HEALTH LTD. The Company had an agreement with Tenet/OrNda, which expired in March 1997, under which the Company leased a portion of its corporate office space to OrNda and shared the cost of building services with OrNda. The agreement also required OrNda to provide tax accounting to the Company. The Company's rental income from OrNda for the space exceeded the payments to OrNda for services by $31 for the year ended June 30, 1997. For the years ended June 30, 1996 and 1995, payments to OrNda for services exceeded rental income for the space by $50 and $23, respectively. The Company believes that the amount reimbursed for the services provided and the rental income received are reasonable. The agreement also indemnified the Company against any liability arising from its divestiture of facilities, the net assets of which were purchased by SHL during the year ended June 30, 1992. The provisions of the indemnification survive the termination of the agreement. Certain provisions of this agreement were terminated or amended as a result of the redemption on August 28, 1995 by OrNda of 100% of the OrNda Notes in exchange for the Company's common stock (see Note 1). In January 1994, the Company entered into a ten-year sub-lease of a nursing care center with SHL. The Company believes the monthly lease payments of $37 are reasonable for the market area. Lease payments to Tenet, OrNda and SHL were $450 for each of the years ended June 30, 1997, 1996 and 1995. At June 30, 1997, the net amount due from Tenet for transactions between the Company and Tenet was $918 and is included in Other Current Assets (see Note 5). 29 30 4. ACQUISITIONS AND CONSTRUCTION ACTIVITY FISCAL YEAR 1997. In August 1996, the Company opened a 110-bed skilled nursing care center in Fort Worth, Texas, and in June 1997, opened another 100 beds at the same site. Total cost of construction including the original purchase price (see this Note, Fiscal Year 1995) was $12,012. On July 1, 1997, the Company opened a 66-bed assisted living center in Orange, California, dedicated to Alzheimer's and other patients with dementia. Total cost of construction, which constituted renovation of an existing building on a campus with a 172-bed skilled nursing center and a 72-bed assisted living center, was $3,525. Cost of construction completed in the year ended June 30, 1997 was financed with funds from $15 million of Senior Secured Notes ("Notes") issued in July 1996 and with cash generated from operations. The Notes represented the second and last issuance of $70 million of Notes. The first issuance of $55 million occurred in December 1995. In July 1996, the Company exercised a purchase option in its lease of a 88-bed skilled nursing care center in Rockport, Texas. The purchase price of $2,022 was financed with funds from the Notes. In December 1996, the Company entered into a limited liability company ("LLC") agreement to operate a pharmacy in Austin, Texas. The purchase price for its 50% membership interest was $1,565 in cash. The pharmacy services nursing centers in Texas operated by either the Company, the other LLC member or non-affiliated nursing center owners. The Company accounts for its investment in the LLC under the equity method of accounting. The Company's equity in earnings of the LLC was insignificant during fiscal year 1997. In June 1997, the Company purchased 10 acres of vacant land in Longview, Texas for $648 in cash. The land will be used for new services which will complement the 174-bed skilled nursing center currently owned and operated by the Company. FISCAL YEAR 1996. On January 8, 1996, the Company opened a 108-bed skilled nursing care center in Fresno, California, and in August 1996, opened another 51 beds at the same site. Total cost of construction including the original purchase price was $14,024. In March 1996, the Company added 20 licensed beds to one of its two skilled nursing care centers in Beaumont, Texas, increasing the center's total beds to 148. Total cost of construction was $785. In June 1996, the Company also added 54 beds to its skilled nursing care center in Longview, Texas, increasing the total beds to 182. Total cost of construction was $1,860. Cost of construction completed in the year ended June 30, 1996 was financed with funds from Notes issued in December 1995 and draws against the Company's bank line of credit (see Note 6). FISCAL YEAR 1995. On September 1, 1994, the Company purchased a 220-bed skilled nursing care center in White Settlement (Fort Worth), Texas, for $11,925 in cash and a four-acre site for $1,500 in cash for construction of a 210-bed skilled nursing care center located in Fort Worth, Texas, which began in May 1995. The Company acquired on October 1, 1994 the leasehold interest in six skilled nursing care centers and the real and personal property of a seventh with a combined total of 783 beds located in various communities in Texas for $30,938, including goodwill of $2,321. The purchase price consists of (i) $11,470 in cash (of which $8,541 was funded under the Company's bank line of credit), (ii) a $2,814 promissory note ($3,000 less a $186 discount) at 9% interest (7% contract rate) fully amortized in seven years and (iii) a $16,654 capital lease obligation assumed by the Company. The leases on the six centers range from eight to twenty-one years, include purchase options, the first exercisable in July 1996, and the last exercisable in February 2005, and have combined monthly payments of $159. On December 1, 1994, the Company acquired four skilled nursing care centers in three communities in East Texas with a combined total of 548 beds for $27,000 in cash and, in a separate transaction, the leasehold interest in a 119-bed skilled nursing care center located in Big Spring, Texas, for $800 in cash. Both transactions were funded under the Company's bank line of credit. The Company's acquisitions have been accounted for as purchases and, accordingly, the results of operations of the acquired centers have been included in the consolidated statement of income since the date of acquisition. 30 31 The Company completed in May 1995 an addition of 74 beds to a 76-bed nursing care center which is operated under a ten-year sub-lease with OrNda (see Note 3). 5. OTHER CURRENT ASSETS Other current assets as of June 30 consist of the following:
1997 1996 --------------------- Due from third party payors $ 2,491 $ 8,055 Deferred tax assets 1,956 1,810 Notes receivable 1,253 672 Prepaid expenses 1,004 952 Income tax receivable 4,128 -- Other receivables 1,524 1,543 ------- ------- $12,356 $13,032 ======= =======
6. LONG-TERM DEBT Long-term debt consists of the following:
June 30, 1997 1996 --------------------------------------------------------------------------------------------------- Senior secured notes, at fixed interest rates from 7.38% to 8.14%, interest only payable semi-annually, principal due from December 2000 to December 2010 in various annual payments, secured by property and equipment with a book value of approximately $91,781 at June 30, 1997. $ 70,000 $ 55,000 Secured revolving bank line of credit expires September 30, 1998, variable interest rates approximating 7.44% in the year ending June 30, 1997, convertible to a term loan due in equal quarterly principal payments through September 2001, secured by property and equipment with a book value of approximately $6,556 at June 30, 1997. 5,000 6,000 8.96% senior secured notes, due 2002, interest only, payable semi-annually through June 1997, annual principal payments of $4,150 beginning December 1997, secured by property and equipment with a book value of approximately $32,779 at June 30, 1997. 25,000 25,000 Present value of capital lease obligations at effective interest rates from 7% to 9%, secured by property and equipment with a book value of approximately $23,216 at June 30, 1997. 13,133 15,680 Mortgage and other note payable, fixed interest rates from 7.75% to 9%, due in various monthly installments through January 2026, secured by property and equipment with a book value of approximately $7,379 at June 30, 1997. 5,281 5,231 Promissory note, less imputed interest of $81 in the year ended June 30, 1997, at an effective interest rate of 9% due in October 2001, secured by the leasehold interest in a nursing care center, with a book value of approximately $3,060 at June 30, 1997. 1,944 2,304
31 32 Mortgage note payable, variable interest rates from 8.25% to 9.0% in year ended June 30, 1997, due in equal monthly principal installments through March 2001, secured by property and equipment with a book value of approximately $2,816 at June 30, 1997. 1,094 1,159 Less current portion -- (2,985) -------- -------- Non-current portion $121,452 $107,389 ======== ========
Future maturities of long-term debt (including capital lease obligations) are as follows: years ending June 30, 1998 - $-0-; 1999 - $8,699; 2000 - $13,788; 2001 - $17,187; 2002 - $10,904, and thereafter - $70,874. In December 1995, the Company amended its secured bank line of credit which reduced the commitment from $60,000 to $40,000, converted accounts receivable from collateral to a negative pledge, extended the revolver to September 30, 1997 (the revolver has been subsequently extended to September 30, 1998) and reduced the period of the term loan upon termination of the revolver from four to three years. The interest rate is variable and at the Company's option, will equal either the bank prime rate or the Eurodollar rate plus a margin (reduced by the amendment) that varies depending on the ratio of certain senior debt to earnings before certain interest, taxes, depreciation and amortization. At June 30, 1997, credit line loans outstanding were $5,000 which was used to finance the construction described in Note 4. At June 30, 1997, the Company classified $6,997 of current debt maturities as long-term debt based on its intent and ability to refinance these obligations under the bank line of credit. The bank line of credit loan agreement and the two senior secured note agreements contain covenants that include requirements to comply with certain financial tests and ratios and restrict the ability of the Company to incur additional indebtedness. Also, the Company is restricted by the agreements from the payment of dividends (other than dividends payable in common stock) or to acquire its common stock to the extent that such payments exceed $5,000 plus 50% of the Company's net income after June 30, 1995. The Company currently is meeting all financial tests and ratios. Interest expense was $10,296, $8,701 and $6,033 in fiscal years 1997, 1996 and 1995, respectively, of which $1,678, $1,605 and $759 in 1997, 1996 and 1995 were capitalized as part of the ongoing construction projects. Interest payments were $10,124, $7,874 and $5,712 in fiscal years 1997, 1996 and 1995, respectively. 7. INCOME TAXES The provision for income taxes consists of the following:
Years Ended June 30, 1997 1996 1995 ------------------------------------------------------------ Federal: Current $(3,979) $3,611 $4,359 Deferred 4,003 19 (277) ------- ------ ------ 24 3,630 4,082 State: Current (662) 798 952 Deferred 757 24 (47) ------- ------ ------ 95 822 905 ------- ------ ------ $ 119 $4,452 $4,987 ======= ====== ======
Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements and represent differences between income for tax purposes and income for financial statement purposes in future years. Temporary differences are primarily attributable to reporting for income tax purposes the excess of tax over book depreciation, bad debts and vacation benefits. The current deferred tax assets are included in other current assets (see Note 5). Significant components of the Company's deferred tax liabilities and assets as of June 30 are as follows: 32 33
1997 1996 ---- ---- Current Non-Current Current Non-Current ------ ------- ------ ------- Income Taxes Deferred tax liabilities: Tax over book depreciation $ -- $(7,858) $ -- $(3,136) Other -- (264) -- (137) ------ ------- ------ ------- Total deferred tax liabilities -- (8,122) -- (3,273) Deferred tax assets: Vacation and deferred compensation benefits and bad debt 1,956 452 1,810 330 State tax -- 159 -- 338 ------ ------- ------ ------- Total deferred tax assets 1,956 611 1,810 668 ------ ------- ------ ------- Net deferred tax assets (liabilities) $1,956 $(7,511) $1,810 $(2,605) ====== ======= ====== =======
A reconciliation of the provision for income taxes with the amount computed using the federal statutory rate is as follows:
Years Ended June 30, 1997 1996 ------------------------------------------------------------------ Federal rate 34.0% 35.0% State taxes, net of federal tax benefit 4.5 4.5 Tax credits -- (1.6) Other, net 24.8 -- ---- ---- 63.3% 37.9% ==== ====
The increase in the effective tax rate was primarily due to certain permanent differences between book income and taxable income. Total income tax payments during fiscal years 1997, 1996 and 1995 were $1,828, $3,904 and $4,876, respectively. 8. LEASES The Company leases certain of its centers, equipment and its pharmacy space under both noncancellable operating leases and capital leases. The leases generally provide for payment of property taxes, insurance and repairs, and have rent escalation clauses based upon the consumer price index or annual per bed adjustments. All capital leases contain purchase options, and the accompanying balance sheet and following table have been prepared assuming such options will be exercised (see Note 11). Some leases contain various renewal options and extend up to the year 2030. Property and equipment includes the following amounts for leases which have been capitalized:
Year Ended June 30, 1997 ----------------------------------------------------------------- Land and land improvements $ 1,400 Buildings and leasehold improvements 21,481 Furniture and equipment 2,405 ------- 25,286 Less accumulated amortization 2,070 ------- $23,216 =======
33 34 The future minimum rental payments under noncancellable operating leases and capital leases (including purchase options when expected to be exercised) that have initial or remaining lease terms in excess of one year as of June 30, 1997, are as follows:
Operating Capital Year ending June 30, Leases Leases Total --------------------------------------------------------------------------------- 1998 $ 3,054 $ 3,321 $ 6,375 1999 2,995 4,634 7,629 2000 2,755 4,297 7,052 2001 2,513 350 2,863 2002 2,176 350 2,526 Thereafter 7,827 3,525 11,352 ------- ------- ------- Total minimum lease payments 21,320 16,477 37,797 Less amount representing interest -- 3,344 3,344 ------- ------- ------- Present value of net minimum lease payments (capital lease amount included in long-term debt - see Note 6) $21,320 $13,133 $34,453 ======= ======= =======
9. CONTINGENCIES The Company is subject to malpractice claims and other litigation arising in the ordinary course of business. In the opinion of management, any liability beyond amounts covered by insurance and the ultimate resolution of all pending legal proceedings will not have a material adverse effect on the Company's financial position or results of operations. 10. STOCK OPTION PLAN Effective July 1, 1991, the Company adopted a stock option plan authorizing the issuance of 250,000 shares of common stock. The plan was amended on December 9, 1994 and again on December 8, 1995 to increase the authorized shares to 1,400,000. Options may be granted to key employees and directors of the Company. Options granted to employees may be either incentive stock options or nonstatutory options. Only non-qualified options may be granted to non-employee directors. Options granted to non-employee directors are granted automatically pursuant to a formula grant provision contained in the plan. The option price per share for incentive stock options shall not be less than 85% of the fair market value at the date of the grant. The terms of each option and the increments in which each is exercisable are determined by a committee appointed by the Board of Directors. No option may be exercised after ten years from the date of the grant and no option may be granted under the plan after June 30, 2001. 34 35 The following summarizes activity in the stock option plan:
Years Ended June 30, 1997 1996 1995 - -------------------- --------------------- ---------------------- ---------------------- Weighted Weighted Weighted Average Average Average Number Exercise Number Exercise Number Exercise of Shares Price of Shares Price of Shares Price --------- -------- --------- -------- --------- -------- Options at beginning of year 948,500 $18.91 523,000 $16.79 256,000 $12.97 Changes during year: Granted 112,000 $13.36 504,000 $21.15 284,500 $19.94 Exercised (3,200) $17.85 (13,500) $12.13 (15,700) $12.20 Canceled (26,800) $20.31 (65,000) $20.58 (1,800) $12.26 --------- ------- ------- Options outstanding at end of year 1,030,500 $18.27 948,500 $18.91 523,000 $16.79 ========= ======= ======= Options exercisable at end of year 352,300 $17.10 161,600 $14.97 58,100 $12.26 Options available for grant at end of year 333,500 418,700 57,700
The weighted average fair value per share of options granted during the year was $6.72 and $10.14 for fiscal years 1997 and 1996, respectively. The exercise prices for options outstanding at June 30, 1997 ranged from $10.50 to $22.50. The weighted average remaining contractual life of these options is approximately 8 years. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) which uses an intrinsic value method and, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, results in no compensation expense. However, pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123, "Accounting and Disclosure of Stock-Based Compensation" (SFAS 123), and, in the following disclosure, has been determined as if the Company had accounted for its stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for the years ended June 30, 1997 and 1996, respectively: risk-free interest rates of 6.4% and 5.5%; dividend yields of zero percent for both years; volatility factors of the expected market price of the Company's common stock of 48.4% and 46.8%; and a weighted average expected life of the options of 5 years. Because the Company's stock options have characteristics significantly different from those options used in the Black-Scholes option pricing model, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's stock options. 35 36 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The effects of providing pro forma disclosure are not likely to be representative of the effects on reported net income for future years. The Company's pro forma information follows for the years ended June 30, 1997 and 1996:
1997 1996 ---- ---- Pro forma net income (loss) $ (543) $6,914 Pro forma earnings (loss) per share $(0.08) $ 1.00
11. SUBSEQUENT EVENT In September 1997, the Company exercised a purchase option in its lease of a 111-bed skilled nursing care center in La Grange, Texas. The purchase option price of $1,871 was financed by a draw on the Company's bank line of credit (see Note 6). 12. UNAUDITED QUARTERLY INFORMATION Following is a summary of unaudited quarterly results of operations from the years ended June 30, 1997 and 1996:
Year ended June 30, 1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total ------------------------ -------- -------- -------- -------- ----- Net revenues $48,907 $46,181 $52,012 $50,827 $197,927 Income (loss) before income taxes 2,587 (1,734) 2,394 (3,059) 188 Net income (loss) 1,565 (1,049) 1,448 (1,895) 69 Earnings (loss) per share $ 0.23 $ (0.15) $ 0.21 $ (0.28) $ 0.01 Year ended June 30, 1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total ------------------------ -------- -------- -------- -------- ----- Net revenues $41,270 $42,801 $45,232 $46,759 $176,062 Income before income taxes 3,924 3,400 2,077 2,360 11,761 Net income 2,359 2,043 1,327 1,580 7,309 Earnings per share $ 0.34 $ 0.30 $ 0.19 $ 0.23 $ 1.06
See accompanying notes 36 37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III The information required by Part III of Form 10-K (Items 10 through 13) is set forth in the Company's definitive proxy statement for its Annual Meeting of Shareholders to be held on December 11, 1997, which will be filed with the Commission pursuant to Regulation 14A within 120 days of the Company's last fiscal year, and such information is incorporated herein by reference. See also "Executive Officers of the Registrant" in Part I of this report for certain information concerning the Company's executive officers who are not also directors of the Company. PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Pages ----- (a) Financial Statements and Financial Statement Schedules: (1) Financial Statements: Report of Independent Auditors 20 Consolidated Statements of Income for each of the three years ended June 30, 1997 21 Consolidated Balance Sheets at June 30, 1997 and 1996 22, 23 Consolidated Statements of Shareholders' Equity for each of the three years ended June 30, 1997 24 Consolidated Statements of Cash Flows for each of the three years ended June 30, 1997 25, 26 Notes to Consolidated Financial Statements 27-36 (2) Financial Statement Schedules: VIII Valuation and Qualifying Accounts 41
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Company's consolidated financial statements and notes thereto. (3) Exhibits 3.1 Amended and Restated Articles of Incorporation. 3.2 Amended and Restated Bylaws. 4.1 Form of Common Stock Certificate. 10.1 Summit Care Corporation Stock Option Plan as amended by Amendment to Summit Care Corporation Stock Option Plan. 10.2 Form of Summit Care Corporation Stock Option Agreement. 10.3 Tax Sharing Agreement among Sierra Land Group, Inc., SHL and the Company, dated May 17, 1991, as amended by Amendment to Tax Sharing Agreement, dated as of February 5, 1992. 10.4 Agreement Regarding Shared Services and Other Matters between SHL and the Company, dated as of February 5, 1992. 10.5 Form of Directors and Officers Indemnity Agreement. 10.7 Palmcrest Convalescent Home (now known as Palm Grove Convalescent Center): Convalescent Hospital Lease, dated November 20, 1969, between Palmcrest Associates, Ltd., and Century Convalescent Centers, as amended by Lease of Convalescent Hospital Facility (as amended), dated September 1, 1979, by which SHL and its appointed nominee Royalwood Convalescent Hospital, Inc. (now Summit Care - California, Inc.) are substituted as lessees. 10.8 Anaheim Care Center: Lease, dated June 1, 1995, between Sam Menlo, Trustee of the Menlo Trust U/T/I 5/22/83 and Summit Care - California, Inc., doing business as Anaheim Care Center. 10.9 Sharon Care Center: Lease, dated May 1, 1987, between Jozef Nabel and Marie Gabrielle Nabel, as tenants in common, and Summit Care - California, Inc.
37 38 10.10 Royalwood Convalescent Hospital: Lease dated August 18, 1964, between Jack H. Cramer and Walter Lee Brown (together, as lessors) and Albert J. Allasandra, as amended by Amendment to Lease and Right of First Refusal to Purchase, dated May 23, 1969, by which Aljar Corporation is substituted as lessee, and as further amended by Amendment to Agreement of Lease and Right of First Refusal, dated November 18, 1974, and as further amended by Second Amendment to Agreement of Lease and Right of First Refusal and Assignment of Lease, dated July 10, 1979, by which National Accommodations, Inc. (now SHL) is substituted as lessee, assigned to the Company by Assignment of Lease, dated March 9, 1992, between SHL and the Company. 10.11 Bay Crest Convalescent Hospital: Lease, dated March 1, 1980, between South Bay Sanitarium and Convalescent Hospital and Garnet Convalescent Hospital, Inc. (now Summit Care - California, Inc.), and Amendment to Lease dated March 1, 1994. 10.12 Brier Oak Convalescent Center: Lease Agreement, dated February 18, 1985, between Bernard Bubman, Arnold Friedman, Irene Weiss and Sunset Motel and Development Co. (collectively, as lessors), and Summit Care - California, Inc. 10.13 Valley Palms Convalescent Hospital: Lease, dated March 16, 1982, between Uni-Cal Associates and Valley Palms Convalescent, Inc. (now Summit Care - California, Inc.). 10.14 Marina Care Center: Standard Industrial Lease - Net, dated March 1, 1989, between Summit Properties and Summit Care - California, Inc., as modified by Addendum to Standard Industrial Lease - Net. 10.15 Phoenix Resident Hotel: Lease, dated July 29, 1977, between Sierra Land & Livestock, Inc. and Southwest Hotels, Inc., as modified by Addendum to Lease dated August 11, 1983, assigned to the Company by Assignment of Lease, dated July 1, 1982, between Southwest Hotels, Inc. and the Company. 10.16 Sublease of Phoenix Retirement Hotel: Sublease, dated July 1, 1987, between the Company and Phoenix McDowell Properties, Inc., as assigned by Assignment of Sublease, dated March 9, 1992, between the Company and Summit Health Ltd. 10.17 Sublease of Marina Care Center: Nursing Home Sublease Agreement, dated March 7, 1989, between Summit Care - California, Inc. and 5240 Sepulveda, Inc., as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care - California, Inc. and Summit Health Ltd. 10.18 Sublease of Valley Palms Care Center: Nursing Home Sublease Agreement, dated May 11, 1989, between Summit Care - California, Inc. and Trinity Health Systems, as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care - California, Inc. and Summit Health Ltd. 10.19 Sublease of Brier Oak Terrace Care Center: Nursing Home Sublease Agreement, dated April 1, 1989, between Summit Care - California, Inc. and Brier Oak Hospital, Inc., as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care - California, Inc. and Summit Health Ltd. 10.20 Sublease of Pharmacy: Standard Sublease, dated August 1, 1989, between St. Luke Medical Center and Mediscript, Inc., as modified by Addendum of the same date. 10.21 Hemet Resident Hotel: Ground Lease dated June 25, 1980, between Genes, Ltd., and SHL, assigned to the Company by Assignment of Lease dated March 9, 1992, between SHL and the Company. 10.22 Summit Care Corporation Note Purchase Agreement dated as of December 15, 1992; 8.96% Senior Secured Notes Due 2002. 10.23 Loan Agreement and Term Note made and entered into by and between Summit Care Corporation, and Union Bank dated as of March 28, 1994. 10.24 Seller Note for purchase of The Woodlands. 10.25 HUD Note for purchase of The Woodlands. 10.26 Sublease with Summit Health Ltd. for Phoenix Living Center dated January 1994. 10.27 Real Estate Lien Note - $3,000,000 dated September 30, 1994 and Security Agreement dated September 30, 1994.
38 39 10.28 Live Oak Nursing Center, George West, Texas Lease Agreement dated July 19, 1991; Assignment of Lease With Option to Purchase dated September 30, 1994 and Consent To Assignment Of Leasehold Estate of Live Oak Nursing Center, George West, Texas dated August 15, 1994. 10.29 Guadalupe Valley Nursing Center, Sequin, Texas Lease Agreement dated February 28, 1989; Assignment Of Lease With Option To Purchase dated September 30, 1994 and Consent To Assignment Of Leasehold Estate Of Guadalupe Valley Nursing Center, Sequin, Texas dated August 15, 1994. 10.30 Southern Manor Nursing Center, Hallettsville, Texas Nursing Home Lease Agreement dated June 29, 1992; Assignment Of Lease With Option To Purchase dated September 30, 1994; Consent To Assignment Of Lease dated June 29, 1992 and Agreement Re Option dated September 30, 1994. 10.31 Oakland Manor Nursing Center, Giddings, Texas Nursing Home Lease Agreement dated June 29, 1992; Assignment Of Lease With Option To Purchase dated September 30, 1994; Consent To Assignment Of Lease dated June 29, 1992 and Agreement Re Option dated September 30, 1994. 10.32 $70,000,000 Note Purchase Agreement dated as of December 15, 1995 among Summit Care Corporation and the several purchasers listed on the acceptance form at the end thereof. 10.33 $25,000,000 Amended and Restated Note Purchase Agreement dated as of December 15, 1995 among Summit Care Corporation and the several purchasers listed on the acceptance form at the end thereof. 10.34 Third Amended and Restated Credit Agreement dated as of December 15, 1995 among Summit Care Corporation, the Lenders named therein, and Bank of Montreal, as the Agent, amending and modifying that certain Second Amended and Restated Credit Agreement, dated as of February 6, 1995, among Summit Care Corporation, the lenders named therein, and The First National Bank of Chicago, as the agent for the lenders named therein. 10.35 7.80% Note, dated December 20, 1995, in the aggregate principal amount of $18,071,429, made by Summit Care Corporation in favor of John Hancock Mutual Life Insurance Company. 10.36 Amended and Restated 8.96% Senior Secured Note due 2002, dated December 31, 1992, in the aggregate principal amount of $5,000,000, made by Summit Care Corporation in favor of Northwestern National Life Insurance Company. 10.37 Note, dated December 20, 1995, in the aggregate principal amount of $7,000,000, made by Summit Care Corporation in favor of Banque Paribas. 10.38 Guaranty in favor of certain note purchasers listed therein, dated as of December 15, 1995, executed by Summit Care Pharmacy, Inc., a California corporation and Summit Care-Texas No. 2, Inc., a Texas corporation and Summit Care-Texas No. 3, Inc., a Texas corporation. 10.39 Amended and Restated Guaranty in favor of certain note purchasers listed therein, dated as of December 15, 1995, executed by Summit Care Pharmacy, Inc., a California corporation, Summit Care-Texas No. 2 Inc., a Texas corporation, and Summit Care-Texas No. 3, Inc., a Texas corporation. 10.40 Second Amended and Restated Guaranty dated as of December 15, 1995 executed by Summit Care Pharmacy, Inc., a California corporation, Summit Care-Texas No. 2, Inc., a Texas corporation and Summit Care-Texas No. 3, Inc., a Texas corporation in favor of the Bank of Montreal. 10.41 Collateral Account Agreement, dated as of December 15, 1995, by and between Summit Care Corporation, Summit Care-California, Inc., a California corporation, Summit Care - Texas No. 2, Inc., a Texas corporation and Harris Trust and Savings Bank. 10.42 Intercreditor Agreement dated as of December 15, 1995 by and among the Bank of Montreal, Harris Trust and Savings Bank, and acknowledged and agreed to by Summit Care Corporation, Summit Care-California, Inc., a California corporation, Summit Care - Texas No. 2, Inc., a Texas corporation, Summit Care - Texas No. 3, Inc., a Texas corporation and Summit Care Pharmacy, Inc., a California corporation. 10.43 Assignment of Deed of Trust and Amended and Restated Deed of Trust, Assignment of Rents, Security Agreement, Financing Statement and Fixture Filing, dated as of December 15, 1995, executed by Summit Care - Texas No. 2, Inc., a Texas corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust and Savings Bank, with respect to the Lubbock-Heritage facility. 10.44 401(k) Savings Plan. 21 List of the Company's Significant Subsidiaries. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule.
39 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUMMIT CARE CORPORATION By /s/ WILLIAM C. SCOTT Chairman of the Board and September 24, 1997 ---------------------------- Chief Executive Officer William C. Scott
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: /s/ DERWIN L. WILLIAMS Sr. Vice President - Finance, September 24, 1997 ---------------------------- Chief Financial Officer and Derwin L. Williams Treasurer (Principal Financial Officer) /s/ JOHN L. FARBER Vice President - Controller September 24, 1997 ---------------------------- and Secretary John L. Farber (Principal Accounting Officer) /s/ DONALD AMARAL Director September 24, 1997 ---------------------------- Donald Amaral /s/ JOHN A. BRENDE Director September 24, 1997 ---------------------------- John A. Brende /s/ WILLIAM J. CASEY Director September 24, 1997 ---------------------------- William J. Casey /s/ GARY MASSIMINO Director September 24, 1997 ---------------------------- Gary Massimino
40 41 SUMMIT CARE CORPORATION SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED BALANCE BEGINNING COSTS AND TO OTHER AT END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD - ----------- --------- -------- ----------- ------------- ------ ACCOUNTS RECEIVABLE: YEAR ENDED JUNE 30, 1997 Allowance for doubtful $2,084 $2,476 $ 8 $(2,540) $2,028 accounts YEAR ENDED JUNE 30, 1996 Allowance for doubtful $ 989 $2,157 $38 $(1,100) $2,084 accounts YEAR ENDED JUNE 30, 1995 Allowance for doubtful $ 653 $1,146 $22 $ (832) $ 989 accounts NOTES RECEIVABLE: YEAR ENDED JUNE 30, 1997 Allowance for notes $ 268 $ 54 $-- $ -- $ 322 receivable YEAR ENDED JUNE 30, 1996 Allowance for notes $ 184 $ 84 $-- $ -- $ 268 receivable YEAR ENDED JUNE 30, 1995 Allowance for notes $ -- $ 184 $-- $ -- $ 184 receivable
(1) Recoveries of amounts written off. (2) Write-offs of uncollectible accounts. 41 42 SUMMIT CARE CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 1997 EXHIBIT INDEX
BEGIN ON EXHIBIT SEQUENTIAL NUMBER PAGE NO. - ------ ---------- 3.1 Amended and Restated Articles of Incorporation. Incorporated by Reference 3.2 Amended and Restated Bylaws. Incorporated by Reference 4.1 Form of Common Stock Certificate. Incorporated by Reference 10.1 Summit Care Corporation Stock Option Plan as amended by Amendment Incorporated to Summit Care Corporation Stock Option Plan. by Reference 10.2 Form of Summit Care Corporation Stock Option Agreement. Incorporated by Reference 10.3 Tax Sharing Agreement among Sierra Land Group, Inc., SHL and the Company, Incorporated dated May 17, 1991, as amended by Amendment to Tax Sharing Agreement, by Reference dated as of February 5, 1992. 10.4 Agreement Regarding Shared Services and Other Matters between SHL and the Incorporated Company, dated as of February 5, 1992. by Reference 10.5 Form of Directors and Officers Indemnity Agreement. Incorporated by Reference 10.7 Palmcrest Convalescent Home (now known as Palm Grove Convalescent Center): Incorporated Convalescent Hospital Lease, dated November 20, 1969, between Palmcrest by Reference Associates, Ltd., and Century Convalescent Centers, as amended by Lease of Convalescent Hospital Facility (as amended), dated September 1, 1979, by which SHL and its appointed nominee Royalwood Convalescent Hospital, Inc. (now Summit Care - California, Inc.) are substituted as lessees. 10.8 Anaheim Care Center: Lease, dated June 1, 1995, between Sam Menlo, Trustee Incorporated of the Menlo Trust U/T/I 5/22/83 and Summit Care - California, Inc., by Reference doing business as Anaheim Care Center. 10.9 Sharon Care Center: Lease, dated May 1, 1987, between Jozef Nabel and Marie Incorporated Gabrielle Nabel, as tenants in common, and Summit Care - California, Inc. by Reference 10.10 Royalwood Convalescent Hospital: Lease dated August 18, 1964, between Incorporated Jack H. Cramer and Walter Lee Brown (together, as lessors) and Albert J. by Reference Allasandra, as amended by Amendment to Lease and Right of First Refusal to Purchase, dated May 23, 1969, by which Aljar Corporation is substituted as lessee, and as further amended by Amendment to Agreement of Lease and Right of First Refusal, dated November 18, 1974, and as further amended by Second Amendment to Agreement of Lease and Right of First Refusal and Assignment of Lease, dated July 10, 1979, by which National Accommodations, Inc. (now SHL) is substituted as lessee, assigned to the Company by Assignment of Lease, dated March 9, 1992, between SHL and the Company. 10.11 Bay Crest Convalescent Hospital: Lease, dated March 1, 1980, between Incorporated South Bay Sanitarium and Convalescent Hospital and Garnet Convalescent by Reference Hospital, Inc. (now Summit Care - California, Inc.), and Amendment to Lease dated March 1, 1994. 10.12 Brier Oak Convalescent Center: Lease Agreement, dated February 18, 1985, Incorporated between Bernard Bubman, Arnold Friedman, Irene Weiss and Sunset Motel and by Reference Development Co. (collectively, as lessors), and Summit Care - California, Inc. 10.13 Valley Palms Convalescent Hospital: Lease, dated March 16, 1982, between Incorporated Uni-Cal Associates and Valley Palms Convalescent, Inc. (now Summit Care - by Reference California, Inc.). 10.14 Marina Care Center: Standard Industrial Lease - Net, dated March 1, 1989, Incorporated between Summit Properties and Summit Care - California, Inc., as modified by Reference by Addendum to Standard Industrial Lease - Net. 10.15 Phoenix Resident Hotel: Lease, dated July 29, 1977, between Sierra Land & Incorporated Livestock, Inc. and Southwest Hotels, Inc., as modified by Addendum to by Reference Lease dated August 11, 1983, assigned to the Company by Assignment of Lease, dated July 1, 1982, between Southwest Hotels, Inc. and the Company. 10.16 Sublease of Phoenix Retirement Hotel: Sublease, dated July 1, 1987, Incorporated between the Company and Phoenix McDowell Properties, Inc., as assigned by by Reference Assignment of Sublease, dated March 9, 1992, between the Company and Summit Health Ltd.
42 43 SUMMIT CARE CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 1997 EXHIBIT INDEX
BEGIN ON EXHIBIT SEQUENTIAL NUMBER PAGE NO. - ------ ---------- 10.17 Sublease of Marina Care Center: Nursing Home Sublease Agreement, dated Incorporated March 7, 1989, between Summit Care - California, Inc. and 5240 Sepulveda, by Reference Inc., as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care - California, Inc. and Summit Health Ltd. 10.18 Sublease of Valley Palms Care Center: Nursing Home Sublease Agreement, Incorporated dated May 11, 1989, between Summit Care - California, Inc. and Trinity by Reference Health Systems, as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care - California, Inc. and Summit Health Ltd. 10.19 Sublease of Brier Oak Terrace Care Center: Nursing Home Sublease Agreement, Incorporated dated April 1, 1989, between Summit Care - California, Inc. and Brier Oak by Reference Hospital, Inc., as assigned by Assignment of Sublease, dated March 9, 1992, between Summit Care - California, Inc. and Summit Health Ltd. 10.20 Sublease of Pharmacy: Standard Sublease, dated August 1, 1989, between St. Incorporated Luke Medical Center and Mediscript, Inc., as modified by Addendum of the by Reference same date. 10.21 Hemet Resident Hotel: Ground Lease dated June 25, 1980, between Genes, Incorporated Ltd., and SHL, assigned to the Company by Assignment of Lease dated March by Reference 9, 1992, between SHL and the Company. 10.22 Summit Care Corporation Note Purchase Agreement dated as of December Incorporated 15, 1992; 8.96% Senior Secured Notes Due 2002. by Reference 10.23 Loan Agreement and Term Note made and entered into by and between Incorporated Summit Care Corporation, and Union Bank dated as of March 28, 1994. by Reference 10.24 Seller Note for purchase of The Woodlands. Incorporated by Reference 10.25 HUD Note for purchase of The Woodlands. Incorporated by Reference 10.26 Sublease with Summit Health Ltd. for Phoenix Living Center dated Incorporated January 1994. by Reference 10.27 Real Estate Lien Note - $3,000,000 dated September 30, 1994 and Security Incorporated Agreement dated September 30, 1994. by Reference 10.28 Live Oak Nursing Center, George West, Texas Lease Agreement dated Incorporated July 19, 1991; Assignment of Lease With Option to Purchase dated by Reference September 30, 1994 and Consent To Assignment Of Leasehold Estate of Live Oak Nursing Center, George West, Texas dated August 15, 1994. 10.29 Guadalupe Valley Nursing Center, Sequin, Texas Lease Agreement dated Incorporated February 28, 1989; Assignment Of Lease With Option To Purchase dated by Reference September 30, 1994 and Consent To Assignment Of Leasehold Estate Of Guadalupe Valley Nursing Center, Sequin, Texas dated August 15, 1994. 10.30 Southern Manor Nursing Center, Hallettsville, Texas Nursing Home Lease Incorporated Agreement dated June 29, 1992; Assignment Of Lease With Option To by Reference Purchase dated September 30, 1994; Consent To Assignment Of Lease dated June 29, 1992 and Agreement Re Option dated September 30, 1994. 10.31 Oakland Manor Nursing Center, Giddings, Texas Nursing Home Lease Incorporated Agreement dated June 29, 1992; Assignment Of Lease With Option To by Reference Purchase dated September 30, 1994; Consent To Assignment Of Lease dated June 29, 1992 and Agreement Re Option dated September 30, 1994.
43 44 SUMMIT CARE CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JUNE 30, 1997 EXHIBIT INDEX
BEGIN ON EXHIBIT SEQUENTIAL NUMBER PAGE NO. - ------ ---------- 10.32 $70,000,000 Note Purchase Agreement dated as of December 15, 1995 among Incorporated Summit Care Corporation and the several purchasers listed by Reference on the acceptance form at the end thereof. 10.33 $25,000,000 Amended and Restated Note Purchase Agreement dated as of Incorporated December 15, 1995 among Summit Care Corporation and the several by Reference purchasers listed on the acceptance form at the end thereof. 10.34 Third Amended and Restated Credit Agreement dated as of December 15, 1995 Incorporated among Summit Care Corporation, the Lenders named therein, and Bank of by Reference Montreal, as the Agent, amending and modifying that certain Second Amended and Restated Credit Agreement, dated as of February 6, 1995, among Summit Care Corporation, the lenders named therein, and The First National Bank of Chicago, as the agent for the lenders named therein. 10.35 7.80% Note, dated December 20, 1995, in the aggregate principal amount Incorporated of $18,071,429, made by Summit Care Corporation in favor of John Hancock by Reference Mutual Life Insurance Company. 10.36 Amended and Restated 8.96% Senior Secured Note due 2002, dated December Incorporated 31, 1992, in the aggregate principal amount of $5,000,000, made by Summit by Reference Care Corporation in favor of Northwestern National Life Insurance Company. 10.37 Note, dated December 20, 1995, in the aggregate principal amount of Incorporated $7,000,000, made by Summit Care Corporation in favor of Banque Paribas. by Reference 10.38 Guaranty in favor of certain note purchasers listed therein, dated as of Incorporated December 15, 1995, executed by Summit Care Pharmacy, Inc., a California by Reference corporation and Summit Care-Texas No. 2, Inc., a Texas corporation and Summit Care-Texas No. 3, Inc., a Texas corporation. 10.39 Amended and Restated Guaranty in favor of certain note purchasers listed Incorporated therein, dated as of December 15, 1995, executed by Summit Care Pharmacy, by Reference Inc., a California corporation, Summit Care-Texas No. 2 Inc., a Texas corporation, and Summit Care-Texas No. 3, Inc., a Texas corporation. 10.40 Second Amended and Restated Guaranty dated as of December 15, 1995 Incorporated executed by Summit Care Pharmacy, Inc., a California corporation, Summit by Reference Care-Texas No. 2, Inc., a Texas corporation and Summit Care-Texas No. 3, Inc., a Texas corporation in favor of the Bank of Montreal. 10.41 Collateral Account Agreement, dated as of December 15, 1995, by and Incorporated between Summit Care Corporation, Summit Care-California, Inc., a by Reference California corporation, Summit Care - Texas No. 2, Inc., a Texas corporation and Harris Trust and Savings Bank. 10.42 Intercreditor Agreement dated as of December 15, 1995 by and among the Incorporated Bank of Montreal, Harris Trust and Savings Bank, and acknowledged and by Reference agreed to by Summit Care Corporation, Summit Care-California, Inc., a California corporation, Summit Care - Texas No. 2, Inc., a Texas corporation, Summit Care - Texas No. 3, Inc., a Texas corporation and Summit Care Pharmacy, Inc., a California corporation. 10.43 Assignment of Deed of Trust and Amended and Restated Deed of Trust, Incorporated Assignment of Rents, Security Agreement, Financing Statement and Fixture by Reference Filing, dated as of December 15, 1995, executed by Summit Care - Texas No. 2, Inc., a Texas corporation to Martha Harris, Esq., as trustee, for the benefit of the Harris Trust and Savings Bank, with respect to the Lubbock-Heritage facility. 10.44 401(k) Savings Plan. 45 21 List of the Company's Significant Subsidiaries. 133 23 Consent of Ernst & Young LLP. 134 27 Financial Data Schedule. 135
44
EX-10.44 2 EXHIBIT 10.44 1 EXHIBIT 10.44 SUMMIT CARE CORPORATION 401(k) SAVINGS PLAN 2 HUTCHISON AND ASSOCIATES, INC. DEFINED CONTRIBUTION PROTOTYPE PLAN AND TRUST AGREEMENT 401 (k) Plan 3 TABLE OF CONTENTS ALPHABETICAL LISTING OF DEFINITIONS............................... v ARTICLE 1, DEFINITIONS 1.01 Employer........................................... 1.01 1.02 Trustee............................................ 1.01 1.03 Plan............................................... 1.01 1.04 Adoption Agreement................................. 1.01 1.05 Plan Administrator................................. 1.02 1.06 Administrative Committee........................... 1.02 1.07 Employee........................................... 1.02 1.08 Self-Employed Individual/Owner-Employee............ 1.02 1.09 Highly Compensated Employee........................ 1.02 1.10 Participant........................................ 1.03 1.11 Beneficiary........................................ 1.03 1.12 Compensation....................................... 1.03 1.13 Earned Income...................................... 1.05 1.14 Account............................................ 1.05 1.15 Accrued Benefit.................................... 1.05 1.16 Nonforfeitable..................................... 1.05 1.17 Plan Year/Limitation Year.......................... 1.05 1.18 Effective Date..................................... 1.05 1.19 Plan Entry Date.................................... 1.05 1.20 Accounting Date.................................... 1.05 1.21 Trust.............................................. 1.05 1.22 Trust Fund......................................... 1.05 1.23 Nontransferable Annuity............................ 1.05 1.24 ERISA.............................................. 1.06 1.25 Code............................................... 1.06 1.26 Service............................................ 1.06 1.27 Hour of Service.................................... 1.06 1.28 Disability......................................... 1.07 1.29 Service for Predecessor Employer................... 1.07 1.30 Related Employers.................................. 1.07 1.31 Leased Employees................................... 1.08 1.32 Special Rules for Owner-Employers.................. 1.08 1.33 Determination of Top Heavy Status.................. 1.09 1.34 Paired Plans....................................... 1.11 ARTICLE II, EMPLOYEE PARTICIPANTS 2.01 Eligibility........................................ 2.01 2.02 Year of Service - Participation.................... 2.01 2.03 Break in Service - Participation................... 2.01 2.04 Participation upon Re-employment................... 2.02 2.05 Change in Employee Status.......................... 2.02 2.06 Election Not to Participate........................ 2.02
4 ARTICLE III, EMPLOYER CONTRIBUTIONS AND FORFEITURES 3.01 Amount............................................. 3.01 3.02 Determination of Contribution...................... 3.01 3.03 Time of Payment of Contribution.................... 3.01 3.04 Contribution Allocation............................ 3.01 3.05 Forfeiture Allocation.............................. 3.03 3.06 Accrual of Benefit................................. 3.03 3.07-3.16 Limitations on Allocations......................... 3.05 3.17 Special Allocation Limitation...................... 3.07 3.18 Defined Benefit Plan Limitation.................... 3.07 3.19 Definitions - Article III.......................... 3.08 ARTICLE IV, PARTICIPANT CONTRIBUTIONS 4.01 Participant Voluntary Contributions................ 4.01 4.02 Participant Deductible Contributions............... 4.01 4.03 Participant Rollover Contributions................. 4.01 4.04 Participant Contribution - Forfeitability.......... 4.02 4.05 Participant Contribution - Withdrawal/Distribution. 4.02 4.06 Participant Contribution - Accrued Benefit......... 4.02 ARTICLE V, TERMINATION OF SERVICE - PARTICIPANT VESTING 5.01 Normal Retirement Age.............................. 5.01 5.02 Participant Disability or Death.................... 5.01 5.03 Vesting Schedule................................... 5.01 5.04 Cash-Out Distributions to Partially-Vested Participants/Restoration of Forfeited Accrued Benefit.................................... 5.01 5.05 Segregated Account for Repaid Amount............... 5.03 5.06 Year of Service - Vesting.......................... 5.03 5.07 Break in Service - Vesting......................... 5.03 5.08 Included Years of Service - Vesting................ 5.03 5.09 Forfeiture Occurs.................................. 5.04 ARTICLE VI, TIME AND METHOD OF PAYMENT OF BENEFITS 6-01 Time of Payment of Accrued Benefit................. 6.01 6.02 Method of Payment of Accrued Benefit............... 6.03 6.03 Benefit Payment Elections.......................... 6.05 6.04 Annuity Distributions to Participants and Surviving Spouses.................................. 6.06 6.05 Waiver Election - Qualified Joint and Survivor Annuity................................... 6.08 6.06 Waiver Election - Preretirement Survivor Annuity... 6.09 6.07 Distributions Under Domestic Relations Orders...... 6.09 ARTICLE VII, EMPLOYER ADMINISTRATIVE PROVISIONS 7.01 Information to Committee........................... 7.01 7.02 No Liability....................................... 7.01 7.03 Indemnity of Plan Administrator and Committee...... 7.01 7.04 Employer Direction of Investment................... 7.01 7.05 Amendment to Vesting Schedule...................... 7.01
5 ARTICLE VIII, PARTICIPANT ADMINISTRATIVE PROVISIONS 8.01 Beneficiary Designation............................ 8.01 8.02 No Beneficiary Designation/Death of Beneficiary.... 8.01 8.03 Personal Data to Committee......................... 8.02 8.04 Address for Notification........................... 8.02 8.05 Assignment of Alienation........................... 8.02 8.06 Notice of Change in Terms.......................... 8.02 8.07 Litigation Against the Trust....................... 8.02 8.08 Information Available.............................. 8.02 8.09 Appeal Procedure for Denial of Benefits............ 8.02 8.10 Participant Direction of Investment................ 8.03 ARTICLE IX, ADMINISTRATIVE COMMITTEE - DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS 9.01 Members' Compensation, Expenses.................... 9.01 9.02 Term............................................... 9.01 9.03 Powers............................................. 9.01 9.04 General............................................ 9.01 9.05 Funding Policy..................................... 9.02 9.06 Manner of Action................................... 9.02 9.07 Authorized Representative.......................... 9.02 9.08 Interested Member.................................. 9.02 9.09 Individual Accounts................................ 9.02 9.10 Value of Participant's Accrued Benefit............. 9.02 9.11 Allocation and Distribution of Net Income Gain or Loss....................................... 9.03 9.12 Individual Statement............................... 9.03 9.13 Account Charged.................................... 9.03 9.14 Unclaimed Account Procedure........................ 9.04 ARTICLE X, CUSTODIAN/TRUSTEE, POWERS AND DUTIES 10.01 Acceptance......................................... 10.01 10.02 Receipt of Contributions. ......................... 10.01 10.03 Investment Powers.................................. 10.01 10.04 Records and Statements............................. 10.06 10.05 Fees and Expenses from Fund........................ 10.06 10.06 Parties to Litigation.............................. 10.06 10.07 Professional Agents................................ 10.06 10.08 Distribution of Cash or Property................... 10.06 10.09 Distribution Directions............................ 10.06 10.10 Third Party/Multiple Trustees...................... 10.06 10.11 Resignation. ...................................... 10.07 10.12 Removal............................................ 10.07 10.13 Interim Duties and Successor Trustee............... 10.07 10.14 Valuation of Trust................................. 10.07 10.15 Trustee or Independent Fiduciary................... 10.07 10.16 Investment in Group Trust Fund..................... 10.08 10.17 Appointment of Ancillary Trustee or Independent Fiduciary.......................................... 10.08
6 ARTICLE XI, PROVISIONS RELATING TO INSURANCE AND INSURANCE COMPANY 11.01 Insurance Benefit.................................. 11.01 11.02 Limitation on Life Insurance Protection............ 11.01 11.03 Definitions........................................ 11.02 11.04 Dividend Plan...................................... 11.02 11.05 Insurance Company Not a Party to Agreement......... 11.02 11.06 Insurance Company Not Responsible for Trustee's Actions.................................. 11.03 11.07 Insurance Company Reliance on Trustee's Signature.......................................... 11.03 11.08 Acquittance........................................ 11.03 11.09 Duties of Insurance Company........................ 11.03 ARTICLE XII, MISCELLANEOUS 12.01 Evidence........................................... 12.01 12.02 No Responsibility for Employer Action.............. 12.01 12.03 Fiduciaries Not Insurers........................... 12.01 12.04 Waiver of Notice................................... 12.01 12.05 Successors......................................... 12.01 12.06 Word Usage......................................... 12.01 12.07 State Law.......................................... 12.01 12.08 Employer's Right to Participate.................... 12.02 12.09 Employment Not Guaranteed.......................... 12.02 ARTICLE XIII, EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION 13.01 Exclusive Benefit.................................. 13.01 13.02 Amendment By Employer.............................. 13.01 13.03 Amendment By Regional Prototype Plan Sponsor....... 13.02 13.04 Discontinuance..................................... 13.02 13.05 Full Vesting on Termination........................ 13.02 13.06 Merger/Direct Transfer............................. 13.02 13.07 Termination........................................ 13.03 ARTICLE XIV, CODE SECTION 401(k) ARRANGEMENTS 14.01 Application........................................ 14.01 14.02 Code Section 401(k) Arrangement................... 14.01 14.03 Definitions........................................ 14.02 14.04 Matching Contributions/Voluntary Contributions..... 14.03 14.05 Time of Payment of Contributions................... 14.04 14.06 Special Allocation Provisions - Deferral Contributions, Matching Contributions and Qualified Nonelective Contributions (Also Called Basic Contributions).................. 14.04 14.07 Annual Elective Deferral Limitation................ 14.05 14.08 Actual Deferral Percentage ("ADP") Test............ 14.06 14.09 Nondiscrimination Rules for Employer Matching Contributions and Participant Voluntary Contributions...................................... 14.08 14.10 Multiple Use Limitation............................ 14.10 14.11 Distribution Restrictions.......................... 14.10 14.12 Special Allocation Rules........................... 14.11
7 ALPHABETICAL LISTING OF DEFINITIONS
SECTION REFERENCE PLAN DEFINITION (PAGE NUMBER) 100% Limitation.............................................3.19(l) (3.10) Account........................................................1.14 (1.05) Accounting Date................................................1.20 (1.05) Accrued Benefit................................................1.15 (1.05) Actual Deferral Percentage ("ADP") Test......................14.08 (14.06) Administrative Committee.......................................1.06 (1.02) Adoption Agreement.............................................1.04 (1.01) Annual Addition.............................................3.19(a) (3.08) Average Contribution Percentage Test.........................14.09 (14.08) Beneficiary....................................................1.11 (1.03) Break in Service for Eligibility Purposes......................2.03 (2.01) Break in Service for Vesting Purposes..........................5.07 (5.03) Cash-out Distribution..........................................5.04 (5.01) Code...........................................................1.25 (1.06) Code Section 411(d)(6) Protected Benefits....................13.02 (13.01) Compensation...................................................1.12 (1.03) Compensation for Code Section 401(k) Purposes.............14.03(f) (14.02) Compensation for Code Section 415 Purposes..................3.19(b) (3.08) Compensation for Top Heavy Purposes......................1.33(B)(3) (1.10) Contract(s)................................................11.03(c)(11.02) Custodian Designation.....................................10.03[B] (10.03) Deemed Cash-out Rule........................................5.04(C) (5.02) Deferral Contributions....................................14.03(g) (14.02) Tax Deferred Account.........................................14.06 (14.04) Defined Benefit Plan........................................3.19(i) (3.09) Defined Benefit Plan Fraction...............................3.19(j) (3.09) Defined Contribution Plan...................................3.19(h) (3.08) Defined Contribution Plan Fraction..........................3.19(k) (3.10) Determination Date.......................................1.33(B)(7) (1.10) Disability.....................................................1.28 (1.07) Distribution Date..............................................6.01 (6.01) Distribution Restrictions.................................14.03(m) (14.03) Earned Income..................................................1.13 (1.05) Effective Date.................................................1.18 (1.05) Elective Deferrals........................................14.03(h) (14.02) Elective Transfer.........................................13.06(A) (13.02) Eligible Employee.........................................14.03(c) (14.02) Employee.......................................................1.07 (1.02) Employee Contributions....................................14.03(n) (14.03) Employer.......................................................1.01 (1.01) Employer Contribution Account................................14.06 (14.04) Employer for Code Section 415 Purposes......................3.19(c) (3.08) Employer for Top Heavy Purposes..........................1.33(B)(6) (1.10) Employment Commencement Date...................................2.02 (2.01) ERISA..........................................................1.24 (1.06)
8 Excess Aggregate Contributions............................14.09(D) (14.09) Excess Amount...............................................3.19(d) (3.08) Excess Contributions......................................14.08(E) (14.07) Exempt Participant.............................................8.01 (8.01) Forfeiture Break in Service....................................5.08 (5.03) Group Trust Fund.............................................10.16 (10.08) Hardship.................................................6.01(A)(4) (6.02) Hardship for Code Section 401(k) Purposes....................14.11 (14.10) Highly Compensated Employee....................................1.09 (1.02) Highly Compensated Group..................................14.03(d) (14.02) Hour of Service................................................1.27 (1.06) Incidental Insurance Benefits................................11.01 (11.01) Insurable Participant.....................................11.03(d) (11.02) Investment Manager..........................................9.04(i) (9.01) Issuing Insurance Company.................................11.03(b) (11.02) Joint and Survivor Annuity..................................6.04(A) (6.06) Key Employee.............................................1.33(B)(1) (1.10) Leased Employees...............................................1.31 (1.08) Limitation Year.........................1.17 and 3.19(e) (1.05) and (3.08) Loan Policy.................................................9.04(A) (9.02) Mandatory Contributions......................................14.04 (14.03) Mandatory Contributions Account..............................14.04 (14.03) Master or Prototype Plan....................................3.19(f) (3.08) Matching Contributions....................................14.03(i) (14.02) Maximum Permissible Amount..................................3.19(g) (3.08) Minimum Distribution Incidental Benefit (MDIB)..............6.02(A) (6.03) Multiple Use Limitation......................................14.10 (14.10) Named Fiduciary...........................................10.03[D] (10.05) Nonelective (Also Called Profit Sharing) Contributions..................................14.03(j) (14.03) Nonforfeitable.................................................1.16 (1.05) Nonhighly Compensated Employee............................14.03(b) (14.02) Nonhighly Compensated Group...............................14.03(e) (14.02) Non-Key Employee.........................................1.33(B)(2) (1.10) Nontransferable Annuity........................................1.23 (1.05) Normal Retirement Age..........................................5.01 (5.01) Owner-Employee.................................................1.08 (1.02) Paired Plans...................................................1.34 (1.11) Participant....................................................1.10 (1.03) Participant Deductible Contributions...........................4.02 (4.01) Participant Forfeiture.........................................3.05 (3.03) Participant Loans.........................................10.03[E] (10.05) Participant Nondeductible (Also Called Voluntary) Contributions................................................4.01 (4.01) Permissive Aggregation Group.............................1.33(B)(5) (1.10) Plan...........................................................1.03 (1.01) Plan Administrator.............................................1.05 (1.02) Plan Entry Date................................................1.19 (1.05) Plan Year......................................................1.17 (1.05) Policy.....................................................11.03(a)(11.02) Predecessor Employer...........................................1.29 (1.07) Preretirement Survivor Annuity...............................6.04(B)(6.07) Qualified Domestic Relations Order.............................6.07 (6.09) Qualified Matching Contributions...........................14.03(k)(14.03)
9 Qualified Nonelective (Also Called Basic) Contributions...........................................14.03(l) (14.03) Qualifying Employer Real Property.........................10.03[F] (10.05) Qualifying Employer Securities............................10.03[F] (10.05) Related Employers..............................................1.30 (1.07) Required Aggregation Group...............................1.33(B)(4) (1.10) Required Beginning Date.....................................6.01(B) (6.02) Rollover Contributions.........................................4.03 (4.01) Self-Employed Individual.......................................1.08 (1.02) Service........................................................1.26 (1.06) Term Life Insurance Contract.................................11.03 (11.02) Top Heavy Minimum Allocation................................3.04(B) (3.01) Top Heavy Ratio................................................1.33 (1.09) Trust..........................................................1.21 (1.05) Trustee........................................................1.02 (1.01) Trustee Designation.......................................10.03[A] (10.01) Trust Fund.....................................................1.22 (1.05) Weighted Average Allocation Method...........................14.12 (14.11) Year of Service for Eligibility Purposes.......................2.02 (2.01) Year of Service for Vesting Purposes...........................5.06 (5.03)
10 HUTCHISON AND ASSOCIATES, INC. DEFINED CONTRIBUTION PROTOTYPE PLAN AND TRUST AGREEMENT BASIC PLAN DOCUMENT #01 Hutchison and Associates, Inc., in its capacity as Regional Prototype Plan Sponsor, establishes this Prototype Plan intended to conform to and qualify under Section 401 and Section 501 of the Internal Revenue Code of 1986, as amended. An Employer establishes a Plan and Trust under this Prototype Plan by executing an Adoption Agreement. If the Employer adopts this Plan as a restated Plan in substitution for, and in amendment of, an existing plan, the provisions of this Plan, as a restated Plan, apply solely to an Employee whose employment with the Employer terminates on or after the restated Effective Date of the Employer's Plan. If an Employee's employment with the Employer terminates prior to the restated Effective Date, that Employee is entitled to benefits under the Plan as the Plan existed on the date of the Employee's termination of employment. ARTICLE I DEFINITIONS 1.01 "Employer" means each employer who adopts this Plan by executing an Adoption Agreement. 1.02 "Trustee" means the person or persons who as Trustee execute the Employer's Adoption Agreement, or any successor in office who in writing accepts the position of Trustee. The Employer must designate in its Adoption Agreement whether the Trustee will administer the Trust as a discretionary Trustee or as a nondiscretionary Trustee. If a person acts as a discretionary Trustee, the Employer also may appoint a Custodian. See Article X. 1.03 "Plan" means the retirement plan established or continued by the Employer in the form of this Agreement, including the Adoption Agreement under which the Employer has elected to participate in this Prototype Plan. The Employer must designate the name of the Plan in its Adoption Agreement. An Employer may execute more than one Adoption Agreement offered under this Prototype Plan, each of which will constitute a separate Plan and Trust established or continued by that Employer. The Plan and the Trust created by each adopting Employer is a separate Plan and a separate Trust, independent from the plan and the trust of any other employer adopting this Prototype Plan. All section references within the Plan are Plan section references unless the context clearly indicates otherwise. 1.04 "Adoption Agreement" means the document executed by each Employer adopting this Prototype Plan. The terms of this Prototype Plan as modified by the terms of an adopting Employer's Adoption Agreement constitute a separate Plan and Trust to be construed as a single Agreement. Each elective provision of the Adoption Agreement corresponds by section reference to the section of the Plan which grants the election. Each Adoption Agreement offered under this Prototype Plan is either a Nonstandardized Plan or a Standardized Plan, as identified in the preamble to that Adoption Agreement. The provisions of this Prototype Plan apply equally to Nonstandardized Plans and to Standardized Plans unless otherwise specified. 1.01 11 1.05 "Plan Administrator" is the Employer unless the Employer designates another person to hold the position of Plan Administrator. In addition to his other duties, the Plan Administrator has full responsibility for compliance with the reporting and disclosure rules under ERISA as respects this Agreement. 1.06 "Administrative Committee" means the Employer's Administrative Committee as from time to time constituted. 1.07 "Employee" means any employee (including a Self-Employed Individual) of the Employer. The Employer must specify in its Adoption Agreement any Employee, or class of Employees, not eligible to participate in the Plan. If the Employer elects to exclude collective bargaining employees, the exclusion applies to any employee of the Employer included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers unless the collective bargaining agreement requires the employee to be included within the Plan. The term "employee representatives" does not include any organization more than half the members of which are owners, officers, or executives of the Employer. 1.08 "Self-Employed Individual/Owner-Employee." "Self-Employed Individual" means an individual who has Earned Income (or who would have had Earned Income but for the fact that the trade or business did not have net earnings) for the taxable year from the trade or business for which the Plan is established. "Owner-Employee" means a Self-Employed Individual who is the sole proprietor in the case of a sole proprietorship. If the Employer is a partnership, "Owner-Employee" means a Self-Employed Individual who is a partner and owns more than 10% of either the capital or profits interest of the partnership. 1.09 "Highly Compensated Employee" means an Employee who, during the Plan Year or during the preceding 12-month period: (a) is a more than 5% owner of the Employer (applying the constructive ownership rules of Code Section 318, and applying the principles of Code Section 318, for an unincorporated entity); (b) has Compensation in excess of $75,000 (as adjusted by the Commissioner of Internal Revenue for the relevant year); (c) has Compensation in excess of $50,000 (as adjusted by the Commissioner of Internal Revenue for the relevant year) and is part of the top-paid 20% group of employees (based on Compensation for the relevant year); or (d) has Compensation in excess of 50% of the dollar amount prescribed in Code Section 413(b)(1)(A) (relating to defined benefit plans) and is an officer of the Employer. If the Employee satisfies the definition in clause (b), (c) or (d) in the Plan Year but does not satisfy clause (b), (c) or (d) during the preceding 12-month period and does not satisfy clause (a) in either period, the Employee is a Highly Compensated Employee only if he is one of the 100 most highly compensated Employees for the Plan Year. The number of officers taken into account under clause (d) will not exceed the greater of 3 or 10% of the total number (after application of the Code Section 414(q) exclusions) of Employees, but no more than 50 officers. If no Employee satisfies the Compensation requirement in clause (d) for the relevant year, the Administrative Committee will treat the highest paid officer as satisfying clause (d) for that year. 1.02 12 For purposes of this Section 1.09, "Compensation" means Compensation as defined in Section 1.12, except any exclusions from Compensation elected in the Employer's Adoption Agreement Section 1.12 do not apply, and Compensation must include "elective contributions" (as defined in Section 1.12). The Administrative Committee must make the determination of who is a Highly Compensated Employee, including the determinations of the number and identity of the top paid 20% group, the top 100 paid Employees, the number of officers includible in clause (d) and the relevant Compensation, consistent with Code Section 414(q) and regulations issued under that Code section. The Employer may make a calendar year election to determine the Highly Compensated Employees for the Plan Year, as prescribed by Treasury regulations. A calendar year election must apply to all plans and arrangements of the Employer. For purposes of applying any nondiscrimination test required under the Plan or under the Code, in a manner consistent with applicable Treasury regulations, the Administrative Committee will treat a Highly Compensated Employee and all family members (a spouse, a lineal ascendant or descendant or a spouse of a lineal ascendant or descendant) as a single Highly Compensated Employee, but only if the Highly Compensated Employee is a more than 5% owner or is one of the 10 Highly Compensated Employees with the greatest Compensation for the Plan Year. This aggregation rule applies to a family member even if that family member is a Highly Compensated Employee without family aggregation. The term "Highly Compensated Employee" also includes any former Employee who separated from Service (or has a deemed Separation from Service, as determined under Treasury regulations) prior to the Plan Year, performs no Service for the Employer during the Plan Year, and was a Highly Compensated Employee either for the separation year or any Plan Year ending on or after his 55th birthday. If the former Employee's Separation from Service occurred prior to January 1, 1987, he is a Highly Compensated Employee only if he satisfied clause (a) of this Section 1.09 or received Compensation in excess of $50,000 during: (1) the year of his Separation from Service (or the prior year); or (2) any year ending after his 54th birthday. 1.10 "Participant" is an Employee who is eligible to be and becomes a Participant in accordance with the provisions of Section 2.01. 1.11 "Beneficiary" is a person designated by a Participant who is or may become entitled to a benefit under the Plan. A Beneficiary who becomes entitled to a benefit under the Plan remains a Beneficiary under the Plan until the Trustee has fully distributed his benefit to him. A Beneficiary's right to (and the Plan Administrator's, the Administrative Committee's or a Trustee's duty to provide to the Beneficiary) information or data concerning the Plan does not arise until he first becomes entitled to receive a benefit under the Plan. 1.12 "Compensation" means, except as provided in the Employer's Adoption Agreement, the Participant's Earned Income, wages, salaries, fees for professional service and other amounts received for personal services actually rendered in the course of employment with the Employer maintaining the plan (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips and bonuses). The Employer must elect in its Adoption Agreement whether to include elective contributions in the definition of Compensation. "Elective contributions" are amounts excludible from the Employee's gross income under Code Sections 125, 402(a)(8), 402(h) or 403(b), and contributed by the Employer, at the Employee's election, to a Code Section 401(k) arrangement, a Simplified Employee Pension, cafeteria plan or tax-sheltered annuity. The term "Compensation" does not include: (a) Employer contributions (other than "elective contributions," if includible in the definition of Compensation under Section 1.12 of the Employer's Adoption Agreement) to a plan of deferred compensation to the extent the contributions are not included in the gross income of the Employee for the taxable year in which contributed, on behalf of an Employee to a Simplified Employee Pension Plan to the extent such contributions are excludible from the Employee's gross income, and any distributions from a plan of deferred compensation, regardless of whether such amounts are includible in the gross income of the Employee when distributed 1.03 13 (b) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture. (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a stock option described in Part II, Subchapter D, Chapter 1 of the Code. (d) Other amounts which receive special tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by an Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Code Section 403(b) (whether or not the contributions are excludible from the gross income of the Employee), other than "elective contributions," if elected in the Employer's Adoption Agreement. Any reference in this Plan to Compensation is a reference to the definition in this Section 1.12, unless the Plan reference specifies a modification to this definition. The Administrative Committee will take into account only Compensation actually paid for the relevant period. A Compensation payment includes Compensation by the Employer through another person under the common paymaster provisions in Code Sections 3121 and 3306. (A) LIMITATIONS ON COMPENSATION. (1) COMPENSATION DOLLAR LIMITATION. For any Plan Year beginning after December 31, 1988, the Administrative Committee must take into account only the first $200,000 (or beginning January 1, 1990, such larger amount as the Commissioner of Internal Revenue may prescribe) of any Participant's Compensation. For any Plan Year beginning prior to January 1, 1989, this $200,000 limitation (but not the family aggregation requirement described in the next paragraph) applies only if the Plan is top heavy for such Plan Year or operates as a deemed top heavy plan for such Plan Year. (2) APPLICATION OF COMPENSATION LIMITATION TO CERTAIN FAMILY MEMBERS. The $200,000 Compensation limitation applies to the combined Compensation of the Employee and of any family member aggregated with the Employee under Section 1.09 who is either (i) the Employee's spouse; or (ii) the Employee's lineal descendant under the age of 19. If, for a Plan Year, the combined Compensation of the Employee and such family members who are Participants entitled to an allocation for that Plan Year exceeds the $200,000 (or adjusted) limitation, "Compensation" for each such Participant, for purposes of the contribution and allocation provisions of Article III, means his Adjusted Compensation. Adjusted Compensation is the amount which bears the same ratio to the $200,000 (or adjusted) limitation as the affected Participant's Compensation (without regard to the $200,000 Compensation limitation) bears to the combined Compensation of all the affected Participants in the family unit. If the Plan uses permitted disparity, the Administrative Committee must determine the integration level of each affected family member Participant prior to the proration of the $200,000 Compensation limitation, but the combined integration level of the affected Participants may not exceed $200,000 (or the adjusted limitation). The combined Excess Compensation of the affected Participants in the family unit may not exceed $200,000 (or the adjusted limitation) minus the affected Participants' combined integration level (as determined under the preceding sentence). If the combined Excess Compensation exceeds this limitation, the Administrative Committee will prorate the Excess Compensation limitation among the affected Participants in the family unit in proportion to each such individual's Adjusted Compensation minus his integration level. If the Employer's Plan is a Nonstandardized Plan, the Employer may elect to use a different method in determining the Adjusted Compensation of the affected Participants by specifying that method in an addendum to the Adoption Agreement, numbered Section 1.12. 1.04 14 (B) NONDISCRIMINATION. For purposes of determining whether the Plan discriminates in favor of Highly Compensated Employees, Compensation means Compensation as defined in this Section 1.12, except: (1) the Employer may elect to include or to exclude elective contributions, irrespective of the Employer's election in its Adoption Agreement regarding elective contributions; and (2) the Employer will not give effect to any elections made in the "modifications to Compensation definition" section of Adoption Agreement Section 1.12. The Employer's election described in clause (1) must be consistent and uniform with respect to all Employees and all plans of the Employer for any particular Plan Year. If the Employer's Plan is a Nonstandardized Plan, the Employer, irrespective of clause (2), may elect to exclude from this nondiscrimination definition of Compensation any items of Compensation excludible under Code Section 414(s) and the applicable Treasury regulations, provided such adjusted definition conforms to the nondiscrimination requirements of those regulations. 1.13 "Earned Income" means net earnings from self-employment in the trade or business with respect to which the Employer has established the Plan, provided personal services of the individual are a material income producing factor. The Administrative Committee will determine net earnings without regard to items excluded from gross income and the deductions allocable to those items. The Administrative Committee will determine net earnings after the deduction allowed to the Self-Employed Individual for all contributions made by the Employer to a qualified plan and, for Plan Years beginning after December 31, 1989, the deduction allowed to the Self-Employed under Code Section 164(f) for self-employment taxes. 1.14 "Account" means the separate account(s) which the Administrative Committee or the Trustee maintains for a Participant under the Employer's Plan. 1.15 "Accrued Benefit" means the amount standing in a Participant's Account(s) as of any date derived from both Employer contributions and Employee contributions, if any. 1.16 "Nonforfeitable" means a Participant's or Beneficiary's unconditional claim, legally enforceable against the Plan, to the Participant's Accrued Benefit. 1.17 "Plan Year" means the fiscal year of the Plan, the consecutive month period specified in the Employer's Adoption Agreement. The Employer's Adoption Agreement also must specify the "Limitation Year" applicable to the limitations on allocations described in Article III. If the Employer maintains Paired Plans, each Plan must have the same Plan Year. 1.18 "Effective Date" of this Plan is the date specified in the Employer's Adoption Agreement. 1.19 "Plan Entry Date" means the date(s) specified in Section 2.01 of the Employer's Adoption Agreement. 1.20 "Accounting Date" is the last day of an Employer's Plan Year. Unless otherwise specified in the Plan, the Administrative Committee will make all Plan allocations for a particular Plan Year as of the Accounting Date of that Plan Year. 1.21 "Trust" means the separate Trust created under the Employer's Plan. 1.22 "Trust Fund" means all property of every kind held or acquired by the Employer's Plan, other than incidental benefit insurance contracts. 1.23 "Nontransferable Annuity" means an annuity which by its terms provides that it may not be sold, assigned, discounted, pledged as collateral for a loan or security for the performance of an obligation or for any purpose to any person other than the insurance company. If the Plan distributes an annuity contract, the contract must be a Nontrasferable Annuity. 1.05 15 1.24 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.25 "Code" means the Internal Revenue Code of 1986, as amended. 1.26 "Service" means any period of time the Employee is in the employ of the Employer, including any period the Employee is on an unpaid leave of absence authorized by the Employer under a uniform, nondiscriminatory policy applicable to all Employees. "Separation from Service" means the Employee no longer has an employment relationship with the Employer maintaining this Plan. 1.27 "Hour of Service" means: (a) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment, for the performance of duties. The Administrative Committee credits Hours of Service under this paragraph (a) to the Employee for the computation period in which the Employee performs the duties, irrespective of when paid; (b) Each Hour of Service for back pay, irrespective of mitigation of damages, to which the Employer has agreed or for which the Employee has received an award. The Administrative Committee credits Hours of Service under this paragraph (b) to the Employee for the computation period(s) to which the award or the agreement pertains rather than for the computation period in which the award, agreement or payment is made; and (c) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment (irrespective of whether the employment relationship is terminated), for reasons other than for the performance of duties during a computation period, such as leave of absence, vacation, holiday, sick leave, illness, incapacity (including disability), layoff, jury duty or military duty. The Administrative Committee will credit no more than 501 Hours of Service under this paragraph (c) to an Employee on account of any single continuous period during which the Employee does not perform any duties (whether or not such period occurs during a single computation period). The Administrative Committee credits Hours of Service under this paragraph (c) in accordance with the rules of paragraphs (b) and (c) of Labor Reg. Section 2530.200b-2, which the Plan, by this reference, specifically incorporates in full within this paragraph (c). The Administrative Committee will not credit an Hour of Service under more than one of the above paragraphs. A computation period for purposes of this Section 1.27 is the Plan Year, Year of Service period, Break in Service period or other period, as determined under the Plan provision for which the Administrative Committee is measuring an Employee's Hours of Service. The Administrative Committee will resolve any ambiguity with respect to the crediting of an Hour of Service in favor of the Employee. (A) METHOD OF CREDITING HOURS OF SERVICE. The Employer must elect in its Adoption Agreement the method the Administrative Committee will use in crediting an Employee with Hours of Service. For purposes of the Plan, "actual" method means the determination of Hours of Service from records of hours worked and hours for which the Employer makes payment or for which payment is due from the Employer. If the Employer elects to apply an "equivalency" method, for each equivalency period for which the Administrative Committee would credit the Employee with at least one Hour of Service, the Administrative Committee will credit the Employee with: (i)10 Hours of Service for a daily equivalency; (ii) 45 Hours of Service for a weekly equivalency; (iii) 95 Hours of Service for a semimonthly payroll period equivalency; and (iv) 190 Hours of Service for a monthly equivalency. 1.06 16 (B) MATERNITY/PATERNITY LEAVE. Solely for purposes of determining whether the Employee incurs a Break in Service under any provision of this Plan, the Administrative Committee must credit Hours of Service during Employee's unpaid absence period due to maternity or paternity leave. The Administrative Committee considers an Employee on maternity or paternity leave if the Employee's absence is due to the Employee's pregnancy, the birth of the Employee's child, the placement with the Employee of an adopted child, or the care of the Employee's child immediately following the child's birth or placement. The Administrative Committee credits Hours of Service under this paragraph on the basis of the number of Hours of Service the Employee would receive if he were paid during the absence period or, if the Administrative Committee cannot determine the number of Hours of Service the Employee would receive, on the basis of 8 hours per day during the absence period. The Administrative Committee will credit only the number (not exceeding 501) of Hours of Service necessary to prevent an Employee's Break in Service. The Administrative Committee credits all Hours of Service described in this paragraph to the computation period in which the absence period begins or, if the Employee does not need these Hours of Service to prevent a Break in Service in the computation period in which his absence period begins, the Administrative Committee credits these Hours of Service to the immediately following computation period. 1.28 "Disability" means the Participant, because of a physical or mental disability, will be unable to perform the duties of his customary position of employment (or is unable to engage in any substantial gainful activity) for an indefinite period which the Administrative Committee considers will be of long continued duration. A Participant also is disabled if he incurs the permanent loss or loss of use of a member or function of the body, or is permanently disfigured, and incurs a Separation from Service. The Plan considers a Participant disabled on the date the Administrative Committee determines the Participant satisfies the definition of disability. The Administrative Committee may require a Participant to submit to a physical examination in order to confirm disability. The Administrative Committee will apply the provisions of this Section 1.28 in a nondiscriminatory, consistent and uniform manner. If the Employer's Plan is a Nonstandardized Plan, the Employer may provide an alternate definition of disability in an addendum to its Adoption Agreement, numbered Section 1.28. 1.29 SERVICE FOR PREDECESSOR EMPLOYER. If the Employer maintains the plan of a predecessor employer, the Plan treats service of the Employee with the predecessor employer as service with the Employer. If the Employer does not maintain the plan of a predecessor employer, the Plan does not credit service with the predecessor employer, unless the Employer identifies the predecessor in its Adoption Agreement and specifies the purposes for which the Plan will credit service with that predecessor employer. 1.30 RELATED EMPLOYERS. A related group is a controlled group of corporations (as defined in Code Section 414(b)), trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c)) or an affiliated service group (as defined in Code Section 414(m) or in Code Section 414(o)). If the Employer is a member of a related group, the term Employer" includes the related group members for purposes of crediting Hours of Service, determining Years of Service and Breaks in Service under Articles 11 and V, applying the Participation Test and the Coverage Test under Section 3.06(E), applying the limitations on allocations in Part 2 of Article 111, applying the top heavy rules and the minimum allocation requirements of Article III, the definitions of Employee, Highly Compensated Employee, Compensation and Leased Employee, and for any other purpose required by the applicable Code section or by a Plan provision. However, an Employer may contribute to the Plan only by being, a signatory to the Execution Page of the Adoption Agreement or to a Participation Agreement to the Employer's Adoption Agreement. If one or more of the Employer's related group members become Participating Employers by executing a Participation Agreement to the Employer's Adoption Agreement, the term "Employer" includes the participating related group members for all purposes of the Plan, and "Plan Administrator" means the Employer that is the signatory to the Execution Page of the Adoption Agreement. 1.07 17 If the Employer's Plan is a Standardized Plan, all Employees of the Employer or of any member of the Employer's related group, are eligible to participate in the Plan, irrespective of whether the related group member directly employing the Employee is a Participating Employer. If the Employer's Plan a Nonstandardized Plan, the Employer must specify in Section 1.07 of its Adoption Agreement, whether the Employees of related group members that are not Participating Employers are eligible to participate in the Plan. Under a Nonstandardized Plan, the Employer may elect to exclude from the definition of "Compensation" for allocation purposes any Compensation received from a related employer that has not executed a Participation Agreement and whose Employees are not eligible to participate in the Plan. 1.31 LEASED EMPLOYEES. The Plan treats a Leased Employee as an Employee of the Employer. A Leased Employee is an individual (who otherwise is not an Employee of the Employer) who, pursuant to a leasing agreement between the Employer and any other person, has performed services for the Employer (or for the Employer and any persons related to the Employer within the meaning of Code Section 144(a)(3)) on a substantially full time basis for at least one year and who performs services historically performed by employees in the Employer's business field. If a Leased Employee is treated as an Employee by reason of this Section 1.31 of the Plan, "Compensation" includes Compensation from the leasing organization which is attributable to services performed for the Employer. (A) SAFE HARBOR PLAN EXCEPTION. The Plan does not treat a Leased Employee as an Employee if the leasing organization covers the employee in a safe harbor plan and, prior to application of this safe harbor plan exception, 20% or less of the Employer's Employees (other than Highly Compensated Employees) are Leased Employees. A safe harbor plan is a money purchase pension plan providing immediate participation, full and immediate vesting, and a nonintegrated contribution formula equal to at least 10% of the employee's compensation without regard to employment by the leasing organization on a specified date. The safe harbor plan must determine the 10% contribution on the basis of compensation as defined in Code Section 415(c)(3) plus elective contributions (as defined in Section 1.12). (B) OTHER REQUIREMENTS. The Administrative Committee must apply this Section 1.31 in a manner consistent with Code Sections 414(n) and 414(o) and the regulations issued under those Code sections. The Employer must specify in the Adoption Agreement the manner in which the Plan will determine the allocation of Employer contributions and Participant forfeitures on behalf of a Participant if the Participant is a Leased Employee covered by a plan maintained by the leasing organization. 1.32 SPECIAL RULES FOR OWNER-EMPLOYEES. The following special provisions and restrictions apply to Owner-Employees: (a) If the Plan provides contributions or benefits for an Owner-Employee or for a group of Owner-Employees who controls the trade or business with respect to which this Plan is established and the Owner-Employee or Owner-Employees also control as Owner-Employees one or more other trades or businesses, plans must exist or be established with respect to all the controlled trades or businesses so that when the plans are combined they form a single plan which satisfies the requirements of Code Section 401(a) and Code Section 401 (d) with respect to the employees of the controlled trades or businesses. (b) The Plan excludes an Owner-Employee or group of Owner-Employees if the Owner-Employee or group of Owner-Employees controls any other trade or business, unless the employees of the other controlled trade or business participate in a plan which satisfies the requirements of Code Section 401(a) and Code Section 401(d). The other qualified plan must provide contributions and benefits which are not less favorable than the contributions and benefits provided for the Owner-Employee or group of 0wner-Employees under this Plan, or if an 1.08 18 Owner-Employee is covered under another qualified plan as an Owner-Employee, then the plan established with respect to the trade or business he does control must provide contributions or benefits as favorable as those provided under the most favorable plan of the trade or business he does not control. If the exclusion of this paragraph (b) applies and the Employer's Plan is a Standardized Plan, the Employer may not participate or continue to participate in this Prototype Plan and the Employer's Plan becomes an individually-designed plan for purposes of qualification reliance. (c) For purposes of paragraphs (a) and (b) of this Section 1.32, an Owner-Employee or group of Owner-Employees controls a trade or business if the Owner-Employee or Owner-Employees together (1) own the entire interest in an unincorporated trade or business, or (2) in the case of a partnership, own more than 50% of either the capital interest or the profits interest in the partnership. 1.33 DETERMINATION OF TOP HEAVY STATUS. If this Plan is the only qualified plan maintained by the Employer, the Plan is top heavy for a Plan Year if the top heavy ratio as of the Determination Date exceeds 60%. The top heavy ratio is a fraction, the numerator of which is the sum of the present value of Accrued Benefits of all Key Employees as of the Determination Date and the denominator of which is a similar sum determined for all Employees. The Administrative Committee must include in the top heavy ratio, as part of the present value of Accrued Benefits, any contribution not made as of the Determination Date but includible under Code Section 416 and the applicable Treasury regulations, and distributions made within the Determination Period. The Administrative Committee must calculate the top heavy ratio by disregarding the Accrued Benefit (and distributions, if any, of the Accrued Benefit) of any Non-Key Employee who was formerly a Key Employee, and by disregarding the Accrued Benefit (including distributions, if any, of the Accrued Benefit) of an individual who has not received credit for at least one Hour of Service with the Employer during the Determination Period. The Administrative Committee must calculate the top heavy ratio, including the extent to which it must take into account distributions, rollovers; and transfers, in accordance with Code Section 416 and the regulations under that Code section. If the Employer maintains other qualified plans (including a simplified employee pension plan), or maintained another such plan which now is terminated, this Plan is top heavy only if it is part of the Required Aggregation Group, and the top heavy ratio for the Required Aggregation Group and for the Permissive Aggregation Group, if any, each exceeds 60%. The Administrative Committee will calculate the top heavy ratio in the same manner as required by the first paragraph of this Section 1.33, taking into account all plans within the Aggregation Group. To the extent the Administrative Committee must take into account distributions to a Participant, the Administrative Committee must include distributions from a terminated plan which would have been part of the Required Aggregation Group if it were in existence on the Determination Date. The Administrative Committee will calculate the present value of accrued benefits under defined benefit plans or simplified employee pension plans included within the group in accordance with the terms of those plans, Code Section 416 and the regulations under that Code section. If a Participant in a defined benefit plan is a Non-Key Employee, the Administrative Committee will determine his accrued benefit under the accrual method, if any, which is applicable uniformly to all defined benefit plans maintained by the Employer or, if there is no uniform method, in accordance with the slowest accrual rate permitted under the fractional rule accrual method described in Code Section 41l(b)(1)(C). If the Employer maintains a defined benefit plan, the Employer must specify in Adoption Agreement Section 3.18 the actuarial assumptions (interest and mortality only) the Administrative Committee will use to calculate the present value of benefits from a defined benefit plan. If an aggregated plan does not have a valuation date coinciding with the Determination Date, the Administrative Committee must value the Accrued Benefits in the aggregated plan as of the most recent valuation date falling within the twelve-month period ending with the Determination Date, except as Code Section 416 and applicable Treasury regulations require for the first and second plan year of a defined benefit plan. The Administrative committee will calculate the top heavy ration with reference to the Determination Dates that fall within the same calendar year. 1.09 19 (A) STANDARDIZED PLAN. If the Employer's Plan is a Standardized Plan, the Plan operates as a deemed top heavy plan in all Plan Years, except, if the Standardized Plan includes a Code Section 401(k) arrangement, the Employer may elect to apply the top heavy requirements only in Plan Years for which the Plan actually is top heavy. Under a deemed top heavy plan, the Administrative Committee need not determine whether the Plan actually is top heavy. However, if the Employer, in Adoption Agreement Section 3.18, elects to override the 100% limitation, the Administrative Committee will need to determine whether a deemed top heavy Plan's top heavy ratio for a Plan Year exceeds 90%. (B) DEFINITIONS. For purposes of applying the provisions of this Section 1.33: (1) "Key Employee" means, as of any Determination Date, any Employee or former Employee (or Beneficiary of such Employee) who, for any Plan Year in the Determination Period: (1) has Compensation in excess of 50% of the dollar amount prescribed in Code Section 415(b)(1)(A) (relating to defined benefit plans) and is an officer of the Employer; (ii) has Compensation in excess of the dollar amount prescribed in Code Section 415(c)(1)(A) (relating to defined contribution plans) and is one of the Employees owning the ten largest interests in the Employer; (iii) is a more than 5% owner of the Employer; or (iv) is a more than 1% owner of the Employer and has Compensation of more than $150,000. The constructive ownership rules of Code Section 318 (or the principles of that section, in the case of an unincorporated Employer,) will apply to determine ownership in the Employer. The number of officers taken into account under clause (i) will not exceed the greater of 3 or 10% of the total number (after application of the Code Section 414(q) exclusions) of Employees, but no more than 50 officers. The Administrative Committee will make the determination of who is a Key Employee in accordance with Code Section 416(i)(1) and the regulations under that Code section. (2) "Non-Key Employee" is an employee who does not meet the definition of Key Employee. (3) "Compensation" means Compensation as determined under Section 1.09 for purposes of identifying Highly Compensated Employees. (4) "Required Aggregation Group" means: (i) each qualified plan of the Employer in which at least one Key Employee participates at any time during the Determination Period; and (11) any other qualified plan of the Employer which enables a plan described in clause (i) to meet the requirements of Code Section 401(a)(4) or of Code Section 410. (5) "Permissive Aggregation Group" is the Required Aggregation Group plus any other qualified plans maintained by the Employer, but only if such group would satisfy in the aggregate the requirements of Code Section 401(a)(4) and of Code Section 410. The Administrative Committee will determine the Permissive Aggregation Group. (6) "Employer" means the Employer that adopts this Plan and any related employers described in Section 1.30. (7) "Determination Date" for any Plan Year is the Accounting Date of the preceding Plan Year or, in the case of the first Plan Year of the Plan, the Accounting Date of that Plan Year. The "Determination Period" is the 5 year period ending on the Determination Date. 1.10 20 1.34 "Paired Plans" means the Employer has adopted two Standardized Plan Adoption Agreements offered with this Prototype Plan, one Adoption Agreement being a Paired Profit Sharing Plan and one Adoption Agreement being a Paired Pension Plan. A Paired Profit Sharing Plan may include a Code Section 401(k) arrangement. A Paired Pension Plan must be a money purchase pension plan or a target benefit pension plan. Paired Plans must be the subject of a favorable opinion letter issued by the National Office of the Internal Revenue Service. This Prototype Plan does not pair any of its Standardized Plan Adoption Agreements with Standardized Plan Adoption Agreements under a defined benefit prototype plan. * * * * * * * * * * 1.11 21 ARTICLE II EMPLOYEE PARTICIPANTS 2.01 ELIGIBILITY. Each Employee becomes a Participant in the Plan in accordance with the participation option selected by the Employer in its Adoption Agreement. If this Plan is a restated Plan, each Employee who was a Participant in the Plan on the day before the Effective Date continues as a Participant in the Plan, irrespective of whether he satisfies the participation conditions in the restated Plan, unless otherwise provided in the Employer's Adoption Agreement. 2.02 YEAR OF SERVICE - PARTICIPATION. For purposes of an Employee's participation in the Plan under Adoption Agreement Section 2.01, the Plan takes into account all of his Years of Service with the Employer, except as provided in Section 2.03. "Year of Service" means an eligibility computation period during which the Employee completes not less than the number of Hours of Service specified in the Employer's Adoption Agreement. The initial eligibility computation period is the first 12 consecutive month period measured from the Employment Commencement Date. The Plan measures succeeding eligibility computation periods in accordance with the option selected by the Employer in its Adoption Agreement. If the Employer elects to measure subsequent periods on a Plan Year basis, an Employee who receives credit for the required number of Hours of Service during the initial eligibility computation period and during the first applicable Plan Year will receive credit for two Years of Service under Article II. "Employment Commencement Date" means the date on which the Employee first performs an Hour of Service for the Employer. If the Employer elects a service condition under Adoption Agreement Section 2.01 based on months, the Plan does not apply any Hour of Service requirement after the completion of the first Hour of Service. 2.03 BREAK IN SERVICE - PARTICIPATION. An Employee incurs a "Break in Service" if during any 12 consecutive month period he does not complete more than 500 Hours of Service with the Employer. The "12 consecutive month period" under this Section 2.03 is the same 12 consecutive month period for which the Plan measures "Years of Service" under Section 2.02. (A) 2-YEAR ELIGIBILITY. If the Employer elects a 2 years of service condition for eligibility purposes under Adoption Agreement Section 2.01, the Plan treats an Employee who incurs a one year Break in Service and who has never become a Participant as a new Employee on the date he first performs an Hour of Service for the Employer after the Break in Service. (B) SUSPENSION OF YEARS OF SERVICE. The Employer must elect in its Adoption Agreement whether a Participant will incur a suspension of Years of Service after incurring a one year Break in Service. If this rule applies under the Employer's Plan, the Plan disregards a Participant's Years of Service (as defined in Section 2.02) earned prior to a Break in Service until the Participant completes another Year of Service and the Plan suspends the Participant's participation in the Plan. If the Participant completes a Year of Service following his Break in Service, the Plan restores that Participant's pre-Break Years of Service (and the Participant resumes active participation in the Plan) retroactively to the first day of the computation period in which the Participant earns the first post-Break Year of Service. The initial computation period under this Section 2.03(B) is the 12 consecutive 2.01 22 month period measured from the date the Participant first receives credit for an Hour of Service following the one year Break in Service period. The Plan measures any subsequent periods, if necessary, in a manner consistent with the computation period selection in Adoption Agreement Section 2.02. This Section 2.03(B) does not affect a Participant's vesting credit under Article V and, during a suspension period, the Participant's Account continues to share fully in Trust Fund allocations under Section 9.11. Furthermore, this Section 2.03(B) will not result in the restoration of any Year of Service disregarded under the Break in Service rule of Section 2.03(A). 2.04 PARTICIPATION UPON RE-EMPLOYMENT. A Participant whose employment with the Employer terminates will re-enter the Plan as a Participant on the date of his reemployment, subject to the Break in Service rule, if applicable, under Section 2.03(B). An Employee who satisfies the Plan's eligibility conditions but who terminates employment with the Employer prior to becoming a Participant will become a Participant on the later of the Plan Entry Date on which he would have entered the Plan had he not terminated employment or the date of his re-employment, subject to the Break in Service rule, if applicable, under Section 2.03(B). Any Employee who terminates employment prior to satisfying the Plan's eligibility conditions becomes a Participant in accordance with Adoption Agreement Section 2.01. 2.05 CHANGE IN EMPLOYEE STATUS. If a Participant has not incurred a Separation from Service but ceases to be eligible to participate in the Plan, by reason of employment within an employment classification excluded by the Employer under Adoption Agreement Section 1.07, the Administrative Committee must treat the Participant as an Excluded Employee during the period such a Participant is subject to the Adoption Agreement exclusion. The Administrative Committee determines a Participant's sharing in the allocation of Employer contributions and Participant forfeitures, if applicable, by disregarding his Compensation paid by the Employer for services rendered in his capacity as an Excluded Employee. However, during such period of exclusion, the Participant, without regard to employment classification, continues to receive credit for vesting under Article V for each included Year of Service and the Participant's Account continues to share fully in Trust Fund allocations under Section 9.11. If an Excluded Employee who is not a Participant becomes eligible to participate in the Plan by reason of a change in employment classification, he will participate in the Plan immediately if he has satisfied the eligibility conditions of Section 2.01 and would have been a Participant had he not been an Excluded Employee during his period of Service. Furthermore, the Plan takes into account all of the Participant's included Years of Service with the Employer as an Excluded Employee for purposes of vesting credit under Article V. 2.06 ELECTION NOT TO PARTICIPATE. If the Employer's Plan is a Standardized Plan, the Plan does not permit an otherwise eligible Employee nor any Participant to elect not to participate in the Plan. If the Employer's Plan is a Nonstandardized Plan, the Employer must specify in its Adoption Agreement whether an Employee eligible to participate, or any present Participant may elect not to participate in the Plan. For an election to be effective for a particular Plan Year, the Employee or Participant must file the election in writing with the Plan Administrator not later than the time specified in the Employer's Adoption Agreement. The Employer may not make a contribution under the Plan for the Employee or for the Participant for the Plan Year for which the participate in the Plan by filing his election in writing with the Plan Administrator not later than the time specified in the election is effective, nor for any succeeding Plan Year, unless the Employee or Participant re-elects to participate in the Plan. After an Employee's or Participant's election not to participate has been effective for at least the minimum period prescribed by the Employer's Adoption Agreement, the Employee or Participant may re-elect to participate in the Plan for any Plan Year and subsequent Plan Years. An Employee or Participant may re-elect to Employer's Adoption Agreement. An Employee or Participant who re-elects to participate may again 2.02 23 elect not to participate only as permitted in the Employer's Adoption Agreement. If an Employee is a Self-Employed Individual, the Employee's election (except as permitted by Treasury regulations without creating a Code Section 401(k) arrangement with respect to that Self-Employed Individual) must be effective no later than the date the Employee first would become a Participant in the Plan and the election is irrevocable. The Plan Administrator must furnish an Employee or a Participant any form required for purposes of an election under this Section 2.06. An election timely filed is effective for the entire Plan Year. A Participant who elects not to participate may not receive a distribution of his Accrued Benefit attributable either to Employer or to Participant contributions except as provided under Article IV or under Article VI. However, for each Plan Year for which a Participant's election not to participate is effective, the Participant's Account, if any, continues to share in Trust Fund allocations under Article IX. Furthermore, the Employee or the Participant receives vesting credit under Article V for each included Year of Service during the period the election not to participate is effective. * * * * * * * * * * * * 2.03 24 ARTICLE III EMPLOYER CONTRIBUTIONS AND FORFEITURES PART 1. AMOUNT OF EMPLOYER CONTRIBUTIONS AND PLAN ALLOCATIONS: SECTIONS 3.01 THROUGH 3.06 3.01 AMOUNT. For each Plan Year, the Employer contributes to the Trust the amount determined by application of the contribution option selected by the Employer in its Adoption Agreement. The Employer may not make a contribution to the Trust for any Plan Year to the extent the contribution would exceed the Participants' Maximum Permissible Amounts. The Employer contributes to this Plan on the condition its contribution is not due to a mistake of fact and the Revenue Service will not disallow the deduction for its contribution. The Trustee, upon written request from the Employer, must return to the Employer the amount of the Employer's contribution made by the Employer by mistake of fact or the amount of the Employer's contribution disallowed as a deduction under Code Section 404. The Trustee will not return any portion of the Employer's contribution under the provisions of this paragraph more than one year after: (a) The Employer made the contribution by mistake of fact; or (b) The disallowance of the contribution as a deduction, and then, only to the extent of the disallowance. The Trustee will not increase the amount of the Employer contribution returnable under this Section 3.01 for any earnings attributable to the contribution, but the Trustee will decrease the Employer contribution returnable for any losses attributable to it. The Trustee may require the Employer to furnish it whatever evidence the Trustee deems necessary to enable the Trustee to confirm the amount the Employer has requested be returned is properly returnable under ERISA. 3.02 DETERMINATION OF CONTRIBUTION. The Employer, from its records, determines the amount of any contributions to be made by it to the Trust under the terms of the Plan. 3.03 TIME OF PAYMENT OF CONTRIBUTION. The Employer may pay its contribution for each Plan Year in one or more installments without interest. The Employer must make its contribution to the Plan within the time prescribed by the Code or applicable Treasury regulations. Subject to the consent of the Trustee, the Employer may make its contribution in property rather than in cash, provided the contribution of property is not a prohibited transaction under the Code or under ERISA. 3.04 CONTRIBUTION ALLOCATION. (A) METHOD OF ALLOCATION. The Employer must specify in its Adoption Agreement the manner of allocating each annual Employer contribution to this Trust. (B) TOP HEAVY MINIMUM ALLOCATION. The Plan must comply with the provisions of this Section 3.04(B), subject to the elections in the Employer's Adoption Agreement. (1) TOP HEAVY ALLOCATION UNDER STANDARDIZED PLAN. Subject to the Employer's election under Section 3.04(B)(3), the top heavy minimum allocation requirement applies to a Standardized Plan for each Plan Year, irrespective of whether the Plan is top heavy. 3.01 25 (a) Each Participant employed by the Employer on the last day of the Plan Year will receive a top heavy minimum allocation for that Plan Year. The Employer may elect in Section 3.04 of its Adoption Agreement to apply this paragraph (a) only to a Participant who is a Non-Key Employee. (b) Subject to any overriding elections in Section 3.18 of the Employer's Adoption Agreement, the top heavy minimum allocation is the lesser of 3% of the Participant's Compensation for the Plan Year or the highest contribution rate for the Plan Year made on behalf of any Participant for the Plan Year. However, if the Employee participates in Paired Plans, the top heavy minimum allocation is 3% of his Compensation. If, under Adoption Agreement Section 3.04, the Employer elects to apply paragraph (a) only to a Participant who is a Non-Key Employee, the Administrative Committee will determine the "highest contribution rate" described in the first sentence of this paragraph (b) by reference only to the contribution rates of Participants who are Key Employees for the Plan Year. (2) TOP HEAVY MINIMUM ALLOCATION UNDER NONSTANDARDIZED PLAN. The top heavy minimum allocation requirement applies to a Nonstandardized Plan only in Plan Years for which the Plan is top heavy. Except as provided in the Employer's Adoption Agreement, if the Plan is top heavy in any Plan Year: (a) Each Non-Key Employee who is a Participant and is employed by the Employer on the last day of the Plan Year will receive a top heavy minimum allocation for that Plan Year, irrespective of whether he satisfies the Hours of Service condition under Section 3.06 of the Employer's Adoption Agreement; and (b) The top heavy minimum allocation is the lesser of 3% of the Non-Key Employee's Compensation for the Plan Year or the highest contribution rate for the Plan Year made on behalf of any Key Employee. However, if a defined benefit plan maintained by the Employer which benefits a Key Employee depends on this Plan to satisfy the antidiscrimination rules of Code Section 401(a)(4) or the coverage rules of Code Section 410 (or another plan benefiting the Key Employee so depends on such defined benefit plan), the top heavy minimum allocation is 3% of the Non-Key Employee's Compensation regardless of the contribution rate for the Key Employees. (3) SPECIAL ELECTION FOR STANDARDIZED CODE SECTION 401(k) PLAN. If the Employer's Plan is a Standardized Code Section 401(k) Plan, the Employer may elect in Adoption Agreement Section 3.04 to apply the top heavy minimum allocation requirements of Section 3.04(B)(1) only for Plan Years in which the Plan actually is a top heavy plan. (4) SPECIAL DEFINITIONS. For purposes of this Section 3.04(B), the term "Participant" includes any Employee otherwise eligible to participate in the Plan but who is not a Participant because of his Compensation level or because of his failure to make elective deferrals under a Code Section 401(k) arrangement or because of his failure to make mandatory contributions. For purposes of subparagraph (1)(b) or (2)(b), "Compensation" means Compensation as defined in Section 1.12, except Compensation does not include elective contributions, irrespective of whether the Employer has elected to include these amounts in Section 1.12 of its Adoption Agreement, any exclusion selected in Section 1.12 of the Adoption Agreement (other than the exclusion of elective contributions) does not apply, and any modification to the definition of Compensation in Section 3.06 does not apply. 3.02 26 (5) DETERMINING CONTRIBUTION RATES. For purposes of this Section 3.04(B), a Participant's contribution rate is the sum of all Employer contributions (not including Employer contributions to Social Security) and forfeitures allocated to the Participant's Account for the Plan Year divided by his Compensation for the entire Plan Year. However, for purposes of satisfying a Participant's top heavy minimum allocation in Plan Years beginning after December 31, 1988, the Participant's contribution rate does not include any elective contributions under a Code Section 401(k) arrangement nor any Employer matching contributions allocated on the basis of those elective contributions or on the basis of employee contributions, except a Nonstandardized Plan may include in the contribution rate any matching contributions not necessary to satisfy the nondiscrimination requirements of Code Section 401(k) or of Code Section 401(m). If the Employee is a Participant in Paired Plans, the Administrative Committee will consider the Paired Plans as a single Plan to determine a Participant's contribution rate and to determine whether the Plans satisfy this top heavy minimum allocation requirement. To determine a Participant's contribution rate under a Nonstandardized Plan, the Administrative Committee must treat all qualified top heavy defined contribution plans maintained by the Employer (or by any related Employers described in Section 1.30) as a single plan. (6) NO ALLOCATIONS. If, for a Plan Year, there are no allocations of Employer contributions or forfeitures for any Participant (for purposes of Section 3.04(B)(1)(b)) or for any Key Employee (for purposes of Section 3.04(B)(2)(b)), the Plan does not require any top heavy minimum allocation for the Plan Year, unless a top heavy minimum allocation applies because of the maintenance by the Employer of more than one plan. (7) ELECTION OF METHOD. The Employer must specify in its Adoption Agreement the manner in which the Plan will satisfy the top heavy minimum allocation requirement. (a) If the Employer elects to make any necessary additional contribution to this Plan, the Administrative Committee first will allocate the Employer contributions (and Participant forfeitures, if any) for the Plan Year in accordance with the provisions of Adoption Agreement Section 3.04. The Employer then will contribute an additional amount for the Account of any Participant entitled under this Section 3.04(B) to a top heavy minimum allocation and whose contribution rate for the Plan Year, under this Plan and any other plan aggregated under paragraph (5), is less than the top heavy minimum allocation. The additional amount is the amount necessary to increase tile Participant's contribution rate to the top heavy minimum allocation. The Administrative Committee will allocate the additional contribution to the Account of the Participant on whose behalf the Employer makes the contribution. (b) If the Employer elects to guarantee the top heavy minimum allocation under another plan, this Plan does not provide the top heavy minimum allocation and the Administrative Committee will allocated the annual Employer contributions (and Participant forfeitures) under the Plan solely in accordance with the allocation method selected under Adoption Agreement Section 3.04. 3.05 FORFEITURE ALLOCATION. The amount of a Participant's Accrued Benefit forfeited under the Plan is a Participant forfeiture. The Administrative committee will allocate Participant forfeitures in the manner specified by the Employer in its Adoption Agreement. The Administrative Committee will continue to hold the undistributed, non-vested portion of a terminated Participant's Accrued Benefit in his Account soley for his benefit until a forfeiture occurs at the time specified in Section 5.09 or if applicable, until the time specified in Section 9.14. Except as provided under Section 5.04, a Participant will not share in the allocation of a forfeiture of any portion of this Accrued Benefit. 3.06 ACCRUAL OF BENEFIT. The Administrative Committee will determine the accrual of benefit (Employer contributions and Participant forfeitures) on the basis of the Plan Year in accordance with the Employer's elections in its Adoption Agreement. 3.03 27 (A) COMPENSATION TAKEN INTO ACCOUNT. The Employer must specify in its Adoption Agreement the Compensation the Administrative Committee is to take into account in allocating an Employer contribution to a Participant's Account for the Plan Year in which the Employee first becomes a Participant. For all other Plan Years, the Administrative Committee will take into account only the Compensation determined for the portion of the Plan Year in which the Employee actually is a Participant. The Administrative Committee must take into account the Employee's entire Compensation for the Plan Year to determine whether the Plan satisfies the top heavy minimum allocation requirement of Section 3.04(B). The Employer, in an addendum to its Adoption Agreement numbered 3.06(A), may elect to measure Compensation for the Plan Year for allocation purposes on the basis of a specified period other than the Plan Year. (B) HOURS OF SERVICE REQUIREMENT. Subject to the applicable minimum allocation requirement of Section 3.04, the Administrative Committee will not allocate any portion of an Employer contribution for a Plan Year to any Participant's Account if the Participant does not complete the applicable minimum Hours of Service requirement specified in the Employer's Adoption Agreement. (C) EMPLOYMENT REQUIREMENT. If the Employer's Plan is a Standardized Plan, a Participant who, during a particular Plan Year, completes the accrual requirements of Adoption Agreement Section 3.06 will share in the allocation of Employer contributions for that Plan Year without regard to whether he is employed by the Employer on the Accounting Date of that Plan Year. If the Employer's Plan is a Nonstandardized Plan, the Employer must specify in its Adoption Agreement whether the Participant will accrue a benefit if he is not employed by the Employer on the Accounting Date of the Plan Year. If the Employer's Plan is a money purchase plan or a target benefit plan, whether Nonstandardized or Standardized, the Plan conditions benefit accrual on employment with the Employer on the last day of the Plan Year for the Plan Year in which the Employer terminates the Plan. (D) OTHER REQUIREMENTS. If the Employer's Adoption Agreement includes options for other requirements affecting the Participant's accrual of benefits under the Plan, the Administrative Committee will apply this Section 3.06 in accordance with the Employer's Adoption Agreement selections. (E) SUSPENSION OF ACCRUAL REQUIREMENTS UNDER NONSTANDARDIZED PLAN. If the Employer's Plan is a Nonstandardized Plan, the Employer may elect in its Adoption Agreement to suspend the accrual requirements elected under Adoption Agreement Section 3.06 if, for any Plan Year beginning after December 31, 1989, the Plan fails to satisfy the Participation Test or the Coverage Test. A Plan satisfies the Participation Test if, on each day of the Plan Year, the number of Employees who benefit under the Plan is at least equal to the lesser of 50 or 40% of the total number of Includible Employees as of such day. A Plan satisfies the Coverage Test if, on the last day of each quarter of the Plan Year, the number of Nonhighly Compensated Employees who benefit under the Plan is at least equal to 70% of the total number of Includible Nonhighly Compensated Employees as of such day. "Includible" Employees are all Employees other than: (1) those Employees excluded from participating in the Plan for the entire Plan Year by reason of the collective bargaining unit exclusion or the nonresident alien exclusion under Adoption Agreement Section 1.07 or by reason of the participation requirements of Sections 2.01 and 2.03; and (2) any Employee who incurs a Separation from Service during the Plan Year and fails to complete at least 501 Hours of Service for the Plan Year. A "Nonhighly Compensated Employee" is an Employee who is not a Highly Compensated Employee and who is not a family member aggregated with a Highly Compensated Employee pursuant to Section 1.09 of the Plan. 3.04 28 For purposes of the Participation Test and the Coverage Test, an Employee is benefiting under the Plan on a particular date if, under Adoption Agreement Section 3.04, he is entitled to an allocation for the Plan Year. Under the Participation Test, when determining whether an Employee is entitled to an allocation under Adoption Agreement Section 3.04, the Administrative Committee will disregard any allocation required solely by reason of the top heavy minimum allocation, unless the top heavy minimum allocation is the only allocation made under the Plan for the Plan Year. If this Section 3.06(E) applies for a Plan Year, the Administrative Committee will suspend the accrual requirements for the Includible Employees who are Participants, beginning first with the Includible Employee(s) employed with the Employer on the last day of the Plan Year, then the Includible Employee(s) who have the latest Separation from Service during the Plan Year, and continuing to suspend in descending order the accrual requirements for each Includible Employee who incurred an earlier Separation from Service, from the latest to the earliest Separation from Service date, until the Plan satisfies both the Participation Test and the Coverage Test for the Plan Year. If two or more Includible Employees have a Separation from Service on the same day, the Administrative Committee will suspend the accrual requirements for all such Includible Employees, irrespective of whether the Plan can satisfy the Participation Test and the Coverage Test by accruing benefits for fewer than all such Includible Employees. If the Plan suspends the accrual requirements for an Includible Employee, that Employee will share in the allocation of Employer contributions and Participant forfeitures, if any, without regard to the number of Hours of Service he has earned for the Plan Year and without regard to whether he is employed by the Employer on the last day of the Plan Year. If the Employees Plan includes Employer matching contributions subject to Code Section 401(m), this suspension of accrual requirements applies separately to the Code Section 401(m) portion of the Plan, and the Administrative Committee will treat an Employee as benefiting under that portion of the Plan if he is an Eligible Employee for purposes of the Code Section 401(m) nondiscrimination test. The Employer may modify the operation of this Section 3.06(E) by electing appropriate modifications in Section 3.06 of its Adoption Agreement. PART 2. LIMITATIONS ON ALLOCATIONS: SECTIONS 3.07 THROUGH 3.19 [Note: Sections 3.07 through 3.10 apply only to Participants in this Plan who do not participate, and who have never participated, in another qualified plan or in a welfare benefit fund (as defined IN Code Section 419(e)) maintained by the Employer.] 3.07 The amount of Annual Additions which the Administrative Committee may allocate under this Plan on a Participant's behalf for a Limitation Year may not exceed the Maximum Permissible Amount. If the amount the Employer otherwise would contribute to the Participant's Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the Employer will reduce the amount of its contribution so the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. If an allocation of Employer contributions, pursuant to Section 3.04, would result in an Excess Amount (other than an Excess Amount resulting from the circumstances described in Section 3.10) to the Participant's Account, the Administrative Committee will reallocate the Excess Amount to the remaining Participants who are eligible for an allocation of Employer contributions for the Plan Year in which the Limitation Year ends. The Administrative Committee will make this reallocation on the basis of the allocation method under the Plan as if the Participant whose Account otherwise would receive the Excess Amount is not eligible for an allocation of Employer contributions. 3.05 29 3.08 Prior to the determination of the Participant's actual Compensation for a Limitation Year, the Administrative Committee may determine the Maximum Permissible Amount on the basis of the Participant's estimated annual Compensation for such Limitation Year. The Administrative Committee must make this determination on a reasonable and uniform basis for all Participants similarly situated. The Administrative Committee must reduce any Employer contributions (including any allocation of forfeitures) based on estimated annual Compensation by any Excess Amounts carried over from prior years. 3.09 As soon as is administratively feasible after the end of the Limitation Year, the Administrative Committee will determine the Maximum Permissible Amount for such Limitation Year on the basis of the Participant's actual Compensation for such Limitation Year. 3.10 If pursuant to Section 3.09, or because of the allocation of forfeitures, there is an Excess Amount with respect to a Participant for a Limitation Year, the Administrative Committee will dispose of such Excess Amount as follows: (a) The Administrative Committee will return any voluntary contributions to the Participant to the extent the return would reduce the Excess Amount. (b) If, after the application of paragraph (a), an Excess Amount still exists, and the Plan covers the Participant at the end of the Limitation Year, then the Administrative Committee will use the Excess Amount(s) to reduce future Employer contributions (including any allocation of forfeitures) under the Plan for the next Limitation Year and for each succeeding Limitation Year, as is necessary, for the Participant. If the Employer's Plan is a profit sharing plan, the Participant may elect to limit his Compensation for allocation purposes to the extent necessary to reduce his allocation for the Limitation Year to the Maximum Permissible Amount and eliminate the Excess Amount. (c) If, after the application of paragraph (a), an Excess Amount still exists, and the Plan does not cover the Participant at the end of the Limitation Year, then the Administrative Committee will hold the Excess Amount unallocated in a suspense account. The Administrative Committee will apply the suspense account to reduce Employer Contributions (including allocation of forfeitures) for all remaining Participants in the next Limitation Year, and in each succeeding Limitation Year if necessary. Neither the Employer nor any Employee contribute to the Plan for any Limitation Year in which the Plan is unable to allocate fully a suspense account maintained pursuant to this paragraph (c). (d) The Administrative Committee will not distribute any Excess Amount(s) to Participants or to former Participants. [Note: Sections 3.11 through 3.16 apply only to Participants who, in addition to this Plan, participate in one or more plans (including Paired Plans), all of which are qualified Master or Prototype defined contribution plans or welfare benefit funds (as defined in Code Section 419(e)) maintained by the Employer during the Limitation Year.) 3.11 The amount of Annual Additions which the Administrative Committee may allocate under this Plan on a Participant's behalf for a Limitation Year may not exceed the Maximum Permissible Amount, reduced by the sum of any Annual Additions allocated to the Participant's Accounts for the same Limitation Year under this Plan and such other defined contribution plan. If the amount the Employer otherwise would contribute to the Participant's Account under this Plan would cause the Annual Additions for the Limitation Year to exceed this limitation, the 3.06 30 Employer will reduce the amount of its contribution so the Annual Additions under all such plans for the Limitation Year will equal the Maximum Permissible Amount. If an allocation of Employer contributions, pursuant to Section 3.04, would result in an Excess Amount (other than an Excess Amount resulting from the circumstances described in Section 3.10) to the Participant's Account, the Administrative Committee will reallocate the Excess Amount to the remaining Participants who are eligible for an allocation of Employer contributions for the Plan Year in which the Limitation Year ends. The Administrative Committee will make this reallocation on the basis of the allocation method under the Plan as if the Participant whose Account otherwise would receive the Excess Amount is not eligible for an allocation of Employer contributions. 3.12 Prior to the determination of the Participant's actual Compensation for the Limitation Year, the Administrative Committee may determine the amounts referred to in 3.11 above on the basis of the Participant's estimated annual Compensation for such Limitation Year. The Administrative Committee will make this determination on a reasonable and uniform basis for all Participants similarly situated. The Administrative Committee must reduce any Employer contribution (including allocation of forfeitures) based on estimated annual Compensation by any Excess Amounts carried over from prior years. 3.13 As soon as is administratively feasible after the end of the Limitation Year, the Administrative Committee will determine the amounts referred to in 3.11 on the basis of the Participant's actual Compensation for such Limitation Year. 3.14 If pursuant to Section 3.13, or because of the allocation of forfeitures, a Participant's Annual Additions under this Plan and all such other plans result in an Excess Amount, such Excess Amount will consist of the Amounts last allocated. The Administrative Committee will determine the Amounts last allocated by treating the Annual Additions attributable to a welfare benefit fund as allocated first, irrespective of the actual allocation date under the welfare benefit fund. 3.15 The Employer must specify in its Adoption Agreement the Excess Amount attributed to this Plan, if the Administrative Committee allocates an Excess Amount to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan. 3.16 The Administrative Committee will dispose of any Excess Amounts attributed to this Plan as provided in Section 3.10. [Note: Section 3.17 applies only to Participants who, in addition to this Plan, participate in one or more qualified plans which are qualified defined contribution plans other than a Master or Prototype plan maintained by the Employer during the Limitation Year.] 3.17 SPECIAL ALLOCATION LIMITATION. The amount of Annual Additions which the Administrative Committee may allocate under this Plan on behalf of any Participant are limited in accordance with the provisions of Section 3.11 through 3.16, as though the other plan were a Master or Prototype plan, unless the Employer provides other limitations in an addendum to the Adoption Agreement, numbered Section 3.17. 3.18 DEFINED BENEFIT PLAN LIMITATION. If the Employer maintains a defined benefit plan, or has ever maintained a defined benefit plan which the Employer has terminated, then the sum of the defined benefit plan fraction and the defined contribution plan fraction for any Participant for any Limitation Year must not exceed 1.0. The Employer must provide in Adoption Agreement Section 3.18 the manner in which the Plan will satisfy this limitation. The Employer also must provide in its Adoption Agreement Section 3.18 the manner in which the Plan will satisfy the top heavy requirements of Code Section 416 after taking into account the existence (or prior maintenance) of the defined benefit plan. 3.07 31 3.19 DEFINITIONS - ARTICLE III. For purposes of Article III, the following terms mean: (a) "Annual Addition" - The sum of the following amounts allocated on behalf of a Participant for a Limitation Year, of (i) all Employer contributions; (ii) all forfeitures; and (iii) all Employee contributions. Except to the extent provided in Treasury regulations, Annual Additions include excess contributions described in Code Section 401(k), excess aggregate contributions described in Code Section 401(m) and excess deferrals described in Code Section 402(g), irrespective of whether the plan distributes or forfeits such excess amounts. Annual Additions also include Excess Amounts reapplied to reduce Employer contributions under Section 3.10. Amounts allocated after March 31, 1984, to an individual medical account (as defined in Code Section 415(l)(2)) included as part of a defined benefit plan maintained by the Employer are Annual Additions. Furthermore, Annual Additions include contributions paid or accrued after December 31, 1985, for taxable years ending after December 31, 1985, attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)) under a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer. (b) "Compensation" - For purposes of applying the limitations of Part 2 of this Article III, "Compensation" means Compensation as defined in Section 1.12, except Compensation does not include elective contributions, irrespective of whether the Employer has elected to include these amounts as Compensation under Section 1.12 of its Adoption Agreement, and any exclusion selected in Section 1.12 of the Adoption Agreement (other than the exclusion of elective contributions) does not apply. (c) "Employer" - The Employer that adopts this Plan and any related employers described in Section 1.30. Solely for purposes of applying the limitations of Part 2 of this Article 111, the Administrative Committee will determine related employers described in Section 1.30 by modifying Code Sections 414(b) and (c) in accordance with Code Section 415(h). (d) "Excess Amount" - The excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. (e) "Limitation Year" - The period selected by the Employer under Adoption Agreement Section 1.17. All qualified plans of the Employer must use the same Limitation Year. If the Employer amends the Limitation Year to a different 12 consecutive month period, the new Limitation Year must begin on a date within the Limitation Year for which the Employer makes the amendment, creating a short Limitation Year. (f) "Master or Prototype Plan" - A plan the form of which is the subject of a favorable notification letter or a favorable opinion letter from the Internal Revenue Service. (g) "Maximum Permissible Amount" - The lesser of (i) $30,000 (or, if greater, one-fourth of the defined benefit dollar limitation under Code Section 415(b)(1)(A)), or (ii) 25% of the Participant's Compensation for the Limitation Year. If there is a short Limitation Year because of a change in Limitation Year, the Administrative Committee will multiply the $30,000 (or adjusted) limitation by the following fraction: Number of months in the short Limitation Year --------------------------------------------- 12 (h) "Defined contribution plan" - A retirement plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which the plan may allocate to such participant's account. The Administrative Committee must treat all defined contribution plans (whether or rot terminated) maintained by the Employer as a single plan. Solely for purposes of the limitations of Part 2 of this Article III, the Administrative Committee will treat employee contributions made to a defined 3.08 32 benefit plan maintained by the Employer as a separate defined contribution plan. The Administrative Committee also will treat as a defined contribution plan an individual medical account (as defined in Code Section 415(l)(2)) included as part of a defined benefit plan maintained by the Employer and, for taxable years ending after December 31, 1985, a welfare benefit fund under Code Section 419(e) maintained by the Employer to the extent there are post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)). (i)"Defined benefit plan" - A retirement plan which does not provide for individual accounts for Employer contributions. The Administrative Committee must treat all defined benefit plans (whether or not terminated) maintained by the Employer as a single plan. [Note: The definitions in paragraphs (j), (k) and (l) apply only if the limitation described in Section 3.18 applies to the Employer's Plan.] (j) "Defined benefit plan fraction" - Projected annual benefit of the Participant under the defined benefit plan(s) ---------------------------------------------------------------------------- The lesser of (i) 125% (subject to the "100% limitation" in paragraph (l)) of the dollar limitation in effect under Code Section 415(b)(1)(A) for the Limitation Year, or (ii) 140% of the Participant's average Compensation for his high three (3) consecutive Years of Service To determine the denominator of this fraction, the Administrative Committee will make any adjustment required under Code Section 415(b) and will determine a Year of Service, unless otherwise provided in an addendum to Adoption Agreement Section 3.18, as a Plan Year in which the Employee completed at least 1,000 Hours of Service. The "projected annual benefit" is the annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if the plan expresses such benefit in a form other than a straight life annuity or qualified joint and survivor annuity) of the Participant under the terms of the defined benefit plan on the assumptions he continues employment until his normal retirement age (or current age, if later) as stated in the defined benefit plan, his compensation continues at the same rate as in effect in the Limitation Year under consideration until the date of his normal retirement age and all other relevant factors used to determine benefits under the defined benefit plan remain constant as of the current Limitation Year for all future Limitation Years. CURRENT ACCRUED BENEFIT. If the Participant accrued benefits in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the dollar limitation used in the denominator of this fraction will not be less than the Participant's Current Accrued Benefit. A Participant's Current Accrued Benefit is the sum of the annual benefits under such defined benefit plans which the Participant had accrued as of the end of the 1986 Limitation Year (the last Limitation Year beginning before January 1, 1987), determined without regard to any change in the terms or conditions of the Plan made after May 5, 1986, and without regard to any cost of living adjustment occurring after May 5, 1986. This Current Accrued Benefit rule applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Code Section 415 as in effect at the end of the 1986 Limitation Year. 3.09 33 (k) "Defined contribution plan fraction" - The sum, as of the close of the Limitation Year, of the Annual Additions to the Participant's Account under the defined contribution plan(s) ----------------------------------------------------------------------- The sum of the lesser of the following amounts determined for the Limitation Year and for each prior Year of Service with the Employer:(i) 125% (subject to the "100% limitation" in paragraph (l)) of the dollar limitation in effect under Code Section 415(c)(1)(A) for the Limitation Year (determined without regard to the special dollar limitations for employee stock ownership plans), or (ii) 35% of the Participant's Compensation for the Limitation Year For purposes of determining the defined contribution plan fraction, the Administrative Committee will not recompute Annual Additions in Limitation Years beginning prior to January 1, 1987, to treat all Employee contributions as Annual Additions. If the Plan satisfied Code Section 415 for Limitation Years beginning prior to January 1, 1987, the Administrative Committee will redetermine the defined contribution plan fraction and the defined benefit plan fraction as of the end of the 1986 Limitation Year, in accordance with this Section 3.19. If the sum of the redetermined fractions exceeds 1.0, the Administrative Committee will subtract permanently from the numerator of the defined contribution plan fraction an amount equal to the product of (1) the excess of the sum of the fractions over 1.0, times (2) the denominator of the defined contribution plan fraction. In making the adjustment, the Administrative Committee must disregard any accrued benefit under the defined benefit plan which is in excess of the Current Accrued Benefit. This Plan continues any transitional rules applicable to the determination of the defined contribution plan fraction under the Employer's Plan as of the end of the 1986 Limitation Year. (l) "100% limitation." If the 100% limitation applies, the Administrative Committee must determine the denominator of the defined benefit plan fraction and the denominator of the defined contribution plan fraction by substituting 100% for 125%. If the Employer's Plan is a Standardized Plan, the 100% limitation applies in all Limitation Years, subject to any override provisions under Section 3.18 of the Employer's Adoption Agreement. If the Employer overrides the 100% limitation under a Standardized Plan, the Employer must specify in its Adoption Agreement the manner in which the Plan satisfies the extra minimum benefit requirement of Code Section 416(h) and the 100% limitation must continue to apply if the Plan's top heavy ratio exceeds 90%. If the Employer's Plan is a Nonstandardized Plan, the 100% limitation applies only if: (i) the Plan's top heavy ratio exceeds 90%; or (ii) the Plan's top heavy ratio is greater than 60%, and the Employer does not elect in its Adoption Agreement Section 3.18 to provide extra minimum benefits which satisfy Code Section 416(h)(2). * * * * * * * * 3.10 34 ARTICLE IV PARTICIPANT CONTRIBUTIONS 4.01 PARTICIPANT VOLUNTARY CONTRIBUTIONS. This Plan does not permit Participant voluntary contributions (which are nondeductible employee contributions) unless the Employer maintains its Plan under a Code Section 401(k) Adoption Agreement. If the Employer does not maintain its Plan under a Code Section 401(k) Adoption Agreement and, prior to the adoption of this Prototype Plan, the Plan accepted Participant voluntary contributions for a Plan Year beginning after December 31, 1986, those contributions must satisfy the requirements of Code Section 401(m). This Section 4.01 does not prohibit the Plan's acceptance of Participant voluntary contributions prior to the first Plan Year commencing after the Plan Year in which the Employer adopts this Prototype Plan. 4.02 PARTICIPANT DEDUCTIBLE CONTRIBUTIONS. A qualified Plan may not accept Participant deductible contributions after April 15, 1987. If the Employer's Plan includes Participant deductible contributions ("DECs") made prior to April 16, 1987, the Administrative Committee must maintain a separate accounting for the Participant's Accrued Benefit attributable to DECs, including DECs which are part of a rollover contribution described in Section 4.03. The Administrative Committee will treat the accumulated DECs as part of the Participant's Accrued Benefit for all purposes of the Plan, except for purposes of determining the top heavy ratio under Section 1.33. The Administrative Committee may not use DECs to purchase life insurance on the Participant's behalf. 4.03 PARTICIPANT ROLLOVER CONTRIBUTIONS. Any Participant, with the Employer's written consent and after filing with the Trustee the form prescribed by the Administrative Committee, may contribute cash or other property to the Trust other than as a voluntary contribution if the contribution is a "rollover contribution" which the Code permits an employee to transfer either directly or indirectly from one qualified plan to another qualified plan. Before accepting a rollover contribution, the Trustee may require an Employee to furnish satisfactory evidence that the proposed transfer is in fact a "rollover contribution" which the Code permits an employee to make to a qualified plan. A rollover contribution is not an Annual Addition under Part 2 of Article III. The Trustee will invest the rollover contribution in a segregated investment Account for the Participant's sole benefit unless the Trustee (or the Named Fiduciary, in the case of a nondiscretionary Trustee designation), in its sole discretion, agrees to invest the rollover contribution as part of the Trust Fund. The Trustee will not have any investment responsibility with respect to a Participant's segregated rollover Account. The Participant, however, from time to time, may direct the Trustee in writing as to the investment of his segregated rollover Account in property, or property interests, of any kind, real, personal or mixed; provided however, the Participant may not direct the Trustee to make loans to his Employer. A Participant's segregated rollover Account alone will bear any extraordinary expenses resulting from investments made at the direction of the Participant. As of the Accounting Date (or other valuation date) for each Plan Year, the Administrative Committee will allocate and credit the net income (or net loss) from a Participant's segregated rollover Account and the increase or decrease in the fair market value of the assets of a segregated rollover Account solely to that Account. The Trustee is not liable nor responsible for any loss resulting to any Beneficiary, nor to any Participant, by reason of any sale or investment made or other action taken pursuant to and in accordance with the direction of the Participant. In all other respects, the Trustee will hold, administer and distribute a rollover contribution in the same manner as any Employer contribution made to the Trust. 4.01 35 An eligible Employee, prior to satisfying the Plan's eligibility conditions, may make a rollover contribution to the Trust to the same extent and in the same manner as a Participant. If an Employee makes a rollover contribution to the Trust prior to satisfying the Plan's eligibility conditions, the Administrative Committee and Trustee must treat the Employee as a Participant for all purposes of the Plan except the Employee is not a Participant for purposes of sharing in Employer contributions or Participant forfeitures under the Plan until he actually becomes a Participant in the Plan. If the Employee has a Separation from Service prior to becoming a Participant, the Trustee will distribute his rollover contribution Account to him as if it were an Employer contribution Account. 4.04 PARTICIPANT CONTRIBUTION - FORFEITABILITY. A Participant's Accrued Benefit is, at all times, 100% Nonforfeitable to the extent the value of his Accrued Benefit is derived from his Participant contributions described in this Article IV. 4.05 PARTICIPANT CONTRIBUTION - WITHDRAWAL/DISTRIBUTION. A Participant, by giving prior written notice to the Trustee, may withdraw all or any part of the value of his Accrued Benefit derived from his Participant contributions described in this Article IV. A distribution of Participant contributions must comply with the joint and survivor requirements described in Article VI, if those requirements apply to the Participant. A Participant may not exercise his right to withdraw the value of his Accrued Benefit derived from his Participant contributions more than once during any Plan Year. The Trustee, in accordance with the direction of the Administrative Committee, will distribute a Participant's unwithdrawn Accrued Benefit attributable to his Participant contributions in accordance with the provisions of Article VI applicable to the distribution of the Participant's Nonforfeitable Accrued Benefit. 4.06 PARTICIPANT CONTRIBUTION - ACCRUED BENEFIT. The Administrative Committee must maintain a separate Account(s) in the name of each Participant to reflect the Participant's Accrued Benefit under the Plan derived from his Participant contributions. A Participant's Accrued Benefit derived from his Participant contributions as of any applicable date is the balance of his separate Participant contribution Account(s). * * * * * * * * * 4-02 36 ARTICLE V TERMINATION OF SERVICE - PARTICIPANT VESTING 5.01 NORMAL RETIREMENT AGE. The Employer must define Normal Retirement Age in its Adoption Agreement. A Participant's Accrued Benefit derived from Employer contributions is 100% Nonforfeitable upon and after his attaining Normal Retirement Age (if employed by the Employer on or after that date). 5.02 PARTICIPANT DISABILITY OR DEATH. The Employer may elect in its Adoption Agreement to provide a Participant's Accrued Benefit derived from Employer contributions will be 100% Nonforfeitable if the Participant's Separation from Service is a result of his death or his disability. 5.03 VESTING SCHEDULE. Except as provided in Sections 5.01 and 5.02, for each Year of Service, a Participant's Nonforfeitable percentage of his Accrued Benefit derived from Employer contributions equals the percentage in the vesting schedule completed by the Employer in its Adoption Agreement. (A) ELECTION OF SPECIAL VESTING FORMULA. If the Trustee makes a distribution (other than a cash-out distribution described in Section 5.04) to a partially-vested Participant, and the Participant has not incurred a Forfeiture Break in Service at the relevant time, the Administrative Committee will establish a separate Account for the Participant's Accrued Benefit. At any relevant time following the distribution, the Administrative Committee will determine the Participant's Nonforfeitable Accrued Benefit derived from Employer contributions in accordance with the following formula: P(AB + (R x D)) - (R x D). To apply this formula, "P" is the Participant's current vesting percentage at the relevant time, "AB" is the Participant's Employer-derived Accrued Benefit at the relevant time, "R" is the ratio of "AB" to the Participant's Employer-derived Accrued Benefit immediately following the earlier distribution and "D" is the amount of the earlier distribution. If, under a restated Plan, the Plan has made distribution to a partially-vested Participant prior to its restated Effective Date and is unable to apply the cash-out provisions of Section 5.04 to that prior distribution, this special vesting formula also applies to that Participant's remaining Account. The Employer, in an addendum to its Adoption Agreement, numbered Section 5.03, may elect to modify this formula to read as follows: P(AB + D) - D. 5.04 CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS/RESTORATION OF FORFEITED ACCRUED BENEFIT. If, pursuant to Article VI, a partially-vested Participant receives a cash-out distribution before he incurs a Forfeiture Break in Service (as defined in Section 5.08), the cash-out distribution will result in an immediate forfeiture of the nonvested portion of the Participant's Accrued Benefit derived from Employer contributions. See Section 5.09. A partially-vested Participant is a Participant whose Nonforfeitable Percentage determined under Section 5.03 is less than 100%. A cash-out distribution is a distribution of the entire present value of the Participant's Nonforfeitable Accrued Benefit. (A) RESTORATION AND CONDITIONS UPON RESTORATION. A partially-vested Participant who is re-employed by the Employer after receiving a cash-out distribution of the Nonforfeitable percentage of his Accrued Benefit may repay the Trustee the amount of the cash-out distribution attributable to Employer contributions, unless the Participant no longer has a right to restoration by reason of the conditions of this Section 5.04(A). If a partially-vested Participant makes the cash-out distribution repayment, the Administrative Committee, subject to the 5.01 37 conditions of this Section 5.04(A), must restore his Accrued Benefit attributable to Employer contributions to the same dollar amount as the dollar amount of his Accrued Benefit on the Accounting Date, or other valuation date, immediately preceding the date of the cash-out distribution, unadjusted for any gains or losses occurring subsequent to that Accounting Date, or other valuation date. Restoration of the Participant's Accrued Benefit includes restoration of all Code Section 411(d)(6) protected benefits with respect to that restored Accrued Benefit, in accordance with applicable Treasury regulations. The Administrative Committee will not restore a re-employed Participant's Accrued Benefit under this paragraph if: (1) 5 years have elapsed since the Participant's first re-employment date with the Employer following the cash-out distribution; or (2) The Participant incurred a Forfeiture Break in Service (as defined in Section 5.08). This condition also applies if the Participant makes repayment within the Plan Year in which he incurs the Forfeiture Break in Service and that Forfeiture Break in Service would result in a complete forfeiture of the amount the Administrative Committee otherwise would restore. (B) TIME AND METHOD OF RESTORATION. If neither of the two conditions preventing restoration of the Participant's Accrued Benefit applies, the Administrative Committee will restore the Participant's Accrued Benefit as of the Plan Year Accounting Date coincident with or immediately following the repayment. To restore the Participant's Accrued Benefit, the Administrative Committee, to the extent necessary, will allocate to the Participant's Account: (1) First, the amount, if any, of Participant forfeitures the Administrative Committee would otherwise allocate under Section 3.05; (2) Second, the amount, if any, of the Trust Fund net income or gain for the Plan Year; and (3) Third, the Employer contribution for the Plan Year to the extent made under a discretionary formula. In an addendum to its Adoption Agreement numbered 5.04(B), the Employer may eliminate as a means of restoration any of the amounts described in clauses (1), (2) and (3) or may change the order of priority of these amounts. To the extent the amounts described in clauses (1), (2) and (3) are insufficient to enable the Administrative Committee to make the required restoration, the Employer must contribute, without regard to any requirement or condition of Section 3.01, the additional amount necessary to enable the Administrative Committee to make the required restoration. If, for a particular Plan Year, the Administrative Committee must restore the Accrued Benefit of more than one re-employed Participant, then the Administrative Committee will make the restoration allocations to each such Participant's Account in the same proportion that a Participant's restored amount for the Plan Year bears to the restored amount for the Plan Year of all re-employed Participants. The Administrative Committee will not take into account any allocation under this Section 5.04 in applying the limitation on allocations under Part 2 of Article III. (C) 0% VESTED PARTICIPANT. The Employer must specify in its Adoption Agreement whether the deemed cash-out rule applies to a 0% vested Participant. A 0% vested Participant is a Participant whose Accrued Benefit derived from Employer contributions is entirely forfeitable at the time of his Separation from Service. For this purpose, a Participant's vested Account shall not include accumulated deductible employee contributions within the meaning of Code Section 72(o)(5)(B) for Plan Years prior to January 1, 1989. If the Participant's Account is not entitled to an allocation of Employer contributions for the Plan Year in which he has a Separation from Service, the 5.02 38 Administrative Committee will apply the deemed cash-out rule as if the 0% vested Participant received a cash-out distribution on the date of the Participant's Separation from Service. If the Participant's Account is entitled to an allocation of Employer contributions or Participant forfeitures for the Plan Year in which he has a Separation from Service, the Administrative Committee will apply the deemed cash-out rule as if the 0% vested Participant received a cash-out distribution on the first day of the first Plan Year beginning after his Separation from Service. For purposes of applying the restoration provisions of this Section 5.04, the Administrative Committee will treat the 0% vested Participant as repaying his cash-out "distribution" on the first date of his re-employment with the Employer. If the deemed cash-out rule does not apply to the Employer's Plan, a 0% vested Participant will not incur a forfeiture until he incurs a Forfeiture Break in Service. 5.05 SEGREGATED ACCOUNT FOR REPAID AMOUNT. Until the Administrative Committee restores the Participant's Accrued Benefit, as described in Section 5.04, the Trustee will invest the cash-out amount the Participant has repaid in a segregated Account maintained solely for that Participant. The Trustee must invest the amount in the Participant's segregated Account in Federally insured interest bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. Until commingled with the balance of the Trust Fund on the date the Administrative Committee restores the Participant's Accrued Benefit, the Participant's segregated Account remains a part of the Trust, but it alone shares in any income it earns and it alone bears any expense or loss it incurs. Unless the repayment qualifies as a rollover contribution, the Administrative Committee will direct the Trustee to repay to the Participant as soon as is administratively practicable the full amount of the Participant's segregated Account if the Administrative Committee determines either of the conditions of Section 5.04(A) prevents restoration as of the applicable Accounting Date, notwithstanding the Participant's repayment. 5.06 YEAR OF SERVICE - VESTING. For purposes of vesting under Section 5.03, Year of Service means any 12-consecutive month period designated in the Employer's Adoption Agreement during which an Employee completes no less than the number of Hours of Service (not exceeding 1,000) specified in the Employer's Adoption Agreement. A Year of Service includes any Year of Service earned prior to the Effective Date of the Plan, except as provided in Section 5.08. 5.07 BREAK IN SERVICE - VESTING. For purposes of this Article V, a Participant incurs a "Break in Service" if during any vesting computation period he does not complete more than 500 Hours of Service. If, pursuant to Section 5.06, the Plan does not require more than 500 Hours of Service to receive credit for a Year of Service, a Participant incurs a Break in Service in a vesting computation period in which he falls to complete a Year of Service. 5.08 INCLUDED YEARS OF SERVICE - VESTING. For purposes of determining "Years of Service" under Section 5.06, the loan takes into account all Years of Service an Employee completes with the Employer except: (a) For the sole purpose of determining a Participant's Nonforfeitable percentage of his Accrued Benefit derived from Employer contributions which accrued for his benefit prior to a Forfeiture Break in Service, the Plan disregards any Year of Service after the Participant first incurs a Forfeiture Break in Service. The Participant incurs a Forfeiture Break in Service when he incurs 5 consecutive Breaks in Service. (b) The Plan disregards any Year of Service excluded under the Employer's Adoption Agreement. 5.03 39 The Plan does not apply the Break in Service rule under Code Section 411(a)(6)(B). Therefore, an Employee need not complete a Year of Service after a Break in Service before the Plan takes into account the Employee's otherwise includible Years of Service under this Article V. 5.09 FORFEITURE OCCURS. A Participant's forfeiture, if any, of his Accrued Benefit derived from Employer contributions occurs under the Plan on the earlier of: (a) The last day of the vesting computation period in which the Participant first incurs a Forfeiture Break in Service; or (b) The date the Participant receives a cash-out distribution. The Administrative Committee determines the percentage of a Participant's Accrued Benefit forfeiture, if any, under this Section 5.09 solely by reference to the vesting schedule of Section 5.03. A Participant does not forfeit any portion of his Accrued Benefit for any other reason or cause except as expressly provided by this Section 5.09 or as provided under Section 9.14. 5.04 40 ARTICLE VI TIME AND METHOD OF PAYMENT OF BENEFITS 6.01 TIME OF PAYMENT OF ACCRUED BENEFIT. Unless, pursuant to Section 6.03, the Participant or the Beneficiary elects in writing to a different time or method of payment, the Administrative Committee will direct the Trustee to commence distribution of a Participant's Nonforfeitable Accrued Benefit in accordance with this Section 6.01. A Participant must consent, in writing, to any distribution required under this Section 6.01 if the present value of the Participant's Nonforfeitable Accrued Benefit, at the time of the distribution to the Participant, exceeds $3,500 and the Participant has not attained the later of Normal Retirement Age or age 62. Furthermore, the Participant's spouse also must consent, in writing, to any distribution, for which Section 6.04 requires the spouse's consent. For all purposes of this Article VI, the term "annuity starting date" means the first day of the first period for which the Plan pays an amount as an annuity or in any other form. A distribution date under this Article VI, unless otherwise specified within the Plan, is the date or dates the Employer specifies in the Adoption Agreement, or as soon as administratively practicable following that distribution date. For purposes of the consent requirements under this Article VI, if the present value of the Participant's Nonforfeitable Accrued Benefit, at the time of any distribution, exceeds $3,500, the Administrative Committee must treat that present value as exceeding $3,500 for purposes of all subsequent Plan distributions to the Participant. (A) SEPARATION FROM SERVICE FOR A REASON OTHER THAN DEATH. (1) PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT NOT EXCEEDING $3,500. If the Participant's Separation from Service is for any reason other than death, the Administrative Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in a lump sum, on the distribution date the Employer specifies in the Adoption Agreement, but in no event later than the 60th day following the close of the Plan Year in which the Participant attains Normal Retirement Age. If the Participant has attained Normal Retirement Age at the time of his Separation from Service, the distribution under this paragraph will occur no later than the 60th day following the close of the Plan Year in which the Participant's Separation from Service occurs. (2) PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT EXCEEDS $3,500. If the Participant's Separation from Service is for any reason other than death, the Administrative Committee will direct the Trustee to commence distribution of the Participant's Nonforfeitable Accrued Benefit in a form and at the time elected by the Participant, pursuant to Section 6.03. In the absence of an election by the Participant, the Administrative Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in a lump sum (or, if applicable, the normal annuity form of distribution required under Section 6.04), on the 60th day following the close of the Plan Year in which the latest of the following events occurs: (a) the Participant attains Normal Retirement Age; (b) the Participant attains age 62; or (c) the Participant's Separation from Service. (3) DISABILITY. If the Participant's Separation from Service is because of his disability, the Administrative Committee will direct the Trustee to pay the Participant's Nonforfeitable Accrued Benefit in lump sum, on the distribution date the Employer specifies in the Adoption Agreement, subject to the notice and consent requirements of this Article VI and subject to the applicable mandatory commencement dates described in Paragraphs (1) and (2). 6.01 41 (4) HARDSHIP. Prior to the time at which the Participant may receive distribution under Paragraphs (1), (2) or (3), the Participant may request a distribution from his Nonforfeitable Accrued Benefit in an amount necessary to satisfy a hardship, if the Employer elects in the Adoption Agreement to permit hardship distributions. Unless the Employer elects otherwise in the Adoption Agreement, a hardship distribution must be on account of any of the following: (a) medical expenses; (b) the purchase (excluding mortgage payments) of the Participant's principal residence; (c) post-secondary education tuition, for the next semester or quarter, for the Participant or for the Participant's spouse, children or dependents; (d) to prevent the eviction of the Participant from his principal residence or the foreclosure on the mortgage of the Participant's principal residence; (e) funeral expenses of the Participant's family member; or (f) the Participant's disability. A partially-vested Participant may not receive a hardship distribution described in this Paragraph (A)(4) prior to incurring a Forfeiture Break in Service, unless the hardship distribution is a cash-out distribution (as defined in Article V). The Administrative Committee will direct the Trustee to make the hardship distribution as soon as administratively practicable after the Participant makes a valid request for the hardship distribution. (B) REQUIRED BEGINNING DATE. If any distribution commencement date described under Paragraph (A) of this Section 6.01, either by Plan provision or by Participant election (or nonelection), is later than the Participant's Required Beginning Date, the Administrative Committee instead must direct the Trustee to make distribution on the Participant's Required Beginning Date, subject to the transitional election, if applicable, under Section 6.03(D). A Participant's Required Beginning Date is the April 1 following the close of the calendar year in which the Participant attains age 70 1/2. However, if the Participant, prior to incurring a Separation from Service, attained age 70 1/2 by January 1, 1988, and, for the five Plan Year period ending in the calendar year in which he attained age 70 1/2 and for all subsequent years, the Participant was not a more than 5% owner, the Required Beginning Date is the April 1 following the close of the calendar year in which the Participant becomes a more than 5% owner. Furthermore, if a Participant who was not a more than 5% owner attained age 70 1/2 during 1988 and did not incur a Separation from Service prior to January 1, 1989, his Required Beginning Date is April 1, 1990. A mandatory distribution at the Participant's Required Beginning Date will be in lump sum (or, if applicable, the normal annuity form of distribution required under Section 6.04) unless the Participant, pursuant to the provisions of this Article VI, makes a valid election to receive an alternative form of payment. (C) DEATH OF THE PARTICIPANT. The Administrative Committee will direct the Trustee, in accordance with this Section 6.01(C), to distribute to the Participant's Beneficiary the Participant's Nonforfeitable Accrued Benefit remaining in the Trust at the time of the Participant's death. Subject to the requirements of Section 6.04, the Administrative Committee will determine the death benefit by reducing the Participant's Nonforfeitable Accrued Benefit by any security interest the Plan has against that Nonforfeitable Accrued Benefit by reason of an outstanding Participant loan. (1) DECEASED PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT DOES NOT EXCEED $3,500. The Administrative Committee, subject to the requirements of Section 6.04, must direct the Trustee to distribute the deceased Participant's Nonforfeitable Accrued Benefit in a single sum, as soon as administratively practicable following the Participant's death or, if later, the date on which the Administrative Committee receives notification of or otherwise confirms the Participant's death. 6.02 42 (2) DECEASED PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT EXCEEDS $3,500. The Administrative Committee will direct the Trustee to distribute the deceased Participant's Nonforfeitable Accrued Benefit at the time and in the form elected by the Participant or, if applicable by the Beneficiary, as permitted under this Article VI. In the absence of an election, subject to the requirements of Section 6.04, the Administrative Committee will direct the Trustee to distribute the Participant's undistributed Nonforfeitable Accrued Benefit in a lump sum on the first distribution date following the close of the Plan Year in which the Participant's death occurs or, if later, the first distribution date following the date the Administrative Committee receives notification of or otherwise confirms the Participant's death. If the death benefit is payable in full to the Participant's surviving spouse, the surviving spouse, in addition to the distribution options provided in this Section 6.01(C), may elect distribution at any time or in any form (other than a joint and survivor annuity) this Article VI would permit for a Participant. 6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT. Subject to the annuity distribution requirements, if any, prescribed by Section 6.04, and any restrictions prescribed by Section 6.03, a Participant or Beneficiary may elect distribution under one, or any combination, of the following methods: (a) by payment in a lump sum; or (b) by payment in monthly, quarterly or annual installments over a fixed reasonable period of time, not exceeding the life expectancy of the Participant, or the joint life and last survivor expectancy of the Participant and his Beneficiary. The Employer may elect in its Adoption Agreement to modify the methods of payment available under this Section 6.02. The distribution options permitted under this Section 6.02 are available only if the present value of the Participant Nonforfeitable Accrued Benefit, at the time of the distribution to the Participant, exceeds $3,500. To facilitate installment payments under this Article VI, the Administrative Committee may direct the Trustee to segregate all or any part of the Participant's Accrued Benefit in a separate Account. The Trustee will invest the Participant's segregated Account in Federally insured interest bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. A segregated Account remains a part of the Trust, but it alone shares in any income it earns, and it alone bears any expense or loss it incurs. A Participant or Beneficiary may elect to receive an installment distribution in the form of a Nontransferable Annuity Contract. Under an installment distribution, the Participant or Beneficiary, at any time, may elect to accelerate the payment of all, or any portion, of the Participant's unpaid Nonforfeitable Accrued Benefit, subject to the requirements of Section 6.04. (A) MINIMUM DISTRIBUTION REQUIREMENTS FOR PARTICIPANTS. The Administrative Committee may not direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit, nor may the Participant elect to have the Trustee distribute his Nonforfeitable Accrued Benefit, under a method of payment which, as of the Required Beginning Date, does not satisfy the minimum distribution requirements under Code Section 401(a)(9) and the applicable Treasury regulations. The minimum distribution for a calendar year equals the Participant's Nonforfeitable Accrued Benefit as of the latest valuation date preceding the beginning of the calendar year divided by the Participant's life expectancy or, if applicable, the joint and last survivor expectancy of the Participant and his designated Beneficiary (as determined under Article VIII, subject to the requirements of the Code Section 401(a)(9) regulations). The Administrative Committee will increase the Participant's Nonforfeitable Accrued Benefit, as determined on the relevant valuation date, for contributions or forfeitures allocated after the valuation date and by December 31 of the valuation calendar year, and will decrease the valuation by distributions made after the valuation date and by December 31 of the valuation calendar year. For purposes of this valuation, the Administrative Committee will treat any portion of the minimum distribution for the first distribution calendar year made after the close of that year as a distribution occurring in that first distribution calendar year. In 6.03 43 computing a minimum distribution, the Administrative Committee must use the unisex life expectancy multiples under Treas. Reg. Section 1.72-9. The Administrative Committee, only upon the Participant's written request, will compute the minimum distribution for a calendar year subsequent to the first calendar year for which the Plan requires a minimum distribution by redetermining the applicable life expectancy. However, the Administrative Committee may not redetermine the joint life and last survivor expectancy of the Participant and a nonspouse designated Beneficiary in a manner which takes into account any adjustment to a life expectancy other than the Participant's life expectancy. If the Participant's spouse is not his designated Beneficiary, a method of payment to the Participant (whether by Participant election or by Administrative Committee direction) may not provide more than incidental benefits to the Beneficiary. For Plan Years beginning after December 31, 1988, the Plan must satisfy the minimum distribution incidental benefit ("MDIB") requirement in the Treasury regulations issued under Code Section 401(a)(9) for distributions made on or after the Participant's Required Beginning Date and before the Participant's death. To satisfy the MDIB requirement, the Administrative Committee will compute the minimum distribution required by this Section 6.02(A) by substituting the applicable MDIB divisor for the applicable life expectancy factor, if the MDIB divisor is a lesser number. Following the Participant's death, the Administrative Committee will compute the minimum distribution required by this Section 6.02(A) solely on the basis of the applicable life expectancy factor and will disregard the MDIB factor. For Plan Years beginning prior to January 1, 1989, the Plan satisfies the incidental benefits requirement if the distributions to the Participant satisfied the MDIB requirement or if the present value of the retirement benefits payable solely to the Participant is greater than 50% of the present value of the total benefits payable to the Participant and his Beneficiaries. The Administrative Committee must determine whether benefits to the Beneficiary are incidental as of the date the Trustee is to commence payment of the retirement benefits to the Participant, or as of any date the Trustee redetermines the payment period to the Participant. The minimum distribution for the first distribution calendar year is due by the Participant's Required Beginning Date. The minimum distribution for each subsequent distribution calendar year, including the calendar year in which the Participant's Required Beginning Date occurs, is due by December 31 of that year. If the Participant receives distribution in the form of a Nontransferable Annuity Contract, the distribution satisfies this Section 6.02(A) if the contract complies with the requirements of Code Section 401(a)(9) and the applicable Treasury regulations. (B) MINIMUM DISTRIBUTION REQUIREMENTS FOR BENEFICIARIES. The method of distribution to the Participant's Beneficiary must satisfy Code Section 401(a)(9) and the applicable Treasury regulations. If the Participant's death occurs after his Required Beginning Date or, if earlier, the date the Participant commences an irrevocable annuity pursuant to Section 6.04, the method of payment to the Beneficiary must provide for completion of payment over a period which does not exceed the payment period which had commenced for the Participant. If the Participant's death occurs prior to his Required Beginning Date, and the Participant had not commenced an irrevocable annuity pursuant to Section 6.04, the method of payment to the Beneficiary, subject to Section 6.04, must provide for completion of payment to the Beneficiary over a period not exceeding: (i) 5 years after the date of the Participant's death; or (ii) if the Beneficiary is a designated Beneficiary, the designated Beneficiary's life expectancy. The Administrative Committee may not direct payment of the Participant's Nonforfeitable Accrued Benefit over a period described in clause (ii) unless the Trustee will commence payment to the designated Beneficiary no later than the December 31 following the close of the calendar year in which the Participant's death occurred or, if later, and the designated Beneficiary is the Participant's surviving spouse, December 31 of the calendar year in which the Participant would have attained age 70 1/2. If the Trustee will make distribution in accordance with clause (ii), the minimum distribution for a calendar year equals the Participant's Nonforfeitable Accrued Benefit as of the latest valuation date preceding the beginning of the calendar year divided by the designated Beneficiary's life expectancy. The Administrative Committee must use the unisex life expectancy multiples under Treas. Reg. 6.04 44 Section 1.72-9 for purposes of applying this paragraph. The Administrative Committee, only upon the written request of the Participant or of the Participant's surviving spouse, will recalculate the life expectancy of the Participant's surviving spouse not more frequently than annually, but may not recalculate the life expectancy of a nonspouse designated Beneficiary after the Trustee commences payment to the designated Beneficiary. The Administrative Committee will apply this paragraph by treating any amount paid to the Participant's child, which becomes payable to the Participant's surviving spouse upon the child's attaining the age of majority, as paid to the Participant's surviving spouse. Upon the Beneficiary's written request, the Administrative Committee must direct the Trustee to accelerate payment of all, or any portion, of the Participant's unpaid Accrued Benefit, as soon as administratively practicable following the effective date of that request. 6.03 BENEFIT PAYMENT ELECTIONS. Not earlier than 90 days, but not later then 30 days, before the Participant's annuity starting date, the Administrative Committee must provide a benefit notice to a Participant who is eligible to make an election under this Section 6.03. The benefit notice must explain the optional forms of benefit in the Plan, including the material features and relative values of those options, and the Participant's right to defer distribution until he attains the later of Normal Retirement Age or age 62. If a Participant or Beneficiary makes an election prescribed by this Section 6.03, the Administrative Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in accordance with that election. Any election under this Section 6.03 is subject to the requirements of Section 6.02 and of Section 6.04. The Participant or Beneficiary must make an election under this Section 6.03 by filing his election with the Administrative Committee at any time before the Trustee otherwise would commence to pay a Participant's Accrued Benefit in accordance with the requirements of Article VI. (A) PARTICIPANT ELECTIONS AFTER SEPARATION FROM SERVICE. If the present value of a Participant's Nonforfeitable Accrued Benefit exceeds $3,500, he may elect to have the Trustee commence distribution as of any distribution date permitted under the Employer's Adoption Agreement Section 6.03. The Participant may reconsider an election at any time prior to the annuity starting date and elect to commence distribution as of any other distribution date permitted under the Employer's Adoption Agreement Section 6.03. If the Participant is partially-vested in his Accrued Benefit, an election under this Paragraph (A) to distribute prior to the Participant's incurring a Forfeiture Break in Service (as defined in Section 5.08), must be in the form of a cash-out distribution (as defined in Article V). A Participant may not receive a cash-out distribution if, prior to the time the Trustee actually makes the cash-out distribution, the Participant returns to employment with the Employer. Following his attainment of Normal Retirement Age, a Participant who has separated from Service may elect distribution as of any distribution date, irrespective of the elections under Adoption Agreement Section 6.03. (B) PARTICIPANT ELECTIONS PRIOR TO SEPARATION FROM SERVICE. The Employer must specify in its Adoption Agreement the distribution election rights, if any, a Participant has prior to his Separation from Service. A Participant must make an election under this Section 6.03(B) on a form prescribed by the Administrative Committee at any time during the Plan Year for which his election is to be effective. In his written election, the Participant must specify the percentage or dollar amount he wishes the Trustee to distribute to him. The Participant's election relates solely to the percentage or dollar amount specified in his election form and his right to elect to receive an amount, if any, for a particular Plan Year greater than the dollar amount or percentage specified in his election form terminates on the Accounting Date. The Trustee must make a distribution to a Participant in accordance with his election under this Section 6.03(B) within the 90 day period (or as soon as administratively practicable) after the Participant files his written election with the Trustee. The Trustee 6.05 45 will distribute the balance of the Participant's Accrued Benefit not distributed pursuant to his election(s) in accordance with the other distribution provisions of this Plan. If the annuity and spousal consent requirements of Section 6.04 apply to a Participant, and if the present value of the Participant's Nonforfeitable Accrued Benefit exceeds $3,500, any distribution to the Participant prior to Separation from Service may be made only if made in accordance with the requirements of Section 6.04. (C) DEATH BENEFIT ELECTIONS. If the present value of the deceased Participant's Nonforfeitable Accrued Benefit exceeds $3,500, the Participant's Beneficiary may elect to have the Trustee distribute the Participant's Nonforfeitable Accrued Benefit in a form and within a period permitted under Section 6.02. The Beneficiary's election is subject to any restrictions designated in writing by the Participant and not revoked as of his date of death. (D) TRANSITIONAL ELECTIONS. Notwithstanding the provisions of Sections 6.01 and 6.02, if the Participant (or Beneficiary) signed a written distribution designation prior to January 1, 1984, the Administrative Committee must distribute the Participant's Nonforfeitable Accrued Benefit in accordance with that designation, subject, however, to the survivor requirements, if applicable, of Sections 6.04, 6.05 and 6.06. This Section 6.03(D) does not apply to a pre-1984 distribution designation, and the Administrative Committee will not comply with that designation, if any of the following applies: (1) the method of distribution would have disqualified the Plan under Code Section 401(a)(9) as in effect on December 31, 1983; (2) the Participant did not have an Accrued Benefit as of December 31, 1983; (3) the distribution designation does not specify the timing and form of the distribution and the death Beneficiaries (in order of priority); (4) the substitution of a Beneficiary modifies the payment period of the distribution; or, (5) the Participant (or Beneficiary) modifies or revokes the distribution designation. In the event of a revocation, the Plan must distribute, no later than December 31 of the calendar year following the year of revocation, the amount which the Participant would have received under Section 6.02(A) if the distribution designation had not been in effect or, if the Beneficiary revokes the distribution designation, the amount which the Beneficiary would have received under Section 6.02(B) if the distribution designation had not been in effect. The Administrative Committee will apply this Section 6.03(D) to rollovers and transfers in accordance with Part J of the Code Section 401(a)(9) Treasury regulations. 6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES (A) JOINT AND SURVIVOR ANNUITY. The Administrative Committee must direct the Trustee to distribute a married or unmarried Participant's Nonforfeitable Accrued Benefit in the form of a qualified joint and survivor annuity, unless the Participant makes a valid waiver election (described in Section 6.05) within the 90 day period ending on the annuity starting date. If, as of the annuity starting date, the Participant is married, a qualified joint survivor annuity is an immediate annuity which is purchasable with the Participant's Nonforfeitable accrued Benefit and which provides a life annuity for the Participant and a survivor annuity payable for the remaining life of the Participant's surviving spouse equal to 50% of the amount of the annuity payable during the life of the Participant. If, as of the annuity starting date, the Participant is not married, a qualified joint and survivor annuity is an immediate life annuity for the Participant which is purchasable with the Participant's Nonforfeitable Accrued Benefit. On or before the annuity starting date, the Administrative Committee, without Participant or spousal consent, must direct the Trustee to pay the Participant's Nonforfeitable Accrued Benefit in a lump sum, in lieu of 6.06 46 a qualified joint and survivor annuity, in accordance with Section 6.01, if the Participant's Nonforfeitable Accrued Benefit is not greater than $3,500. This Section 6.04(A) applies only to a Participant who has completed at least one Hour of Service with the Employer after August 22, 1984. (B) Preretirement Survivor Annuity. If a married Participant dies prior to his annuity starting date, the Administrative Committee will direct the Trustee to distribute a portion of the Participant's Nonforfeitable Accrued Benefit to the Participant's surviving spouse in the form of a preretirement survivor annuity, unless the Participant has a valid waiver election (as described in Section 6.06) in effect, or unless the Participant and his spouse were not married throughout the one year period ending on the date of his death. A preretirement survivor annuity is an annuity which is purchasable with 50% of the Participant's Nonforfeitable Accrued Benefit (determined as of the date of the Participant's death) and which is payable for the life of the Participant's surviving spouse. The value of the preretirement survivor annuity is attributable to Employer contributions and to Employee contributions in the same proportion as the Participant's Nonforfeitable Accrued Benefit is attributable to those contributions. The portion of the Participant's Nonforfeitable Accrued Benefit not payable under this paragraph is payable to the Participant's Beneficiary, in accordance with the other provisions of this Article VI. If the present value of the preretirement survivor annuity does not exceed $3,500, the Administrative Committee, on or before the annuity starting date, must direct the Trustee to make a lump sum distribution to the Participant's surviving spouse, in lieu of a preretirement survivor annuity. This Section 6.04(B) applies only to a Participant who dies after August 22, 1984, and either (i) completes at least one Hour of Service with the Employer after August 22, 1984, or (ii) separated from Service with at least 10 Years of Service (as defined in Section 5.06) and completed at least one Hour of Service with the Employer in a Plan Year beginning after December 31, 1975. (C) Surviving Spouse Elections. If the present value of the preretirement survivor annuity exceeds $3,500, the Participant's surviving spouse may elect to have the Trustee commence payment of the preretirement survivor annuity at any time following the date of the Participant's death, but not later than the mandatory distribution periods described in Section 6.02, and may elect any of the forms of payment described in Section 6.02, in lieu of the preretirement survivor annuity. In the absence of an election by the surviving spouse, the Administrative Committee must direct the Trustee to distribute the preretirement survivor annuity on the first distribution date following the close of the Plan Year in which the latest of the following events occurs: (i) the Participant's death; (ii) the date the Administrative Committee receives notification of or otherwise confirms the Participant's death; (iii) the date the Participant would have attained Normal Retirement Age; or (iv) the date the Participant would have attained age 62. (D) Special Rules. If the Participant has in effect a valid waiver election regarding the qualified joint and survivor annuity or the preretirement survivor annuity, the Administrative Committee must direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in accordance with Sections 6.01, 6.02 and 6.03. The Administrative Committee will reduce the Participant's Nonforfeitable Accrued Benefit by any security interest (pursuant to any offset rights authorized by Section 10.03 [E]) held by the Plan by reason of a Participant loan to determine the value of the Participant's Nonforfeitable Accrued Benefit distributable in the form of a qualified joint and survivor annuity or preretirement survivor annuity, provided any post-August 18, 1985, loan satisfied the spousal consent requirement described in Section 10.03 [E] of the Plan. For purposes of applying this Article VI, the Administrative Committee treats a former spouse as the Participant's spouse or surviving spouse to the extent provided under a qualified domestic relations order described in Section 6.07. The provisions of this 6.07 47 Section 6.04, and of Sections 6.05 and 6.06, apply separately to the portion of the Participant's Nonforfeitable Accrued Benefit subject to the qualified domestic relations order and to the portion of the Participant's Nonforfeitable Accrued Benefit not subject to that order. (E) PROFIT SHARING PLAN ELECTION. If this Plan is a profit sharing plan, the employer must elect the extent to which the preceding provisions of Section 6.04 apply. If the Employer elects to apply this Section 6.04 only to a Participant described in this Section 6.04(E), the preceding provisions of this Section 6.04 apply only to the following Participants: (1) a Participant as respects whom the Plan is a direct or indirect transferee from a plan subject to the Code Section 417 requirements and the Plan received the transfer after December 31, 1984, unless the transfer is an elective transfer described in Section 13.06; (2) a Participant who elects a life annuity distribution (if Section 6.02 or Section 13.02 of the Plan requires the Plan to provide a life annuity distribution option); and (3) a Participant whose benefits under a defined benefit plan maintained by the Employer are offset by benefits provided under this Plan. If the Employer elects to apply this Section 6.04 to all Participants, the preceding provisions of this Section 6.04 apply to all Participants described in the first two paragraphs of this Section 6.04, without regard to the limitations of this Section 6.04(E). Sections 6.05 and 6.06 only apply to Participants to whom the preceding provisions of this Section 6.04 apply. 6.05 WAIVER ELECTION -- QUALIFIED JOINT AND SURVIVOR ANNUITY. Not earlier than 90 days, but not later than 30 days, before the Participant's annuity starting date, the Administrative Committee must provide the Participant a written explanation of the terms and conditions of the qualified joint and survivor annuity, the Participant's right to make, and the effect of, an election to waive the joint and survivor form of benefit, the rights of the Participant's spouse regarding the waiver election and the Participant's right to make, and the effect of, a revocation of a waiver election. The Plan does not limit the number of times the Participant may revoke a waiver of the qualified joint and survivor annuity or make a new waiver during the election period. A married Participant's waiver election is not valid unless (a) the Participant's spouse (to whom the survivor annuity is payable under the qualified joint and survivor annuity), after the Participant has received the written explanation described in this Section 6.05, has consented in writing to the waiver election, the spouse's consent acknowledges the effect of the election, and a notary public or the Plan Administrator (or his representative) witnesses the spouse's consent, (b) the spouse consents to the alternate form of payment designated by the Participant or to any change in that designated form of payment, and (c) unless the spouse is the Participant's sole primary Beneficiary, the spouse consents to the Participant's Beneficiary designation or to any change in the Participant's Beneficiary designation. The spouse's consent to a waiver of the qualified joint and survivor annuity is irrevocable, unless the Participant revokes the waiver election. The spouse may execute a blanket consent to any form of payment designation or to any Beneficiary designation made by the Participant, if the spouse acknowledges the right to limit that consent to a specific designation but, in writing, waives that right. The consent requirements of this Section 6.05 apply to a former spouse of the Participant, to the extent required under a qualified domestic relations order described in Section 6.07. The Administrative Committee will accept as valid a waiver election which does not satisfy the spousal consent requirement if the Administrative Committee establishes the Participant does not have a spouse, the Administrative Committee is not able to locate the Participant's spouse, the Participant is legally separated or has been abandoned (within the meaning of State law) and the Participant has a court order to that effect, or other circumstances exist under which the Secretary of the Treasury will excuse the consent requirement. If the Participant's spouse is legally incompetent to give consent, the spouse's legal guardian (even if the guardian is the Participant) may give consent. 6.06 WAIVER ELECTION -- PRERETIREMENT SURVIVOR ANNUITY. The Administrative 6.08 48 Committee must provide a written explanation of the preretirement survivor annuity to each married Participant, within the following period which ends last: (1) the period beginning on the first day of the Plan Year in which the Participant attains age 32 and ending on the last day of the Plan Year in which the Participant attains age 34; (2) a reasonable period after an Employee becomes a Participant; (3) a reasonable period after the joint and survivor rules become applicable to the Participant; or (4) a reasonable period after a fully subsidized preretirement survivor annuity no longer satisfies the requirements for a fully subsidized benefit. A reasonable period described in clauses (2), (3) and (4) is the period beginning one year before and ending one year after the applicable event. If the Participant separates from Service before attaining age 35, clauses (1), (2), (3) and (4) do not apply and the Administrative Committee must provide the written explanation within the period beginning one year before and ending one year after the Separation from Service. The written explanation must describe, in a manner consistent with Treasury regulations, the terms and conditions of the preretirement survivor annuity comparable to the explanation of the qualified joint and survivor annuity required under Section 6.05. The Plan does not limit the number of times the Participant may revoke a waiver of the preretirement survivor annuity or make a new waiver during the election period. A Participant's waiver election of the preretirement survivor annuity is not valid unless (a) the Participant makes the waiver election no earlier than the first day of the Plan Year in which he attains age 35 and (b) the Participant's spouse (to whom the preretirement survivor annuity is payable) satisfies the consent requirements described in Section 6.05, except the spouse need not consent to the form of benefit payable to the designated Beneficiary. The spouse's consent to the waiver of the preretirement survivor annuity is irrevocable, unless the Participant revokes the waiver election. Irrespective of the time of election requirement described in clause (a), if the Participant separates from Service prior to the first day of the Plan Year in which he attains age 35, the Administrative Committee will accept a waiver election as respects the Participant's Accrued Benefit attributable to his Service prior to his Separation from Service. Furthermore, if a Participant who has not separated from Service makes a valid waiver election, except for the timing requirement of clause (a), the Administrative Committee will accept that election as valid, but only until the first day of the Plan Year in which the Participant attains age 35. A waiver election described in this paragraph is not valid unless made after the Participant has received the written explanation described in this Section 6.06. 6.07 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS. Nothing contained in this Plan prevents the Trustee, in accordance with the direction of the Administrative Committee, from complying with the provisions of a qualified domestic relations order (as defined in Code Section 414(p)). This Plan specifically permits distribution to an alternate payee under a qualified domestic relations order at any time, irrespective of whether the Participant has attained his earliest retirement age (as defined under Code Section 414(p)) under the Plan. A distribution to an alternate payee prior to the Participant's attainment of earliest retirement age is available only if (1) the order specifies distribution at that time or permits an agreement between the Plan and the alternate payee to authorize an earlier distribution, and (2) if the present value of the alternate payee's benefits under the Plan exceeds $3,500, and the order requires, the alternate payee consents to any distribution occurring prior to the Participant's attainment of earliest retirement age. The Employer, in an addendum to its Adoption Agreement numbered 6.07, may elect to limit distribution to an alternate payee only when the Participant has attained his earliest retirement age under the Plan. Nothing in this Section 6.07 gives a Participant a right to receive distribution at a time otherwise not permitted under the Plan nor does it permit the alternate payee to receive a form of payment not otherwise permitted under the Plan. 6.09 49 The Administrative Committee must establish reasonable procedures to determine the qualified status of a domestic relations order. Upon receiving a domestic relations order, the Administrative Committee promptly will notify the Participant and any alternate payee named in the order, in writing, of the receipt of the order and the Plan's procedures for determining the qualified status of the order. Within a reasonable period of time after receiving the domestic relations order, the Administrative Committee must determine the qualified status of the order and must notify the Participant and each alternate payee, in writing, of its determination. The Administrative Committee must provide notice under this paragraph by mailing to the individual's address specified in the domestic relations order, or in a manner consistent with Department of Labor regulations. If any portion of the Participant's Nonforfeitable Accrued Benefit is payable during the period the Administrative Committee is making its determination of the qualified status of the domestic relations order, the Administrative Committee must make a separate accounting of the amounts payable. If the Administrative Committee determines the order is a qualified domestic relations order within 18 months of the date amounts first are payable following receipt of the order, the Administrative Committee will direct the Trustee to distribute the payable amounts in accordance with the order. If the Administrative Committee does not make its determination of the qualified status of the order within the 18-month determination period, the Administrative Committee will direct the Trustee to distribute the payable amounts in the manner the Plan would distribute if the order did not exist and will apply the order prospectively if the Administrative Committee later determines the order is a qualified domestic relations order. To the extent it is not inconsistent with the provisions of the qualified domestic relations order, the Administrative Committee may direct the Trustee to invest any partitioned amount in a segregated subaccount or separate account and to invest the account in Federally insured, interest-bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. A segregated subaccount remains a part of the Trust, but it alone shares in any income it earns, and it alone bears any expense or loss it incurs. The Trustee will make any payments or distributions required under this Section 6.07 by separate benefit checks or other separate distribution to the alternate payee(s). * * * * * * * * * * 6.10 50 ARTICLE VII EMPLOYER ADMINISTRATIVE PROVISIONS 7.01 INFORMATION TO COMMITTEE. The Employer must supply current information to the Administrative Committee as to the name, date of birth, date of employment, annual compensation, leaves of absence, Years of Service and date of termination of employment of each Employee who is, or who will be eligible to become, a Participant under the Plan, together with any other information which the Administrative Committee considers necessary. The Employer's records as to the current information the Employer furnishes to the Administrative Committee are conclusive as to all persons. 7.02 NO LIABILITY. The Employer assumes no obligation or responsibility to any of its Employees, Participants or Beneficiaries for any act of, or failure to act, on the part of its Administrative Committee (unless the Employer is the Administrative Committee), the Trustee, the Custodian, if any, or the Plan Administrator (unless the Employer is the Plan Administrator). 7.03 INDEMNITY OF CERTAIN FIDUCIARIES. The Employer indemnifies and saves harmless the Plan Administrator and the members of the Administrative Committee, and each of them, from and against any and all loss resulting from liability to which the Plan Administrator and the Administrative Committee, or the members of the Administrative Committee, may be subjected by reason of any act or conduct (except willful misconduct or gross negligence) in their official capacities in the administration of this Trust or Plan or both, including all expenses reasonably incurred in their defense, in case the Employer fails to provide such defense. The indemnification provisions of this Section 7.03 do not relieve the Plan Administrator or any Administrative Committee member from any liability he may have under ERISA for breach of a fiduciary duty. Furthermore, the Plan Administrator and the Administrative Committee members and the Employer may execute a letter agreement further delineating the indemnification agreement of this Section 7.03, provided the letter agreement must be consistent with and does not violate ERISA. The indemnification provisions of this Section 7.03 extend to the Trustee (or to a Custodian, if any) solely to the extent provided by a letter agreement executed by the Trustee (or Custodian) and the Employer. 7.04 EMPLOYER DIRECTION OF INVESTMENT. The Employer has the right to direct the Trustee with respect to the investment and re-investment of assets comprising the Trust Fund only if the Trustee consents in writing to permit such direction. If the Trustee consents to Employer direction of investment, the Trustee and the Employer must execute a letter agreement as a part of this Plan containing such conditions, limitations and other provisions they deem appropriate before the Trustee will follow any Employer direction as respects the investment or re-investment of any part of the Trust Fund. 7.05 AMENDMENT TO VESTING SCHEDULE. Though the Employer reserves the right to amend the vesting schedule at any time, the Administrative Committee will not apply the amended vesting schedule to reduce the Nonforfeitable percentage of any Participant's Accrued Benefit derived from Employer contributions (determined as of the later of the date the Employer adopts the amendment, or the date the amendment becomes effective) to a percentage less than the Nonforfeitable percentage computed under the Plan without regard to the amendment. And amended vesting schedule will apply to a Participant only if the Participant receives credit for at least one Hour of Service after the new schedule becomes effective. 7.01 51 If the Employer makes a permissible amendment to the vesting schedule, each Participant having at least 3 Years of Service with the Employer may elect to have the percentage of his Nonforfeitable Accrued Benefit computed under the Plan without regard to the amendment. For Plan Years beginning prior to January 1, 1989, the election described in the preceding sentence applies only to Participants having at least 5 Years of Service with the Employer. The Participant must file his election with the Administrative Committee within 60 days of the latest of (a) the Employer's adoption of the amendment; (b) the effective date of the amendment; or (c) his receipt of a copy of the amendment. The Administrative Committee, as soon as practicable, must forward a true copy of any amendment to the vesting schedule to each affected Participant, together with an explanation of the effect of the amendment, the appropriate form upon which the Participant may make an election to remain under the vesting schedule provided under the Plan prior to the amendment and notice of the time within which the Participant must make an election to remain under the prior vesting schedule. The election described in this Section 7.05 does not apply to a Participant if the amended vesting schedule provides for vesting at least as rapid at all times as the vesting schedule in effect prior to the amendment. For purposes of this Section 7.05, an amendment to the vesting schedule includes any Plan amendment which directly or indirectly affects the computation of the Nonforfeitable percentage of an Employee's rights to his Employer derived Accrued Benefit. Furthermore, the Administrative Committee must treat any shift in the vesting schedule, due to a change in the Plan's top heavy status, as an amendment to the vesting schedule for purposes of this Section 7.05. * * * * * * * * * * 7.02 52 ARTICLE VIII PARTICIPANT ADMINISTRATIVE PROVISIONS 8.01 BENEFICIARY DESIGNATION. Any Participant may from time to time designate, in writing, any person or persons, contingently or successively, to whom the Trustee will pay his Nonforfeitable Accrued Benefit (including any life insurance proceeds payable to the Participant's Account) in the event of his death and the Participant may designate the form and method of payment. The Administrative Committee will prescribe the form for the written designation of Beneficiary and, upon the Participant's filing the form with the Administrative Committee, the form effectively revokes all designations filed prior to that date by the same Participant. (A) COORDINATION WITH SURVIVOR REQUIREMENTS. If the joint and survivor requirements of Article VI apply to the Participant, this Section 8.01 does not impose any special spousal consent requirements on the Participant's Beneficiary designation. However, in the absence of spousal consent (as required by Article VI) to the Participant's Beneficiary designation: (1) any waiver of the joint and survivor annuity or of the preretirement survivor annuity is not valid; and (2) if the Participant dies prior to his annuity starting date, the Participant's Beneficiary designation will apply only to the portion of the death benefit which is not payable as a preretirement survivor annuity. Regarding clause (2), if the Participant's surviving spouse is a primary Beneficiary under the Participant's Beneficiary designation, the Trustee will satisfy the spouse's interest in the Participant's death benefit first from the portion which is payable as a preretirement survivor annuity. (B) PROFIT SHARING PLAN EXCEPTION. If the Plan is a profit sharing plan, the Beneficiary designation of a married Exempt Participant is not valid unless the Participant's spouse consents (in a manner described in Section 6.05) to the Beneficiary designation. An "Exempt Participant" is a Participant who is not subject to the joint and survivor requirements of Article VI. The spousal consent requirement in this paragraph does not apply if the Exempt Participant and his spouse are not married throughout the one year period ending on the date of the Participant's death, or if the Participant's spouse is the Participant's sole primary Beneficiary. 8.02 NO BENEFICIARY DESIGNATION/DEATH OF BENEFICIARY. If a Participant fails to name a Beneficiary in accordance with Section 8.01, or if the Beneficiary named by a Participant predeceases him, then the Trustee will pay the Participant's Nonforfeitable Accrued Benefit in accordance with Section 6.02 in the following order of priority, unless the Employer specifies a different order of priority in an addendum to its Adoption Agreement, to: (a) The Participant's surviving spouse; (b) The Participant's surviving children, including adopted children, in equal shares; (c) The Participant's surviving parents, in equal shares; or (d) The Participant's estate. If the Beneficiary does not predecease the Participant, but dies prior to distribution of the Participant's entire Nonforfeitable Accrued Benefit, the Trustee will pay the remaining Nonforfeitable Accrued Benefit to the Beneficiary's estate unless the Participant's Beneficiary designation provides otherwise or unless the employer provides otherwise in its Adoption Agreement. If the Plan is a profit sharing plan, and the Plan includes Exempt Participants, the Employer may not specify a different order of priority in the Adoption Agreement unless the Participant's surviving spouse will be first in the different order of priority. The Administrative Committee will direct the Trustee as to the method and to whom the Trustee will make payment under this Section 8.02. 8.01 53 8.03 PERSONAL DATA TO COMMITTEE. Each Participant and each Beneficiary of a deceased Participant must furnish to the Administrative Committee such evidence, data or information as the Administrative Committee considers necessary or desirable for the purpose of administering the Plan. The provisions of this Plan are effective for the benefit of each Participant upon the condition precedent that each Participant will furnish promptly full, true and complete evidence, data and information when requested by the Administrative Committee, provided the Administrative Committee advises each Participant of the effect of his failure to comply with its request. 8.04 ADDRESS FOR NOTIFICATION. Each Participant and each Beneficiary of a deceased Participant must file with the Administrative Committee from time to time, in writing, his post office address and any change of post office address. Any communication, statement or notice addressed to a Participant, or Beneficiary, at his last post office address filed with the Administrative Committee, or as shown on the records of the Employer, binds the Participant, or Beneficiary, for all purposes of this Plan. 8.05 ASSIGNMENT OR ALIENATION. Subject to Code Section 414(p) relating to qualified domestic relations orders, neither a Participant nor a Beneficiary may anticipate, assign or alienate (either at law or in equity) any benefit provided under the Plan, and the Trustee will not recognize any such anticipation, assignment or alienation. Furthermore, a benefit under the Plan is not subject to attachment, garnishment, levy, execution or other legal or equitable process. 8.06 NOTICE OF CHANGE IN TERMS. The Plan Administrator, within the time prescribed by ERISA and the applicable regulations, must furnish all Participants and Beneficiaries a summary description of any material amendment to the Plan or notice of discontinuance of the Plan and all other information required by ERISA to be furnished without charge. 8.07 LITIGATION AGAINST THE TRUST. A court of competent jurisdiction may authorize any appropriate equitable relief to redress violations of ERISA or to enforce any provisions of ERISA or the terms of the Plan. A fiduciary may receive reimbursement of expenses properly and actually incurred in the performance of his duties with the Plan. 8.08 INFORMATION AVAILABLE. Any Participant in the Plan or any Beneficiary may examine copies of the Plan description, latest annual report, any bargaining agreement, this Plan and Trust, contract or any other instrument under which the Plan was established or is operated. The Plan Administrator will maintain all of the items listed in this Section 8.08 in this office, or in such other place or places as he may designate from time to time in order to comply with the regulations issued under ERISA, for examination during reasonable business hours. Upon the written request of a Participant or Beneficiary the Plan Administrator must furnish him with a copy of any item listed in this Section 8.08. The Plan Administrator may make a reasonable charge to the requesting person for the copy so furnished. 8.09 APPEAL PROCEDURE FOR DENIAL OF BENEFITS. A Participant or a Beneficiary ("Claimant") may file with the Administrative Committee a written claim for benefits, if the Participant or Beneficiary determines the distribution procedures of the Plan have not provided him his proper Nonforfeitable Accrued Benefit. The Administrative Committee must render a decision on the claim within 60 days of the Claimant's written claim for benefits. The Plan Administrator must provide adequate notice in writing to the Claimant whose claim for benefits under the Plan the Administrative Committee has denied. The Plan Administrator's notice to the Claimant must set forth: (a) The specific reason for the denial, (b) Specific references to pertinent provisions on which the Administrative Committee based its denial; 8.02 54 (c)A description of any additional material and information needed for the Claimant to perfect his claim and an explanation of why the material or information is needed; and (d) That any appeal the Claimant wishes to make of the adverse determination must be in writing to the Administrative Committee within 75 days after receipt of the Plan Administrator's notice of denial of benefits. The Plan Administrator's notice must further advise the Claimant that his failure to appeal the action to the Administrative Committee in writing within the 75-day period will render the Administrative Committee's determination final, binding and conclusive. If the Claimant should appeal to the Administrative Committee, he, or his duly authorized representative, may submit, in writing, whatever issues and comments he, or his duly authorized representative, feels are pertinent. The Claimant, or his duly authorized representative, may review pertinent Plan documents. The Administrative Committee will re-examine all facts related to the appeal and make a final determination as to whether the denial of benefits is justified under the circumstances. The Administrative Committee must advise the Claimant of its decision within 60 days of the Claimant's written request for review, unless special circumstances (such as a hearing) would make the rendering of a decision within the 60-day limit unfeasible, but in no event may the Administrative Committee render a decision respecting a denial for a claim for benefits later than 120 days after its receipt of a request for review. The Plan Administrator's notice of denial of benefits must identify the name of each member of the Administrative Committee and the name and address of the Administrative Committee member to whom the Claimant may forward his appeal. 8.10 PARTICIPANT DIRECTION OF INVESTMENT. A Participant has the right to direct the Trustee with respect to the investment or re-investment of the assets comprising the Participant's individual Account only if the Trustee consents in writing to permit such direction. If the Trustee consents to Participant direction of investment, the Trustee will accept direction from each Participant on a written election form (or other written agreement), as a part of this Plan, containing such conditions, limitations and other provisions the parties deem appropriate. The Trustee or, with the Trustee's consent, the Administrative Committee, may establish written procedures, incorporated specifically as part of this Plan, relating to Participant direction of investment under this Section 8.10. The Trustee will maintain a segregated investment Account to the extent a Participant's Account is subject to Participant self-direction. The Trustee is not liable for any loss, nor is the Trustee liable for any breach, resulting from a Participant's direction of the investment of any part of his directed Account. The Administrative Committee, to the extent provided in a written loan policy adopted under Section 9.04, will treat a loan made to a Participant as a Participant direction of investment under this Section 8.10. To the extent of the loan outstanding at any time, the borrowing Participant's Account alone shares in any interest paid on the loan, and it alone bears any expense or loss it incurs in connection with the loan. The Trustee may retain any principal or interest paid on the borrowing Participant's loan in an interest bearing segregated Account on behalf of the borrowing Participant until the Trustee (or the Named Fiduciary, in the case of a nondiscretionary Trustee) deems it appropriate to add the amount paid to the Participant's separate Account under the Plan. If the Trustee consents to Participant direction of investment of his Account, the Plan treats any post-December 31, 1981, investment by a Participant's directed Account in collectibles (as defined by Code Section 408(m)) as a deemed distribution to the Participant for Federal income tax purposes. * * * * * * * * * * * * * * * 8.03 55 ARTICLE IX ADMINISTRATIVE COMMITTEE - DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS 9.01 MEMBERS' COMPENSATION, EXPENSES. The Employer must appoint an Administrative Committee to administer the Plan, the members of which may or may not be Participants in the Plan, or which may be the Plan Administrator acting alone. In the absence of an Administrative Committee appointment, the Plan Administrator assumes the powers, duties and responsibilities of the Administrative Committee. The members of the Administrative Committee will serve without compensation for services as such, but the Employer will pay all expenses of the Administrative Committee, except to the extent the Trust properly pays for such expenses, pursuant to Article X. 9.02 TERM. Each member of the Administrative Committee serves until the appointment of his successor. 9.03 POWERS. In case of a vacancy in the membership of the Administrative Committee, the remaining members of the Administrative Committee may exercise any and all of the powers, authority, duties and discretion conferred upon the Administrative Committee pending the filling of the vacancy. 9.04 GENERAL. The Administrative Committee has the following powers and duties: (a) To select a Secretary, who need not be a member of the Administrative Committee; (b) To determine the rights of eligibility of an Employee to participate in the Plan, the value of a Participant's Accrued Benefit and the Nonforfeitable percentage of each Participant's Accrued Benefit; (c) To adopt rules of procedure and regulations necessary for the proper and efficient administration of the Plan provided the rules are not inconsistent with the terms of this Agreement; (d) To construe and enforce the terms of the Plan and the rules and regulations it adopts, including interpretation of the Plan documents and documents related to the Plan's operation; (e) To direct the Trustee as respects the crediting and distribution of the Trust; (f) To review and render decisions respecting a claim for (or denial of a claim for) a benefit under the Plan; (g) To furnish the Employer with information which the Employer may require for tax or other purposes; (h) To engage the service of agents whom it may deem advisable to assist it with the performance of its duties; (i) To engage the services of an Investment Manager or Managers (as defined in ERISA Section 3(38)), each of whom will have full power and authority to manage, acquire or dispose (or direct the Trustee with respect to acquisition or disposition) of any Plan asset under its control; (j) To establish, in its sole discretion, a nondiscriminatory policy (see Section 9.04(A)) which the Trustee must observe in making loans, if any, to Participants and Beneficiaries, and (k) To establish and maintain a funding standard account and to make credits and charges to the account to the extent required by and in accordance with the provisions of the Code. The Administrative Committee must exercise all of its powers, duties and discretion under the Plan in a uniform and nondiscriminatory manner. 9.01 56 (A) LOAN POLICY. If the Administrative Committee adopts a loan policy, pursuant to paragraph (j), the loan policy must be a written document and must include: (1) the identity of the person or positions authorized to administer the participant loan program; (2) a procedure for applying for the loan; (3) the criteria for approving or denying a loan; (4) the limitations, if any, on the types and amounts of loans available; (5) the procedure for determining a reasonable rate of interest; (6) the types of collateral which may secure the loan; and (7) the events constituting default and the steps the Plan will take to preserve plan assets in the event of default. This Section 9.04 specifically incorporates a written loan policy as part of the Employer's Plan. 9.05 FUNDING POLICY. The Administrative Committee will review, not less often than annually, all pertinent Employee information and Plan data in order to establish the funding policy of the Plan and to determine the appropriate methods of carrying out the Plan's objectives. The Administrative Committee must communicate periodically, as it deems appropriate, to the Trustee and to any Plan Investment Manager the Plan's short-term and long-term financial needs so investment policy can be coordinated with Plan financial requirements. 9.06 MANNER OF ACTION. The decision of a majority of the members appointed and qualified controls. 9.07 AUTHORIZED REPRESENTATIVE. The Administrative Committee may authorize any one of its members, or its Secretary, to sign on its behalf any notices, directions, applications, certificates, consents, approvals, waivers, letters or other documents. The Administrative Committee must evidence this authority by an instrument signed by all members and filed with the Trustee. 9.08 INTERESTED MEMBER. No member of the Administrative Committee may decide or determine any matter concerning the distribution, nature or method of settlement of his own benefits under the Plan, except in exercising an election available to that member in his capacity as a Participant, unless the Plan Administrator is acting alone in the capacity of the Administrative Committee. 9.09 INDIVIDUAL ACCOUNTS. The Administrative Committee will maintain, or direct the Trustee to maintain, a separate Account, or multiple Accounts, in the name of each Participant to reflect the Participant's Accrued Benefit under the Plan. If a Participant re-enters the Plan subsequent to his having a Forfeiture Break in Service, the Administrative Committee, or the Trustee, must maintain a separate Account for the Participant's pre-Forfeiture Break in Service Accrued Benefit and a separate Account for his post-Forfeiture Break in Service Accrued Benefit, unless the Participant's entire Accrued Benefit under the Plan is 100% Nonforfeitable. The Administrative Committee will make its allocations, or request the Trustee to make its allocations, to the Accounts of the Participants in accordance with the provisions of Section 9.11. The Administrative Committee may direct the Trustee to maintain a temporary segregated investment Account in the name of a Participant to prevent a distortion of income, gain or loss allocations under Section 9.11. The Administrative Committee must maintain records of its activities. 9.10 VALUE OF PARTICIPANT'S ACCRUED BENEFIT. The value of each Participant's Accrued Benefit consists of that proportion of the net worth (at fair market value) of the Employer's Trust Fund which the net credit balance in his Account (exclusive of the cash value of incidental benefit insurance contracts) bears to the total net credit balance in the Accounts (exclusive of the cash value of the incidental benefit insurance contracts) of all Participants plus the cash surrender value of any incidental benefit insurance contracts held by the Trustee on the Participant's life. 9.02 57 For purposes of a distribution under the Plan, the value of a Participant's Accrued Benefit is its value as of the valuation date immediately preceding the date of the distribution. Any distribution (other than a distribution from a segregated Account) made to a Participant (or to his Beneficiary) more than 90 days after the most recent valuation date may include interest on the amount of the distribution as an expense of the Trust Fund. The interest, if any, accrues from such valuation date to the date of the distribution at the rate established in the Employer's Adoption Agreement. 9.11 ALLOCATION AND DISTRIBUTION OF NET INCOME GAIN OR LOSS. A "valuation date" under this Plan is each Accounting Date and each interim valuation date determined under Section 10.14. As of each valuation date the Administrative Committee must adjust Accounts to reflect net income, gain or loss since the last valuation date. The valuation period is the period beginning the day after the last valuation date and ending on the current valuation date. (A) TRUST FUND ACCOUNTS. The allocation provisions of this paragraph apply to all Participant Accounts other than segregated investment Accounts. The Administrative Committee first will adjust the Participant Accounts, as those Accounts stood at the beginning of the current valuation period, by reducing the Accounts for any forfeitures arising under Section 5.09 or under Section 9.14, for amounts charged during the valuation period to the Accounts in accordance with Section 9.13 (relating to distributions) and Section 11.01 (relating to insurance premiums), and for the cash value of incidental benefit insurance contracts. The Administrative Committee then, subject to the restoration allocation requirements of Section 5.04 or of Section 9.14, will allocate the net income, gain or loss pro rata to the adjusted Participant Accounts. The allocable net income, gain or loss is the net income (or net loss), including the increase or decrease in the fair market value of assets, since the last valuation date. (B) SEGREGATED INVESTMENT ACCOUNTS. A segregated investment Account receives all income it earns and bears all expense or loss it incurs. The Administrative Committee will adopt uniform and nondiscriminatory procedures for determining income or loss of a segregated investment Account in a manner which reasonably reflects investment directions relating to pooled investments and investment directions occurring during a valuation period. As of the valuation date, the Administrative Committee must reduce a segregated Account for any forfeiture arising under Section 5.09 after the Administrative Committee has made all other allocations, changes or adjustments to the Account for the Plan Year. (C) ADDITIONAL RULES. An Excess Amount or suspense account described in Part 2 of Article III does not share in the allocation of net income, gain or loss described in this Section 9.11. If the Employer maintains its Plan under a Code Section 401(k) Adoption Agreement, the Employer may specify in its Adoption Agreement alternate valuation provisions authorized by that Adoption Agreement. This Section 9.11 applies solely to the allocation of net income, gain or loss of the Trust. The Administrative Committee will allocate the Employer contributions and Participant forfeitures, if any, in accordance with Article III. 9.12 INDIVIDUAL STATEMENT. As soon as practicable after the Accounting Date of each Plan Year, but within the time prescribed by ERISA and the regulations under ERISA, the Plan Administrator will deliver to each Participant (and to each Beneficiary) a statement reflecting the condition of his Accrued Benefit in the Trust as of that date and such other information ERISA requires be furnished the Participant or Beneficiary. No Participant, except a member of the Administrative Committee, has the right to inspect the records reflecting the Account of any other Participant. 9.13 ACCOUNT CHARGED. The Administrative Committee will charge a Participant's Account for all distributions made from that Account to the Participant, to his Beneficiary or to an alternate payee. The Administrative Committee also will charge a Participant's Account for any administrative expenses Incurred by the Plan directly related to that Account. 9-03 58 9.14 UNCLAIMED ACCOUNT PROCEDURE. The Plan does not require either the Trustee or the Administrative Committee to search for, or to ascertain the whereabouts of, any Participant or Beneficiary. At the time the Participant's or Beneficiary's benefit becomes distributable under Article VI, the Administrative Committee, by certified or registered mail addressed to his last known address of record with the Administrative Committee or the Employer, must notify any Participant, or Beneficiary, that he is entitled to a distribution under this Plan. The notice must quote the provisions of this Section 9.14 and otherwise must comply with the notice requirements of Article VI. If the Participant, or Beneficiary, fails to claim his distributive share or make his whereabouts known in writing to the Administrative Committee within 6 months from the date of mailing of the notice, the Administrative Committee will treat the Participant's or Beneficiary's unclaimed payable Accrued Benefit as forfeited and will reallocate the unclaimed payable Accrued Benefit in accordance with Section 3.05. A forfeiture under this paragraph will occur at the end of the notice period or, if later, the earliest date applicable Treasury regulations would permit the forfeiture. Pending forfeiture, the Administrative Committee, following the expiration of the notice period, may direct the Trustee to segregate the Nonforfeitable Accrued Benefit in a segregated Account and to invest that segregated Account in Federally insured interest bearing savings accounts or time deposits (or in a combination of both), or in other fixed income investments. If a Participant or Beneficiary who has incurred a forfeiture of his Accrued Benefit under the provisions of the first paragraph of this Section 9.14 makes a claim, at any time, for his forfeited Accrued Benefit, the Administrative Committee must restore the Participant's or Beneficiary's forfeited Accrued Benefit to the same dollar amount as the dollar amount of the Accrued Benefit forfeited, unadjusted for any gains or losses occurring subsequent to the date of the forfeiture. The Administrative Committee will make the restoration during the Plan Year in which the Participant or Beneficiary makes the claim, first from the amount, if any, of Participant forfeitures the Administrative Committee otherwise would allocate for the Plan Year, then from the amount if any, of the Trust Fund net income or gain for the Plan Year and then from the amount, or additional amount, the Employer contributes to enable the Administrative Committee to make the required restoration. The Administrative Committee must direct the Trustee to distribute the Participant's or Beneficiary's restored Accrued Benefit to him not later than 60 days after the close of the Plan Year in which the Administrative Committee restores the forfeited Accrued Benefit. The forfeiture provisions of this Section 9.14 apply solely to the Participant's or to the Beneficiary's Accrued Benefit derived from Employer contributions. *************** 9.04 59 ARTICLE X CUSTODIAN/TRUSTEE, POWERS AND DUTIES 10.01 ACCEPTANCE. The Trustee accepts the Trust created under the Plan and agrees to perform the obligations imposed. The Trustee must provide bond for the faithful performance of its duties under the Trust to the extent required by ERISA. 10.02 RECEIPT OF CONTRIBUTIONS. The Trustee is accountable to the Employer for the funds contributed to it by the Employer, but does not have any duty to see that the contributions received comply with the provisions of the Plan. The Trustee is not obliged to collect any contributions from the Employer, nor is obliged to see that funds deposited with it are deposited according to the provisions of the Plan. 10.03 INVESTMENT POWERS [A] DISCRETIONARY TRUSTEE DESIGNATION. If the Employer, in Adoption Agreement Section 1.02, designates the Trustee to administer the Trust as a discretionary Trustee, then the Trustee has full discretion and authority with regard to the investment of the Trust Fund, except with respect to a Plan asset under the control or direction of a properly appointed Investment Manager or with respect to a Plan asset properly subject to Employer, Participant or Administrative Committee direction of investment. The Trustee must coordinate its investment policy with Plan financial needs as communicated to it by the Administrative Committee. The Trustee is authorized and empowered, but not by way of limitation, with the following powers, rights and duties: (a) To invest any part or all of the Trust Fund in any common or preferred stocks, open-end or closed-end mutual funds, put and call options traded on a national exchange, United States retirement plan bonds, corporate bonds, debentures, convertible debentures, commercial paper, U.S. Treasury bills, U.S. Treasury notes and other direct or indirect obligations of the United States Government or its agencies, improved or unimproved real estate situated in the United States, limited partnerships, insurance contracts of any type, mortgages, notes or other property of any kind, real or personal, to buy or sell options on common stock on a nationally recognized exchange with or without holding the underlying common stock, to buy and sell commodities, commodity options and contracts for the future delivery of commodities, and to make any other investments the Trustee deems appropriate, as a prudent man would do under like circumstances with due regard for the purposes of this Plan. Any investment made or retained by the Trustee in good faith is proper but must be of a kind constituting a diversification considered by law suitable for trust investments. (b) To retain in cash so much of the Trust Fund as it may deem advisable to satisfy liquidity needs of the Plan and to deposit any cash held in the Trust Fund in a bank account at reasonable interest. (c) To invest, if the Trustee is a bank or similar financial institution supervised by the United States or by a State, in any type of deposit of the Trustee (or of a bank related to the Trustee within the meaning of Code Section 414(b)) at a reasonable rate of interest or in a common trust fund, as described in Code Section 584, or in a collective investment fund, the provisions of which govern the investment of such assets and which the Plan incorporates by this reference, which the Trustee (or its affiliate, as defined in Code Section 1504) maintains exclusively for the collective investment of money contributed by the bank (or the affiliate) in its capacity as trustee and which conforms to the rules of the Comptroller of the Currency. (d) To manage, sell, contract to sell, grant options to purchase, convey, exchange, transfer, abandon, improve, repair, insure, lease for any term even though commencing in the future or extending beyond the term of the Trust, and otherwise deal with all property, real or personal, in such manner, for such considerations and on such terms and conditions as the Trustee decides. 10.01 60 (e) To credit and distribute the Trust as directed by the Administrative Committee. The Trustee is not obliged to inquire as to whether any payee or distributee is entitled to any payment or whether the distribution is proper or within the terms of the Plan, or as to the manner of making any payment or distribution. The Trustee is accountable only to the Administrative Committee for any payment or distribution made by it in good faith on the order or direction of the Administrative Committee. (f) To borrow money, to assume indebtedness, extend mortgages and encumber by mortgage or pledge. (g) To compromise, contest, arbitrate or abandon claims and demands, in its discretion. (h) To have with respect to the Trust all of the rights of an individual owner, including the power to give proxies, to participate in any voting trusts, mergers, consolidations or liquidations, and to exercise or sell stock subscriptions or conversion rights. (i) To lease for oil, gas and other mineral purposes and to create mineral severances by grant or reservation; to pool or unitize interests in oil, gas and other minerals; and to enter into operating agreements and to execute division and transfer orders. (j) To hold any securities or other property in the name of the Trustee or its nominee, with depositories or agent depositories or in another form as it may deem best, with or without disclosing the trust relationship. (k) To perform any and all other acts in its judgment necessary or appropriate for the proper and advantageous management, investment and distribution of the Trust. (1) To retain any funds or property subject to any dispute without liability for the payment of interest, and to decline to make payment or delivery of the funds or property until final adjudication is made by a court of competent jurisdiction. (m) To file all tax returns required of the Trustee. (n) To furnish to the Employer, the Plan Administrator and the Administrative Committee an annual statement of account showing the condition of the Trust Fund and all investments, receipts, disbursements and other transactions effected by the Trustee during the Plan Year covered by the statement and also stating the assets of the Trust held at the end of the Plan Year, which accounts are conclusive on all persons, including the Employer, the Plan Administrator and the Administrative Committee, except as to any act or transaction concerning which the Employer, the Plan Administrator or the Administrative Committee files with the Trustee written exceptions or objections within 90 days after the receipt of the accounts or for which ERISA authorizes a longer period within which to object. (o) To begin, maintain or defend any litigation necessary in connection with the administration of the Plan, except that the Trustee is not obliged or required to do so unless indemnified to its satisfaction. 10.02 61 [B] NONDISCRETIONARY TRUSTEE DESIGNATION/APPOINTMENT OF CUSTODIAN. If the Employer, in its Adoption Agreement Section 1.02, designates the Trustee to administer the Trust as a nondiscretionary Trustee, then the Trustee will not have any discretion or authority with regard to the investment of the Trust Fund, but must act solely as a directed trustee of the funds contributed to it. A nondiscretionary Trustee, as directed trustee of the funds held by it under the Employer Plan, is authorized and empowered, by way of limitation, with the following powers, rights and duties, each of which the nondiscretionary Trustee exercises solely as directed trustee in accordance with the written direction of the Named Fiduciary (except to the extent a Plan asset is subject to the control and management of a properly appointed Investment Manager or subject to Administrative Committee or Participant direction of investment): (a) To invest any part or all of the Trust Fund in any common or preferred stocks, open-end or closed-end mutual funds, put and call options traded on a national exchange, United States retirement plan bonds, corporate bonds, debentures, convertible debentures, commercial paper, U.S. Treasury bills, U.S. Treasury notes and other direct or indirect obligations of the United States Government or its agencies, improved or unimproved real estate situated in the United States, limited partnerships, insurance contracts of any type, mortgages, notes or other property of any kind, real or personal, to buy or sell options on common stock on a nationally recognized options exchange with or without holding the underlying common stock, to buy and sell commodities, commodity options and contracts for the future delivery of commodities, and to make any other investments the Named Fiduciary deems appropriate. (b) To retain in cash so much of the Trust Fund as the Named Fiduciary may direct in writing to satisfy liquidity needs of the Plan and to deposit any cash held in the Trust Fund in a bank account at reasonable interest, including, specific authority to invest in any type of deposit of the Trustee (or of a bank related to the Trustee within the meaning of Code Section 414(b)) at a reasonable rate of interest. (c) To sell, contract to sell, grant options to purchase, convey, exchange, transfer, abandon, improve, repair, insure, lease of any term even though commencing in the future or extending beyond the term of the Trust, and otherwise deal with all property, real or personal, in such manner, for such considerations and on such terms and conditions as the Named Fiduciary directs in writing. (d) To credit and distribute the trust as directed by the Administrative Committee. The Trustee is not obliged to inquire as to whether any payee or distributee is entitled to any payment or whether the distribution is proper or within the terms of the Plan, or as to the manner of making any payment or distribution. The Trustee is accountable only to the Administrative Committee for any payment or distribution made by it in good faith on the order or directing of the Administrative Committee. (e) To borrow money, to assume indebtedness, extend mortgages and encumber by mortgage or pledge. (f) To have with respect to the trust all of the rights of an individual owner, including the power to give proxies, to participate in any voting trusts, mergers, consolidations or liquidations, and to exercise or sell stock subscriptions or conversion rights, provided the exercise of any such powers is in accordance with and at the written direction of the Named Fiduciary. (g) To lease for oil, gas and other mineral purposes and to create mineral severances by grant or reservation; to pool or unitize interests in oil, gas and other minerals; and to enter into operating agreements and to execute division and transfer orders, provided the exercise of any such powers is in accordance with and at the written direction of the Named Fiduciary. 10.03 62 (h) To hold any securities or other property in the name of the nondiscretionary Trustee or its nominee, with depositories or agent depositories or in another form as the Named Fiduciary may deem best, with or without disclosing the custodial relationship. (i) To retain any funds or property subject to any dispute without liability for the payment of interest, and to decline to make payment or delivery of the funds or property until a court of competent jurisdiction makes final adjudication. (j) To file all tax returns required of the Trustee. (k) To furnish to the Named Fiduciary, the Employer, the Plan Administrator and the Administrative Committee an annual statement of account showing the condition of the Trust Fund and all investments, receipts, disbursements and other transactions effected by the nondiscretionary Trustee during the Plan Year covered by the statement and also stating the assets of the Trust held at the end of the Plan Year, which accounts are conclusive on all persons, including the Named Fiduciary, the Employer, the Plan Administrator and the Administrative Committee, except as to any act or transaction concerning which the Named Fiduciary, the Employer, the Plan Administrator or the Administrative Committee files with the nondiscretionary Trustee written exceptions or objections within 90 days after the receipt of the accounts or for which ERISA authorizes a longer period within which to object. (l) To begin, maintain or defend any litigation necessary in connection with the administration of the Plan, except that the Trustee is not obliged or required to do so unless indemnified to its satisfaction. APPOINTMENT OF CUSTODIAN. The Employer may appoint a Custodian under the Plan, the acceptance by the Custodian indicated on the execution page of the Employer's Adoption Agreement. If the Employer appoints a Custodian, the Employer's Plan must have a discretionary Trustee, as described in Section 10.03[A]. A Custodian has the same powers, rights and duties as a nondiscretionary Trustee, as described in this Section 10.03[B]. The Custodian accepts the terms of the Plan and Trust by executing the Employer's Adoption Agreement. Any reference in the Plan to a Trustee also is a reference to a Custodian where the context of the Plan dictates. A limitation of the Trustee's liability by Plan provision also acts as a limitation of the Custodian's liability. Any action taken by the Custodian at the discretionary Trustee's direction satisfies any provision in the Plan referring to the Trustee's taking that action. MODIFICATION OF POWERS/LIMITED RESPONSIBILITY. The Employer and the Custodian or nondiscretionary Trustee, by letter agreement, may limit the powers of the Custodian or nondiscretionary Trustee to any combination of powers listed within this Section 10.03[B]. If there is a Custodian or a nondiscretionary Trustee under the Employee's Plan, then the Employer, in adopting this Plan acknowledges the Custodian or nondiscretionary Trustee has no discretion with respect to the investment or re-investment of the Trust Fund and that the Custodian or nondiscretionary Trustee is acting solely as custodian or as directed trustee with respect to the assets comprising the Trust Fund. [C] LIMITATION OF POWERS OF CERTAIN CUSTODIANS. If a Custodian is a bank which, under its governing state law, does not possess trust powers, then paragraphs (a), (c), (e), (f), (g) of Section 10.03[B], Section 10.16 and Article XI do not apply to that bank and that bank only has the power and authority to exercise the remaining powers, rights and duties under Section 10.03[B]. 10.04 63 [D] NAMED FIDUCIARY/LIMITATION OF LIABILITY OF NONDISCRETIONARY TRUSTEE OR CUSTODIAN. Under a nondiscretionary Trustee designation, the Named Fiduciary under the Employer's Plan has the sole responsibility for the management and control of the Employer's Trust Fund, except with respect to a Plan asset under the control or direction of a properly appointed Investment Manager or with respect to a Plan asset properly subject to Participant or Administrative Committee direction of investment. If the Employer appoints a Custodian, the Named Fiduciary is the discretionary Trustee. Under a nondiscretionary Trustee designation, unless the Employer designates in writing another person or persons to serve as Named Fiduciary, the Named Fiduciary under the Plan is the president of a corporate Employer, the managing partner of a partnership Employer or the sole proprietor, as appropriate. The Named Fiduciary will exercise its management and control of the Trust Fund through its written direction to the nondiscretionary Trustee or to the Custodian, whichever applies to the Employer's Plan. The nondiscretionary Trustee or Custodian has no duty to review or to make recommendations regarding investments made at the written direction of the Named Fiduciary. The nondiscretionary Trustee or Custodian must retain any investment obtained at the written direction of the Named Fiduciary until further directed in writing by the Named Fiduciary to dispose of such investment. The nondiscretionary Trustee or Custodian is not liable in any manner or for any reason for making, retaining or disposing of any investment pursuant to any written direction described in this paragraph. Furthermore, the Employer agrees to indemnify and to hold the nondiscretionary Trustee or Custodian harmless from any damages, costs or expenses, including reasonable counsel fees, which the nondiscretionary Trustee or Custodian may incur as a result of any claim asserted against the nondiscretionary Trustee, the Custodian or the Trust arising out of the nondiscretionary Trustee's or Custodian's compliance with any written direction described in this paragraph. [E] PARTICIPANT LOANS. This Section 10.03[E] specifically authorizes the Trustee to make loans on a nondiscriminatory basis to a Participant or to a Beneficiary in accordance with the loan policy established by the Administrative Committee, provided: (1) the loan policy satisfies the requirements of Section 9.04; (2) loans are available to all Participants and Beneficiaries on a reasonably equivalent basis and are not available in a greater amount for Highly Compensated Employees than for other Employees; (3) any loan is adequately secured and bears a reasonable rate of interest; (4) the loan provides for repayment within a specified time; (5) the default provisions of the note prohibit offset of the Participant's Nonforfeitable Accrued Benefit prior to the time the Trustee otherwise would distribute the Participant's Nonforfeitable Accrued Benefit; (6) the amount of the loan does not exceed (at the time the Plan extends the loan) the present value of the Participant's Nonforfeitable Accrued Benefit; and (7) the loan otherwise conforms to the exemption provided by Code Section 4975(d)(1). If the joint and survivor requirements of Article VI apply to the Participant, the Participant may not pledge any portion of his Accrued Benefit as security for a loan made after August 18, 1985, unless, within the 90 day period ending on the date the pledge becomes effective, the Participant's spouse, if any, consents (in a manner described in Section 6.05 other than the requirement relating to the consent of a subsequent spouse) to the security or, by separate consent, to an increase in the amount of security. If the Employer is an unincorporated trade or business, a Participant who is an Owner-Employee may not receive a loan from the Plan, unless he has obtained a prohibited transaction exemption from the Department of Labor. If the Employer is an "S Corporation," a Participant who is a shareholder-employee (an employee or an officer) who, at any time during the Employer's taxable year, owns more than 5%, either directly or by attribution under Code Section 318(a)(1), of the Employer's outstanding stock may not receive a loan from the Plan, unless he has obtained a prohibited transaction exemption from the Department of Labor. If the Employer is not an unincorporated trade or business nor an "S Corporation," this Section 10.03[E] does not impose any restrictions on the class of Participants eligible for a loan from the Plan. [F] INVESTMENT IN QUALIFYING EMPLOYER SECURITIES AND QUALIFYING EMPLOYER REAL PROPERTY. The investment options in this Section 10.03[F] include the ability to invest in qualifying Employer securities or qualifying Employer real property, as defined in and as limited by ERISA. If the Employer's Plan is a Nonstandardized profit sharing plan, it may elect in its Adoption Agreement to permit the aggregate investments in qualifying Employer securities and in qualifying Employer real property to exceed 10% of the value of Plan assets. 10.05 64 10.04 RECORDS AND STATEMENTS. The records of the Trustee pertaining to the Plan must be open to the inspection of the Plan Administrator, the Administrative Committee and the Employer at all reasonable times and may be audited from time to time by any person or persons as the Employer, Plan Administrator or Administrative Committee may specify in writing. The Trustee must furnish the Plan Administrator or Administrative Committee with whatever information relating to the Trust Fund the Plan Administrator or Administrative Committee considers necessary. 10.05 FEES AND EXPENSES FROM FUND. A Trustee or Custodian will receive reasonable annual compensation as may be agreed upon from time to time between the Employer and the Trustee or Custodian. No person who is receiving full pay from the Employer may receive compensation for services as Trustee or as Custodian. The Trustee will pay from the Trust Fund all fees and expenses reasonably incurred by the Plan, to the extent such fees and expenses are for the ordinary and necessary administration and operation of the Plan, unless the Employer pays such fees and expenses. Any fee or expense paid, directly or indirectly, by the Employer is not an Employer contribution to the Plan, provided the fee or expense relates to the ordinary and necessary administration of the Fund. 10.06 PARTIES TO LITIGATION. Except as otherwise provided by ERISA, no Participant or Beneficiary is a necessary party or is required to receive notice of process in any court proceeding involving the Plan, the Trust Fund or any fiduciary of the Plan. Any final judgment entered in any proceeding will be conclusive upon the Employer, the Plan Administrator, the Administrative Committee, the Trustee, Custodian, Participants and Beneficiaries. 10.07 PROFESSIONAL AGENTS. The Trustee may employ and pay from the Trust Fund reasonable compensation to agents, attorneys, accountants and other persons to advise the Trustee as in its opinion may be necessary. The Trustee may delegate to any agent, attorney, accountant or other person selected by it any non-Trustee power or duty vested in it by the Plan, and the Trustee may act or refrain from acting on the advice or opinion of any agent, attorney, accountant or other person so selected. 10.08 DISTRIBUTION OF CASH OR PROPERTY. The Trustee may make distribution under the Plan in cash or property, or partly in each, at its fair market value as determined by the Trustee. For purposes of a distribution to a Participant or to a Participant's designated Beneficiary or surviving spouse, "property" includes a Nontransferable Annuity Contract, provided the contract satisfies the requirements of this Plan. 10.09 DISTRIBUTION DIRECTIONS. If no one claims a payment or distribution made from the Trust, the Trustee must promptly notify the Administrative Committee and then dispose of the payment in accordance with the subsequent direction of the Administrative Committee. 10.10 THIRD PARTY/MULTIPLE TRUSTEES. No person dealing with the Trustee is obligated to see to the proper application of any money paid or property delivered to the Trustee, or to inquire whether the Trustee has acted pursuant to any of the terms of the Plan. Each person dealing with the Trustee may act upon any notice, request or representation in writing by the Trustee, or by the Trustee's duly authorized agent, and is not liable to any person in so acting. The certificate of the Trustee that it is acting in accordance with the Plan will be conclusive in favor of any person relying on the certificate. If more than two persons act as Trustee, a decision of the majority of such persons controls with respect to any decision regarding the administration or investment of the Trust Fund or of any portion of the Trust Fund with respect to which such persons act as Trustee. However, the signature of only one Trustee is necessary to effect any transaction on behalf of the Trust. 10.06 65 10.11 RESIGNATION. The Trustee or Custodian may resign its position at any time by giving 30 days' written notice in advance to the employer and to the Administrative Committee. If the Employer fails to appoint a successor Trustee within 60 days of its receipt of the Trustee's written notice of resignation, the Trustee will treat the Employer as having appointed itself as Trustee and as having filed its acceptance of appointment with the former Trustee. The Employer, in its sole discretion, may replace a Custodian. If the Employer does not replace a Custodian, the discretionary Trustee will assume possession of Plan assets held by the former Custodian. 10.12 REMOVAL. The Employer, by giving 30 days' written notice in advance to the Trustee, may remove any Trustee or Custodian. In the event of the resignation or removal of a Trustee, the Employer must appoint a successor Trustee if it intends to continue the Plan. If two or more persons hold the position of Trustee, in the event of the removal of one such person, during any period the selection of a replacement is pending, or during any period such person is unable to serve for any reason, the remaining person or persons will act as the Trustee. 10.13 INTERIM DUTIES AND SUCCESSOR TRUSTEE. Each successor Trustee succeeds to the title to the Trust vested in his predecessor by accepting in writing his appointment as successor Trustee and by filing the acceptance with the former Trustee and the Administrative Committee without the signing or filing of any further statement. The resigning or removed trustee, upon receipt of acceptance in writing of the Trust by the successor Trustee, must execute all documents and do all acts necessary to vest the title of record in any successor Trustee. Each successor Trustee has and enjoys all of the powers, both discretionary and ministerial, conferred under this Agreement upon his predecessor. A successor Trustee is not personally liable for any act or failure to act of any predecessor Trustee, except as required under ERISA. With the approval of the Employer and the Administrative Committee, a successor Trustee, with respect to the Plan, may accept the account rendered and the property delivered to it by a predecessor Trustee without incurring any liability or responsibility for so doing. 10.14 VALUATION OF TRUST. The Trustee must value the Trust Fund as of each Accounting Date to determine the fair market value of each participant's Accrued Benefit in the Trust. The Trustee also must value the Trust Fund on such other valuation dates as directed in writing by the Administrative Committee or as required by the Employer's Adoption Agreement. 10.15 LIMITATION ON LIABILITY - IF INVESTMENT MANAGER, ANCILLARY TRUSTEE OR INDEPENDENT FIDUCIARY APPOINTED. The Trustee is not liable for the acts or omissions of any Investment Manager the Administrative Committee may appoint, nor is the Trustee under any obligation to invest or otherwise manage any asset of the Plan which is subject to the management of a properly appointed Investment Manager. The Administrative Committee, the Trustee and any properly appointed Investment Manager may execute a letter agreement as a part of this Plan delineating the duties, responsibilities and liabilities of the Investment Manager with respect to any part of the Trust Fund under the control of the Investment Manager. The limitation on liability described in this Section 10.15 also applies to the acts or omissions of any ancillary trustee or independent fiduciary properly appointed under Section 10.17 of the Plan. However, if a discretionary Trustee, pursuant to the delegation described in Section 10.17 of the Plan, appoints an ancillary trustee, the discretionary Trustee is responsible for the periodic review of the ancillary trustee's actions and must exercise its delegated authority in accordance with the terms of the Plan and in a manner consistent with ERISA. The Employer, the discretionary Trustee and an ancillary trustee may execute a letter agreement as a part of this Plan delineating any indemnification agreement between the parties. 10.07 66 10.16 INVESTMENT IN GROUP TRUST FUND. The Employer, by adopting this Plan, specifically authorizes the Trustee to invest all or any portion of the assets comprising the Trust Fund in any group trust fund which at the time of the investment provides for the pooling of the assets of plans qualified under Code Section 401(a). This authorization applies solely to a group trust fund exempt from taxation under Code Section 501(a) and the trust agreement of which satisfies the requirements of Revenue Ruling 81-100. The provisions of the group trust fund agreement, as amended from time to time, are by this reference incorporated within this Plan and Trust. The provisions of the group trust fund will govern any investment of Plan assets in that fund. The Employer must specify in an attachment to its adoption agreement the group trust fund(s) to which this authorization applies. If the Trustee is acting as a nondiscretionary Trustee, the investment in the group trust fund is available only in accordance with a proper direction, by the Named Fiduciary, in accordance with Section 10.03[B]. Pursuant to paragraph (c) of Section 10.03 [A] of the Plan, a Trustee has the authority to invest in certain common trust funds and collective investment funds without the need for the authorizing addendum described in this Section 10.16. Furthermore, at the Employer's direction, the Trustee, for collective investment purposes, may combine into one trust fund the Trust created under this Plan with the Trust created under any other qualified retirement plan the Employer maintains. However, the Trustee must maintain separate records of account for the assets of each Trust in order to reflect properly each Participant's Accrued Benefit under the plan(s) in which he is a Participant. 10.17 APPOINTMENT OF ANCILLARY TRUSTEE OR INDEPENDENT FIDUCIARY. The Employer, in writing, may appoint any person in any State to act as ancillary trustee with respect to a designated portion of the Trust Fund. An ancillary trustee must acknowledge in writing its acceptance of the terms and conditions of its appointment as ancillary trustee and its fiduciary status under ERISA. The ancillary trustee has the rights, powers, duties and discretion as the Employer may delegate, subject to any limitations or directions specified in the instrument evidencing appointment of the ancillary trustee and to the terms of the Plan or of ERISA. The investment powers delegated to the ancillary trustee may include any investment powers available under Section 10.03 of the Plan including the right to invest any portion of the assets of the Trust Fund in a common trust fund, as described in Code Section 584, or in any collective investment fund, the provisions of which govern the investment of such assets and which the Plan incorporates by this reference, but only if the ancillary trustee is a bank or similar financial institution supervised by the United States or by a State and the ancillary trustee (or its affiliate, as defined in Code Section 1504) maintains the common trust fund or collective investment fund exclusively for the collective investment of money contributed by the ancillary trustee (or its affiliate) in a trustee capacity and which conforms to the rules of the Comptroller of the Currency. The Employer also may appoint as an ancillary trustee, the trustee of any group trust fund designated for investment pursuant to the provisions of Section 10.16 of the Plan. The ancillary trustee may resign its position at any time by providing at least 30 days' advance written notice to the Employer, unless the Employer waives this notice requirement. The Employer, in writing, may remove an ancillary trustee at any time. In the event of resignation or removal, the Employer may appoint another ancillary trustee, return the assets to the control and management of the Trustee or receive such assets in the capacity of ancillary trustee. The Employer may delegate its responsibilities under this Section 10.17 to a discretionary Trustee under the Plan, but not to a nondiscretionary Trustee or to a Custodian, subject to the acceptance by the discretionary Trustee of that delegation. If the U.S. Department of Labor ("the Department") requires engagement of an independent fiduciary to have control or management of all or a portion of the Trust Fund, the Employer will appoint such independent fiduciary, as directed by the Department. The independent fiduciary will have the duties, responsibilities and powers prescribed by the Department and will exercise those duties, responsibilities and powers in accordance with the terms, restrictions and conditions established by the Department and, to the extent not inconsistent with ERISA, the terms of the Plan. The independent fiduciary must accept its appointment in writing and must acknowledge its status as a fiduciary of the Plan. * * * * * * * * * * * * * * * 10.08 67 ARTICLE XI PROVISIONS RELATING TO INSURANCE AND INSURANCE COMPANY 11.01 INSURANCE BENEFIT. The Employer may elect to provide incidental life insurance benefits for insurable Participants who consent to life insurance benefits by signing the appropriate insurance company application form. The Trustee will not purchase any incidental life insurance benefit for any Participant prior to an allocation to the Participant's Account. At an insured Participant's written direction, the Trustee will use all or any portion of the Participant's nondeductible voluntary contributions, if any, to pay insurance premiums covering the Participant's life. This Section 11.01 also authorizes the purchase of life insurance, for the benefit of the Participant, on the life of a family member of the Participant or on any person in whom the Participant has an insurable interest. However, if the policy is on the joint lives of the Participant and another person, the Trustee may not maintain that policy if that other person predeceases the Participant. The Employer will direct the Trustee as to the insurance company and insurance agent through which the Trustee is to purchase the insurance contracts, the amount of the coverage and the applicable dividend plan. Each application for a policy, and the policies themselves, must designate the Trustee as sole owner, with the right reserved to the Trustee to exercise any right or option contained in the policies, subject to the terms and provisions of this Agreement. The Trustee must be the named beneficiary for the Account of the insured Participant. Proceeds of insurance contracts paid to the Participant's Account under this Article XI are subject to the distribution requirements of Article V and of Article VI. The Trustee will not retain any such proceeds for the benefit of the Trust. The Trustee will charge the premiums on any incidental benefit insurance contract covering the life of a Participant against the Account of that Participant. The Trustee will hold all incidental benefit insurance contracts issued under the Plan as assets of the Trust created under the Plan. (A) INCIDENTAL INSURANCE BENEFITS. The aggregate of life insurance premiums paid for the benefit of a Participant, at all times, may not exceed the following percentages of the aggregate of the Employer's contributions allocated to any Participant's Account: (i) 49% in the case of the purchase of ordinary life insurance contracts; or (ii) 25% in the case of the purchase of term life insurance or universal life insurance contracts. If the Trustee purchases a combination of ordinary life insurance contract(s) and term life insurance or universal life insurance contract(s), then the sum of one-half of the premiums paid for the ordinary life insurance contract(s) and the premiums paid for the term life insurance or universal life insurance contract(s) may not exceed 25% of the Employer contributions allocated to any Participant's Account. (B) EXCEPTION FOR CERTAIN PROFIT SHARING PLANS. If the Employer's Plan is a profit sharing plan, the incidental insurance benefits requirement does not apply to the Plan if the Plan purchases life insurance benefits only from Employer contributions accumulated in the Participant's Account for at least two years (measured from the allocation date). 11.02 LIMITATION ON LIFE INSURANCE PROTECTION. The Trustee will not continue any life insurance protection for any Participant beyond his annuity starting date (as defined in Article VI). If the Trustee holds any incidental benefit insurance contract(s) for the benefit of a Participant when he terminates his employment (other than by reason of death), the Trustee must proceed as follows: (a) If the entire cash value of the contract(s) is vested in the terminating Participant, or if the contract(s) will have no cash value at the end of the policy year in which termination of employment occurs, the Trustee will transfer the contract(s) to the Participant endorsed so as to vest in the transferee all right, title and interest to the contract(s), free and clear of the Trust; subject however, to restrictions as to surrender or payment of benefits as the issuing insurance company may permit and as the Administrative Committee directs; 11.01 68 (b) If only part of the cash value of the contract(s) is vested in the terminating Participant, the Trustee, to the extent the Participant's interest in the cash value of the contract(s) is not vested, may adjust the Participant's interest in the value of his Account attributable to Trust assets other than incidental benefit insurance contracts and proceed as in (a), or the Trustee must effect a loan from the issuing insurance company on the sole security of the contract(s) for an amount equal to the difference between the cash value of the contract(s) at the end of the policy year in which termination of employment occurs and the amount of the cash value that is vested in the terminating Participant, and the Trustee must transfer the contract(s) endorsed so as to vest in the transferee all right, title and interest to the contract(s), free and clear of the Trust; subject however, to the restrictions as to surrender or payment of benefits as the issuing insurance company may permit and the Administrative Committee directs; (c) If no part of the cash value of the contract(s) is vested in the terminating Participant, the Trustee must surrender the contract(s) for cash proceeds as may be available. In accordance with the written direction of the Administrative Committee, the Trustee will make any transfer of contract(s) under this Section 11.02 on the Participant's annuity starting date (or as soon as administratively practicable after that date). The Trustee may not transfer any contract under this Section 11.02 which contains a method of payment not specifically authorized by Article VI or which fails to comply with the joint and survivor annuity requirements, if applicable, of Article VI. In this regard, the Trustee either must convert such a contract to cash and distribute the cash instead of the contract, or before making the transfer, require the issuing company to delete the unauthorized method of payment option from the contract. 11.03 DEFINITIONS. For purposes of this Article XI: (a) "Policy" means an ordinary life insurance contract or a term life insurance contract issued by an insurer on the life of a Participant. (b) "Issuing insurance company" is any life insurance company which has issued a policy upon application by the Trustee under the terms of this Agreement. (c) "Contract" or "Contracts" means a policy of insurance. In the event of any conflict between the provisions of this Plan and the terms of any contract or policy of insurance issued in accordance with this Article XI, the provisions of the Plan control. (d) "Insurable Participant" means a Participant to whom an insurance company, upon an application being submitted in accordance with the Plan, will issue insurance coverage, either as a standard risk or as a risk in an extra mortality classification. 11.04 DIVIDEND PLAN. The dividend plan is premium reduction unless the Administrative Committee directs the Trustee to the contrary. The Trustee must use all dividends for a contract to purchase insurance benefits or additional insurance benefits for the Participant on whose life the insurance company has issued the contract. Furthermore, the Trustee must arrange, where possible, for all policies issued on the lives of Participants under the Plan to have the same premium due date and all ordinary life insurance contracts to contain guaranteed cash values with as uniform basic options as are possible to obtain. The term "dividends" includes policy dividends, refunds of premiums and other credits. 11.05 INSURANCE COMPANY NOT A PARTY TO AGREEMENT. No insurance company, solely in its capacity as an issuing insurance company, is a party to this Agreement nor is the company responsible for its validity. 11.02 69 11.06 INSURANCE COMPANY NOT RESPONSIBLE FOR TRUSTEE'S ACTIONS. No insurance company, solely in its capacity as an issuing insurance company, need examine the terms of this Agreement nor is responsible for any action taken by the Trustee. 11.07 INSURANCE COMPANY RELIANCE ON TRUSTEE'S SIGNATURE. For the purpose of making application to an insurance company and in the exercise of any right or option contained in any policy, the insurance company may rely upon the signature of the Trustee and is saved harmless and completely discharged in acting at the direction and authorization of the Trustee. 11.08 ACQUITTANCE. An insurance company is discharged from all liability for any amount paid to the Trustee or paid in accordance with the direction of the Trustee, and is not obliged to see to the distribution or further application of any moneys it so pays. 11.09 DUTIES OF INSURANCE COMPANY. Each insurance company must keep such records, make such identification of contracts, funds and accounts within funds, and supply such information as may be necessary for the proper administration of the Plan under which it is carrying insurance benefits. Note: The provisions of this Article XI are not applicable, and the Plan may not invest in insurance contracts, if a Custodian signatory to the Adoption Agreement is a bank which has not acquired trust powers from its governing state banking authority. * * * * * * * * * * * * * * * * 11.03 70 ARTICLE XII MISCELLANEOUS 12.01 EVIDENCE. Anyone required to give evidence under the terms of the Plan may do so by certificate, affidavit, document or other information which the person to act in reliance may consider pertinent, reliable and genuine, and to have been signed, made or presented by the proper party or parties. The Administrative Committee and the Trustee are fully protected in acting and relying upon any evidence described under the immediately preceding sentence. 12.02 NO RESPONSIBILITY FOR EMPLOYER ACTION. Neither the Trustee nor the Administrative Committee has any obligation or responsibility with respect to any action required by the Plan to be taken by the Employer, any Participant or eligible Employee, or for the failure of any of the above persons to act or make any payment or contribution, or to otherwise provide any benefit contemplated under this Plan. Furthermore, the Plan does not require the Trustee or the Administrative Committee to collect any contribution required under the Plan, or to determine the correctness of the amount of any Employer contribution. Neither the Trustee nor the Administrative Committee need inquire into or be responsible for any action or failure to act on the part of the others, or on the part of any other person who has any responsibility regarding the management, administration or operation of the Plan, whether by the express terms of the Plan or by a separate agreement authorized by the Plan or by the applicable provisions of ERISA. Any action required of a corporate Employer must be by its Board of Directors or its designate. 12.03 FIDUCIARIES NOT INSURERS. The Trustee, the Administrative Committee, the Plan Administrator and the Employer in no way guarantee the Trust Fund from loss or depreciation. The Employer does not guarantee the payment of any money which may be or becomes due to any person from the Trust Fund. The liability of the Administrative Committee and the Trustee to make any payment from the Trust Fund at any time and all times is limited to the then available assets of the Trust. 12.04 WAIVER OF NOTICE. Any person entitled to notice under the Plan may waive the notice, unless the Code or Treasury regulations prescribe the notice or ERISA specifically or impliedly prohibits such a waiver. 12.05 SUCCESSORS. The Plan is binding upon all persons entitled to benefits under the Plan, their respective heirs and legal representatives, upon the Employer, its successors and assigns, and upon the Trustee, the Administrative Committee, the Plan Administrator and their successors. 12.06 WORD USAGE. Words used in the, masculine also apply to the feminine where applicable, and wherever the context of the Employer's Plan dictates, the plural includes the singular and the singular includes the plural. 12.07 STATE LAW. The law of the state of the Employer's principal place of business (unless otherwise designated in an addendum to the Employer's Adoption Agreement) will determine all questions arising with respect to the provisions of this Agreement except to the extent superseded by Federal law. 12.01 71 12.08 EMPLOYER'S RIGHT TO PARTICIPATE. If the Employer's Plan fails to qualify or to maintain qualification or if the Employer makes any amendment or modification to a provision of this Plan (other than a proper completion of an elective provision under the Adoption Agreement or the attachment of an addendum authorized by the Plan or by the Adoption Agreement), the Employer may no longer participate under this Prototype Plan. Furthermore, if the Employer no longer is a client of the Regional Prototype Sponsor, subsequent amendments to this Prototype Plan by the Regional Prototype Sponsor, pursuant to Section 13.03 of the Plan, will result in the discontinuance of the Employer's participation in this Prototype Plan unless it resumes its client relationship with the Regional Prototype Sponsor. If the Employer is not entitled to participate under this Prototype Plan, the Employer's Plan is an individually-designed plan and the reliance procedures specified in the applicable Adoption Agreement no longer will apply. 12.09 EMPLOYMENT NOT GUARANTEED. Nothing contained in this Plan, or with respect to the establishment of the Trust, or any modification or amendment to the Plan or Trust, or in the creation of any Account, or the payment of any benefit, gives any Employee, Employee-Participant or any Beneficiary any right to continue employment, any legal or equitable right against the Employer, or Employee of the Employer, or against the Trustee, or its agents or employees, or against the Plan Administrator, except as expressly provided by the Plan, the Trust, ERISA or by a separate agreement. * * * * * * * * * * * * * * * * 12.02 72 ARTICLE XIII EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION 13.01 EXCLUSIVE BENEFIT. Except as provided under Article III, the Employer has no beneficial interest in any asset of the Trust and no part of any asset in the Trust may ever revert to or be repaid to an Employer, either directly or indirectly; nor, prior to the satisfaction of all liabilities with respect to the Participants and their Beneficiaries under the Plan, may any part of the corpus or income of the Trust Fund, or any asset of the Trust, be (at any time) used for, or diverted to, purposes other than the exclusive benefit of the Participants or their Beneficiaries. However, if the Commissioner of Internal Revenue, upon the Employer's request for initial approval of this Plan, determines the Trust created under the Plan is not a qualified trust exempt from Federal income tax, then (and only then) the Trustee, upon written notice from the Employer, will return the Employer's contributions (and increment attributable to the contributions) to the Employer. The Trustee must make the return of the Employer contribution under this Section 13.01 within one year of a final disposition of the Employer's request for initial approval of the Plan. The Employer's Plan and Trust will terminate upon the Trustee's return of the Employer's contributions. 13.02 AMENDMENT BY EMPLOYER. The Employer has the right at any time and from time to time: (a) To amend the elective provisions of the Adoption Agreement in any manner it deems necessary or advisable in order to qualify (or maintain qualification of) this Plan and the Trust created under it under the provisions of Code Section 401(a); (b) To amend the Plan to allow the Plan to operate under a waiver of the minimum funding requirement; and (c) To amend this Agreement in any other manner. No amendment may authorize or permit any of the Trust Fund (other than the part which is required to pay taxes and administrative expenses) to be used for or diverted to purposes other than for the exclusive benefit of the Participants or their Beneficiaries or estates. No amendment may cause or permit any portion of the Trust Fund to revert to or become a property of the Employer. The Employer also may not make any amendment which affects the rights, duties or responsibilities of the Trustee, the Plan Administrator or the Administrative Committee without the written consent of the affected Trustee, the Plan Administrator or the affected member of the Administrative Committee. The Employer must make all amendments in writing. Each amendment must state the date to which it is either retroactively or prospectively effective. See Section 12.08 for the effect of certain amendments adopted by the Employer. (A) CODE SECTION 411(d)(6) PROTECTED BENEFITS. An amendment (including the adoption of this Plan as a restatement of an existing plan) may not decrease a Participant's Accrued Benefit, except to the extent permitted under Code Section 412(c)(8), and may not reduce or eliminate Code Section 411(d)(6) protected benefits determined immediately prior to the adoption date (or, if later, the effective date) of the amendment. An amendment reduces or eliminates Code Section 411(d)(6) protected benefits if the amendment has the effect of either (1) eliminating or reducing an early retirement benefit or a retirement-type subsidy (as defined in Treasury regulations), or (2) except as provided by Treasury regulations, eliminating an optional form of benefit. The Administrative Committee must disregard an amendment to the extent application of the amendment would fail to satisfy this paragraph. If the Administrative Committee must disregard an amendment because the amendment would violate clause (1) or clause (2), the Administrative Committee must maintain a schedule of the early retirement option or other optional forms of benefit the Plan must continue for the affected Participants. 13.01 73 13.03 AMENDMENT BY REGIONAL PROTOTYPE PLAN SPONSOR. The Regional Prototype Plan Sponsor, without the Employer's consent, may amend the Plan and Trust, from time to time, in order to conform the Plan and Trust to any requirement for qualification of the Plan and Trust under the Internal Revenue Code. The Regional Prototype Plan Sponsor may not amend the Plan in any manner which would modify any election made by the Employer under the Plan without the Employer's written consent. Furthermore, the Regional Prototype Plan Sponsor may not amend the Plan in any manner which would violate the proscription of Section 13.02. A Trustee does not have the power to amend the Plan or Trust. 13.04 DISCONTINUANCE. The Employer has the right, at any time, to suspend or discontinue its contributions under the Plan, and to terminate, at any time, this Plan and the Trust created under this Agreement. The Plan will terminate upon the first to occur of the following: (a) The date terminated by action of the Employer; (b) The dissolution or merger of the Employer, unless the successor makes provision to continue the Plan, in which event the successor must substitute itself as the Employer under this Plan. Any termination of the Plan resulting from this paragraph (b) is not effective until compliance with any applicable notice requirements under ERISA. 13.05 FULL VESTING ON TERMINATION. Upon either full or partial termination of the Plan, or, if applicable, upon complete discontinuance of profit sharing plan contributions to the Plan, an affected Participant's right to his Accrued Benefit is 100% Nonforfeitable, irrespective of the Nonforfeitable percentage which otherwise would apply under Article V. 13.06 MERGER/DIRECT TRANSFER. The Trustee may not consent to, or be a party to, any merger or consolidation with another plan, or to a transfer of assets or liabilities to another plan, unless immediately after the merger, consolidation or transfer, the surviving Plan provides each Participant a benefit equal to or greater than the benefit each Participant would have received had the Plan terminated immediately before the merger or consolidation or transfer. The Trustee possesses the specific authority to enter into merger agreements or direct transfer of assets agreements with the trustees of other retirement plans described in Code Section 401(a), including an elective transfer, and to accept the direct transfer of plan assets, or to transfer plan assets, as a party to any such agreement. The Trustee may accept a direct transfer of plan assets on behalf of an Employee prior to the date the Employee satisfies the Plan's eligibility conditions. If the Trustee accepts such a direct transfer of plan assets, the Administrative Committee and Trustee must treat the Employee as a Participant for all purposes of the Plan except the Employee is not a Participant for purposes of sharing in Employer contributions or Participant forfeitures under the Plan until he actually becomes a Participant in the Plan. (A) ELECTIVE TRANSFERS. The Trustee, after August 9, 1988, may not consent to, or be a party to a merger, consolidation or transfer of assets with a defined benefit plan, except with respect to an elective transfer, or unless the transferred benefits are in the form of paid-up individual annuity contracts guaranteeing the payment of the transferred benefits in accordance with the terms of the transferor plan and in a manner consistent with the Code and with ERISA. The Trustee will hold, administer and distribute the transferred assets as a part of the Trust 13.02 74 Fund and the Trustee must maintain a separate Employer contribution Account for the benefit of the Employee on whose behalf the Trustee accepted the transfer in order to reflect the value of the transferred assets. Unless a transfer of assets to this Plan is an elective transfer, the Plan will preserve all Code Section 411(d)(6) protected benefits with respect to those transferred assets, in the manner described in Section 13.02. A transfer is an elective transfer if: (1) the transfer satisfies the first paragraph of this Section 13.06; (2) the transfer is voluntary, under a fully informed election by the Participant; (3) the Participant has an alternative that retains his Code Section 411(d)(6) protected benefits (including an option to leave his benefit in the transferor plan, if that plan is not terminating); (4) the transfer satisfies the applicable spousal consent requirements of the Code; (5) the transferor plan satisfies the joint and survivor notice requirements of the Code, if the Participant's transferred benefit is subject to those requirements; (6) the Participant has a right to immediate distribution from the transferor plan, in lieu of the elective transfer; (7) the transferred benefit is at least the greater of the single sum distribution provided by the transferor plan for which the Participant is eligible or the present value of the Participant's accrued benefit under the transferor plan payable at that plan's normal retirement age; (8) the Participant has a 100% Nonforfeitable interest in the transferred benefit; and (9) the transfer otherwise satisfies applicable Treasury regulations. An elective transfer may occur between qualified plans of any type. Any direct transfer of assets from a defined benefit plan after August 9, 1988, which does not satisfy the requirements of this paragraph will render the Employer's Plan individually-designed. See Section 12.08. (B) DISTRIBUTION RESTRICTIONS UNDER CODE SECTION 401(k). If the Plan receives a direct transfer (by merger or otherwise) of elective contributions (or amounts treated as elective contributions) under a Plan with a Code Section 401(k) arrangement, the distribution restrictions of Code Sections 401(k)(2) and (10) continue to apply to those transferred elective contributions. 13.07 TERMINATION. (A) PROCEDURE. Upon termination of the Plan, the distribution provisions of Article VI remain operative, with the following exceptions: (1) if the present value of the Participant's Nonforfeitable Accrued Benefit does not exceed $3,500, the Administrative Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit to him in lump sum as soon as administratively practicable after the Plan terminates; and (2) if the present value of the Participant's Nonforfeitable Accrued Benefit exceeds $3,500, the Participant or the Beneficiary, in addition to the distribution events permitted under Article VI, may elect to have the Trustee commence distribution of his Nonforfeitable Accrued Benefit as soon as administratively practicable after the Plan terminates. To liquidate the Trust, the Administrative Committee will purchase a deferred annuity contract for each Participant which protects the Participant's distribution rights under the Plan, if the Participant's Nonforfeitable Accrued Benefit exceeds $3,500 and the Participant does not elect an immediate distribution pursuant to Paragraph (2). If the Employer's Plan is a profit sharing plan, in lieu of the preceding provisions of this Section 13.07 and the distribution provisions of Article VI, the Administrative Committee will direct the Trustee to distribute each Participant's Nonforfeitable Accrued Benefit, in lump sum, as soon as administratively practicable after the 13.03 75 termination of the Plan, irrespective of the present value of the Participant's Nonforfeitable Accrued Benefit and whether the Participant consents to that distribution. This paragraph does not apply if: (1) the Plan provides an annuity option; or (2) as of the period between the Plan termination date and the final distribution of assets, the Employer maintains any other defined contribution plan (other than an ESOP). The Employer, in an addendum to its Adoption Agreement numbered 13.07, may elect not to have this paragraph apply. The Trust will continue until the Trustee in accordance with the direction of the Administrative Committee has distributed all of the benefits under the Plan. On each valuation date, the Administrative Committee will credit any part of a Participant's Accrued Benefit retained in the Trust with its proportionate share of the Trust's income, expenses, gains and losses, both realized and unrealized. Upon termination of the Plan, the amount, if any, in a suspense account under Article III will revert to the Employer, subject to the conditions of the Treasury regulations permitting such a reversion. A resolution or amendment to freeze all future benefit accrual but otherwise to continue maintenance of this Plan, is not a termination for purposes of this Section 13.07. (B) DISTRIBUTION RESTRICTIONS UNDER CODE SECTION 401(k). If the Employer's Plan includes a Code Section 401(k) arrangement or if transferred assets described in Section 13.06 are subject to the distribution restrictions of Code Sections 401(k)(2) and (10), the special distribution provisions of this Section 13.07 are subject to the restrictions of this paragraph. The portion of the Participant's Nonforfeitable Accrued Benefit attributable to elective contributions (or to amounts treated under the Code Section 401(k) arrangement as elective contributions) is not distributable on account of Plan termination, as described in this Section 13.07, unless: (a) the Participant otherwise is entitled under the Plan to a distribution of that portion of his Nonforfeitable Accrued Benefit; or (b) the Plan termination occurs without the establishment of a successor plan. A successor plan under clause (b) is a defined contribution plan (other than an ESOP) maintained by the Employer (or by a related employer) at the time of the termination of the Plan or within the period ending twelve months after the final distribution of assets. A distribution made after March 31, 1988, pursuant to clause (b), must be part of a lump sum distribution to the Participant of his Nonforfeitable Accrued Benefit. * * * * * * * * * * * * * * * * 13.04 76 ARTICLE XIV CODE SECTION 401(k) ARRANGEMENTS 14.01 APPLICATION. This Article XIV applies to an Employer's Plan only if the Employer is maintaining its Plan under a Code Section 401(k) Adoption Agreement. 14.02 CODE SECTION 401(k) ARRANGEMENT. The Employer will elect in Section 3.01 of its Adoption Agreement the terms of the Code Section 401(k) arrangement, if any, under the Plan. If the Employer's Plan is a Standardized Plan, the Code Section 401(k) arrangement must be a salary reduction arrangement. If the Employer's Plan is a Nonstandardized Plan, the Code Section 401(k) arrangement may be a salary reduction arrangement or a cash or deferred arrangement. (A) SALARY REDUCTION ARRANGEMENT. If the Employer elects a salary reduction arrangement, any Employee eligible to participate in the Plan may file a salary reduction agreement with the Administrative Committee. The salary reduction agreement may not be effective earlier than the following date which occurs last: (i) the Employee's Plan Entry Date (or, in the case of a reemployed Employee, his reparticipation date under Article II); (ii) the execution date of the Employee's salary reduction agreement; (iii) the date the Employer adopts the Code Section 401(k) arrangement by executing the Adoption Agreement; or (iv) the effective date of the Code Section 401(k) arrangement, as specified in the Employer's Adoption Agreement. Regarding clause (i), an Employee subject to the Break in Service rule of Section 2.03(B) of the Plan may not enter into a salary reduction agreement until the Employee has completed a sufficient number of Hours of Service to receive credit for a Year of Service (as defined in Section 2.02) following his reemployment commencement date. A salary reduction agreement must specify the amount of Compensation (as defined in Section 1.12) or percentage of Compensation the Employee wishes to defer. The salary reduction agreement will apply only to Compensation which becomes currently available to the Employee after the effective date of the salary reduction agreement. The Employer will apply a reduction election to all Compensation (and to increases in such Compensation) unless the Employee specifies in his salary reduction agreement to limit the election to certain Compensation. The Employer will specify in Adoption Agreement Section 3.01 the rules and restrictions applicable to the Employees salary reduction agreements. (B) CASH OR DEFERRED ARRANGEMENT. If the Employer elects a cash or deferred arrangement, a Participant may elect to make a cash election against his proportionate share of the Employer's Cash or Deferred Contribution, in accordance with the Employer's elections in Adoption Agreement Section 3.01. A Participant's proportionate share of the Employer's Cash or Deferred Contribution is the percentage of the total Cash or Deferred Contribution which bears the same ratio that the Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year. For purposes of determining each Participant's proportionate share of the Cash or Deferred Contribution, a Participant's Compensation is his Compensation as determined under Section 1.12 of the Plan (as modified by Section 3.06 for allocation purposes), excluding any effect the proportionate share may have on the Participant's Compensation for the Plan Year. The Administrative Committee will determine the proportionate share prior to the Employer's actual contribution to the Trust, to provide the Participants the opportunity to file cash elections. The Employer will pay directly to the Participant the portion of his proportionate share the Participant has elected to receive in cash. (C) ELECTION NOT TO PARTICIPATE. A Participant's or Employee's election not to participate, pursuant to Section 2.06, includes his right to enter into a salary reduction agreement or to share in the allocation of a Cash or Deferred Contribution, unless the Participant or Employee limits the effect of the election to the non-401(k) portions of the Plan. 14.01 77 14.03 DEFINITIONS. For purposes of this Article XIV: (a) "Highly Compensated Employee" means an Eligible Employee who satisfies the definition in Section 1.09 of the Plan. Family members aggregated as a single Employee under Section 1.09 constitute a single Highly Compensated Employee, whether a particular family member is a Highly Compensated Employee or a Nonhighly Compensated Employee without the application of family aggregation. (b) "Nonhighly Compensated Employee" means an Eligible Employee who is not a Highly Compensated Employee and who is not a family member treated as a Highly Compensated Employee. (c) "Eligible Employee" means, for purposes of the ADP test described in Section 14.08, an Employee who is eligible to enter into a salary reduction agreement for the Plan Year, irrespective of whether he actually enters into such an agreement, and a Participant who is eligible for an allocation of the Employer's Cash or Deferred Contribution for the Plan Year. For purposes of the ACP test described in Section 14.09, an "Eligible Employee" means a Participant who is eligible to receive an allocation of matching contributions (or would be eligible if he made the type of contributions necessary to receive an allocation of matching contributions) and a Participant who is eligible to make voluntary contributions, irrespective of whether he actually makes voluntary contributions. An Employee continues to be an Eligible Employee during a period the Plan suspends the Employee's night to make elective deferrals or voluntary contributions following a hardship distribution. (d) "Highly Compensated Group" means the group of Eligible Employees who are Highly Compensated Employees for the Plan Year. (e) "Nonhighly Compensated Group" means the group of Eligible Employees who are Nonhighly Compensated Employees for the Plan Year. (f) "Compensation" means, except as specifically provided in this Article XIV, Compensation as defined for nondiscrimination purposes in Section 1.12(B) of the Plan. To complete an Employee's ADP or ACP, the Administrative Committee may limit Compensation taken into account to Compensation received only for the portion of the Plan Year in which the Employee was an Eligible Employee and only for the portion of the Plan Year in which the Plan or the Code Section 401(k) arrangement was in effect. (g) "Deferral contributions" are Tax Deferred Contributions and Cash or Deferred Contributions the Employer contributes to the Trust on behalf of an Eligible Employee, irrespective of whether, in the case of Cash or Deferred Contributions, the contribution is at the election of the Employee. For Tax Deferred Contributions, the terms "deferral contributions" and "elective deferrals" have the same meaning. (h) "Elective deferrals" are all Tax Deferred Contributions and that portion of any Cash or Deferred Contribution which the Employer contributes to the Trust at the election of an Eligible Employee. Any portion of a Cash or Deferred Contribution contributed to the Trust because of the Employee's failure to make a cash election is an elective deferral. However, any portion of a Cash or Deferred Contribution over which the Employee does not have a cash election is not an elective deferral. Elective deferrals do not include amounts which have become currently available to the Employee prior to the election nor amounts designated as voluntary contributions at the time of deferral or contribution. (i) "Matching contributions" are contributions made by the Employer on account of elective deferrals under a Code Section 401(k) arrangement or on account of employee contributions. Matching contributions also include Participant forfeitures allocated on account of such elective deferrals or employee contributions. 14.02 78 (j) "Nonelective contributions" (also called profit sharing contributions) are contributions made by the Employer which are not subject to a deferral election by an Employee and which are not matching contributions. (k) "Qualified matching contributions" are matching contributions which are 100% Nonforfeitable at all times and which are subject to the distribution restrictions described in paragraph (m). Matching contributions are not 100% Nonforfeitable at all times if the Employee has a 100% Nonforfeitable interest because of his Years of Service taken into account under a vesting schedule. Any matching contributions allocated to a Participant's Qualified Matching Contributions Account under the Plan automatically satisfy the definition of qualified matching contributions. (l) "Qualified nonelective contributions" (which are also called "basic contributions" in the Plan) are nonelective contributions which are 100% Nonforfeitable at all times and which are subject to the distribution restrictions described in paragraph (m). Nonelective contributions are not 100% Nonforfeitable at all times if the Employee has a 100% Nonforfeitable interest because of his Years of Service taken into account under a vesting schedule. Any nonelective contributions allocated to a Participant's Basic Contributions Account under the Plan automatically satisfy the definition of qualified nonelective contributions (also called basic contributions). (m) "Distribution restrictions" means the Employee may not receive a distribution of the specified contributions (nor earnings on those contributions) except in the event of (1) the Participant's death, disability, termination of employment or attainment of age 59 1/2, (2) financial hardship satisfying the requirements of Code Section 401(k) and the applicable Treasury regulations, (3) a plan termination, without establishment of a successor defined contribution plan (other than an ESOP), (4) a sale of substantially all of the assets (within the meaning of Code Section 409(d)(2)) used in a trade or business, but only to an employee who continues employment with the corporation acquiring those assets, or (5) a sale by a corporation of its interest in a subsidiary (within the meaning of Code Section 409(d)(3)), but only to an employee who continues employment with the subsidiary. For Plan Years beginning after December 31, 1988, a distribution on account of financial hardship, as described in clause (2), may not include earnings on elective deferrals credited as of a date later than December 31, 1988, and may not include qualified matching contributions and qualified nonelective contributions, nor any earnings on such contributions, credited after December 31, 1988. A Plan does not violate the distribution restrictions if, instead of the December 31, 1988, date in the preceding sentence the plan specifies a date not later than the end of the last Plan Year ending before July 1, 1989. A distribution described in clauses (3), (4) or (5), if made after March 31, 1988, must be a lump sum distribution, as required under Code Section 401(k)(10). (n) "Employee contributions" are contributions made by a Participant on an after-tax basis, whether voluntary or mandatory, and designated, at the time of contribution, as an employee (or nondeductible) contribution. Elective deferrals and deferral contributions are not employee contributions. Participant voluntary contributions, made pursuant to Section 4.01 of the Plan, are employee contributions. 14.04 MATCHING CONTRIBUTIONS/EMPLOYEE CONTRIBUTIONS. The Employer may elect in Adoption Agreement Section 3.01 to provide matching contributions. The Employer also may elect in Adoption Agreement Section 4.01 to permit or to require a Participant to make voluntary contributions. (A) MANDATORY CONTRIBUTIONS. Any Participant voluntary contributions eligible for matching contributions arc mandatory contributions. The Administrative Committee will maintain a separate accounting, pursuant to Section 4.06 of the Plan, to reflect the Participant's Accrued Benefit derived from his mandatory contributions. The Employer, under Adoption Agreement Section 4.05, may prescribe special distribution restrictions which will apply to the Mandatory Contributions Account prior to the Participant's Separation from Service. Following his Separation from Service, the general distribution provisions of Article VI apply to the distribution of the participant's Mandatory Contributions Account. 14.03 79 14.05 TIME OF PAYMENT CONTRIBUTIONS. The Employer must make Tax Deferred Contributions to the Trust with an administratively reasonable period of time after withholding the corresponding Compensation from the Participant. Furthermore, the Employer must make Tax Deferred Contributions, Cash or Deferred Contributions, Employer matching contributions (including qualified Employer matching contributions) and basic contributions no later than the time prescribed by the Code or by applicable Treasury regulations. Tax Deferred Contributions and Cash or Deferred Contributions are Employer contributions for all purposes under this Plan, except to the extent the Code or Treasury regulations prohibit the use of these contributions to satisfy the qualification requirements of the Code. 14.06 SPECIAL ALLOCATION PROVISIONS - DEFERRAL CONTRIBUTIONS, MATCHING CONTRIBUTIONS AND QUALIFIED NONELECTIVE CONTRIBUTIONS (ALSO CALLED BASIC CONTRIBUTIONS). To make allocations under the Plan, the Administrative Committee must establish a Tax Deferred Account, a Qualified Matching Contributions Account, a Regular Matching Contributions Account, a Basic Contributions Account and an Employer Contributions Account for each Participant. (A) DEFERRAL CONTRIBUTIONS. The Administrative Committee will allocate to each Participant's Tax Deferred Account the amount of Deferral Contributions the Employer makes to the Trust on behalf of the Participant. The Administrative Committee will make this allocation as of the last day of each Plan Year unless, in Adoption Agreement Section 3.04, the Employer elects more frequent allocation dates for tax deferred contributions. (B) MATCHING CONTRIBUTIONS. The Employer must specify in its Adoption Agreement whether the Administrative Committee will allocate matching contributions to the Qualified Matching Contributions Account or to the Regular Matching Contributions Account of each Participant. The Administrative Committee will make this allocation as of the last day of each Plan Year unless, in Adoption Agreement Section 3.04, the Employer elects more frequent allocation dates for matching contributions. (1) To the extent the Employer makes matching contributions under a fixed matching contribution formula, the Administrative Committee will allocate the matching contribution to the Account of the Participant on whose behalf the Employer makes that contribution. A fixed matching contribution formula is a formula under which the Employer contributes a certain percentage or dollar amount on behalf of a Participant based on that Participant's deferral contributions or voluntary contributions eligible for a match, as specified in Section 3.01 of the Employer's Adoption Agreement. The Employer may contribute on a Participant's behalf under a specific matching contribution formula only if the Participant satisfies the accrual requirements for matching contributions specified in Section 3.06 of the Employer's Adoption Agreement and only to the extent the matching contribution does not exceed the Participant's annual additions limitation in Part 2 of Article III. (2) To the extent the Employer makes matching contributions under a discretionary formula, the Administrative Committee will allocate the discretionary matching contributions to the Account of each Participant who satisfies the accrual requirements for matching contributions specified in Section 3.06 of the Employer's Adoption Agreement. The allocation of discretionary matching contributions to a Participant's Account is in the same proportion that each Participant's eligible contributions bear to the total eligible contributions of all Participants. If the discretionary formula is a tiered formula, the Administrative Committee will make this allocation separately with respect to each tier of eligible contributions, allocating in such manner the amount of the matching contributions made with respect to that tier. "Eligible contributions" are the Participant's deferral contributions or voluntary contributions eligible for an allocation of matching contributions, as specified in Section 3.01 of the Employer's Adoption Agreement. 14.04 80 If the matching contribution formula applies both to deferral contributions and to participant voluntary contributions, the matching contributions apply first to deferral contributions. Furthermore, the matching contribution formula does not apply to deferral contributions that are excess deferrals under Section 14.07. For this purpose: (a) excess deferrals relate first to deferral contributions for the Plan Year not otherwise eligible for a matching contribution; and (2) if the Plan Year is not a calendar year, the excess deferrals for a Plan Year are the last elective deferrals made for a calendar year. Under a Standardized Plan, an Employee forfeits any matching contribution attributable to an excess contribution or to an excess aggregate contribution, unless distributed pursuant to Sections 14.08 or 14.09. Under a Nonstandardized Plan, this forfeiture rule applies only if specified in Adoption Agreement Section 3.06. The provisions of Section 3.05 govern the treatment of any forfeiture described in this paragraph, and the Administrative Committee will compute a Participant's ACP under 14.09 by disregarding the forfeiture. (C) BASIC CONTRIBUTIONS. If the employer, at the time of contribution, designates a contribution to be a basic contribution for the Plan Year, the Administrative committee will allocate that basic contribution to the Basic Contributions Account of each Participant eligible for all allocation of that designated contribution, as specified in Section 3.04 of the Employer's Adoption Agreement. The Administrative Committee will make the allocation to each eligible Participant's Account in the same ratio that the Participant's Compensation for the Plan Year bears to the total Compensation of all eligible Participants for the Plan Year. The Administrative Committee will determine a Participant's Compensation in accordance with the general definition of Compensation under Section 1.12 of the Plan, as modified by the Employer in Sections 1.12 and 3.06 of its Adoption Agreement. (D) NONELECTIVE CONTRIBUTIONS. To the extent the Employer makes nonelective contributions for the Plan Year which, at the time of contribution, it does not designate as basic contributions, the Administrative Committee will allocate those contributions in accordance with the elections under Section 3.04 of the Employer's Adoption Agreement. For purposes of the special nondiscrimination tests described in Sections 14.08 and 14.09, the Administrative Committee may treat nonelective contributions allocated under this paragraph as basic contributions, if the contributions otherwise satisfy the definition of basic contributions. 14.07 ANNUAL ELECTIVE DEFERRAL LIMITATION. (A) ANNUAL ELECTIVE DEFERRAL LIMITATION. An Employee's elective deferrals for a calendar year beginning after December 31, 1986, may not exceed the 402(g) limitation. The 402(g) limitation is the greater of $7,000 or the adjusted amount determined by the Secretary of the Treasury. If, pursuant to a salary reduction agreement or pursuant to a cash or deferral election, the Employer determines the Employee's elective deferrals to the Plan for a calendar year would exceed the 402(g) limitation, the Employer will suspend the Employee's salary reduction agreement, if any, until the following January 1 and pay in cash the portion of a cash or deferral election which would result in the Employee's elective deferrals for the calendar year exceeding the 402(g) limitation. If the Administrative Committee determines an Employee's elective deferrals already contributed to the Plan for a calendar year exceed the 402(g) limitation, the Administrative Committee will distribute the amount in excess of the 402(g) limitation (the "excess deferral"), as adjusted for allocable income, no later than April 15 of the following calendar year. If the Administrative Committee distributes the excess deferral by the appropriate April 15, it may make the distribution irrespective of any other provision under this Plan or under the Code. The Administrative Committee will reduce the amount of excess deferrals for a calendar year distributable to the Employee by the Amount of excess contributions (as determined in Section 14.08), if any, previously distributed to the Employee for the Plan Year beginning in that calendar year. 14.05 81 If an Employee participates in another plan under which he makes elective deferrals pursuant to a Code Section 401(k) arrangement, elective deferrals under a Simplified Employee Pension, or salary reduction contributions to a tax-sheltered annuity, irrespective of whether the Employer maintains the other plan, he may provide the Administrative Committee a written claim for excess deferrals made for a calendar year. The Employee must submit the claim no later than the March 1 following the close of the particular calendar year and the claim must specify the amount of the Employee's elective deferrals under this Plan which are excess deferrals. If the Administrative Committee receives a timely claim, it will distribute the excess deferral (as adjusted for allocable income) the Employee has assigned to this Plan, in accordance with the distribution procedure described in the immediately preceding paragraph. (B) ALLOCABLE INCOME. For purposes of making a distribution of excess deferrals pursuant to this Section 14.07, allocable income means net income or net loss allocable to the excess deferrals for the calendar year in which the Employee made the excess deferral determined in a manner which is uniform, nondiscriminatory and reasonably reflective of the manner used by the Plan to allocate income to Participants' Accounts. 14.08 ACTUAL DEFERRAL PERCENTAGE ("ADP") TEST. For each Plan year, the Administrative Committee must determine whether the Plan's Code Section 401(k) arrangement satisfies either the following ADP tests: (i) The average ADP for the Highly Compensated Group does not exceed 1.25 times the average ADP of the Nonhighly Compensated Group; or (ii) The average ADP for the Highly Compensated Group does not exceed the average ADP for the Nonhighly Compensated Group by more than two percentage points (or the lesser percentage permitted by the multiple use limitation in Section 14.10) and the average ADP for the Highly Compensated Group is not more than twice the average ADP for the Nonhighly Compensated Group. (A) CALCULATION OF ADP. The average ADP for a group is the average of the separate ADPs calculated for each Eligible Employee who is a member of that group. An Eligible Employee's ADP for a Plan Year is the ratio of the Eligible Employee's deferral contributions for the Plan Year to the Employee's Compensation for the Plan Year. For aggregated family members treated as a singly Highly Compensated Employee, the ADP of the family unit is the ADP determined by combining the deferral contributions and Compensation of all aggregated family members. A Nonhighly Compensated Employee's ADP does not include elective deferrals made to this Plan or to any other Plan maintained by the Employer, to the extent such elective deferrals exceed the 402(g) limitation described in Section 14.07(A). The Administrative Committee, in a manner consistent with Treasury regulations, may determine the ADPs of the Eligible Employees by taking into account basic contributions or qualified matching contributions, or both, made to this Plan or to any other qualified Plan maintained by the Employer. The Administrative Committee may not include basic contributions in the ADP test unless the allocation of nonelective contributions is nondiscriminatory when the Administrative Committee takes into account all nonelective contributions (including the basic contributions) and also when the Administrative Committee takes into account only the nonelective contributions not used in either the ADP test described in this Section 14.08 or the ACP test described in Section 14.09. For Plan Years beginning after December 31, 1989, the Administrative Committee may not include in the ADP test any basic contributions or qualified matching contributions under another qualified plan unless that plan has the same plan year as this Plan. The Administrative Committee must maintain records to demonstrate compliance with the ADP test, including the extent to which the Plan used basic contributions or qualified matching contributions to satisfy the test. 14.06 82 For Plan Years beginning prior to January 1, 1992, the Administrative Committee may elect to apply a separate ADP test to each component group under the Plan. Each component group separately must satisfy the commonality requirement of the Code Section 401(k) regulations and the minimum coverage requirements of Code Section 410(b). A component group consists of all the allocations and other benefits, rights and features provided that group of Employees. An Employee may not be part of more than one component group. The correction rules described in this Section 14.08 apply separately to each component group. (B) SPECIAL AGGREGATION RULE FOR HIGHLY COMPENSATED EMPLOYEES. To determine the ADP of any Highly Compensated Employee, the deferral contributions taken into account must include any elective deferrals made by the Highly Compensated Employee under any other Code Section 401(k) arrangement maintained by the Employer, unless the elective deferrals are to an ESOP. If the plans containing the Code Section 401(k) arrangements have different plan years, the Administrative Committee will determine the combined deferral contributions on the basis of the plan years ending in the same calendar year. (C) AGGREGATION OF CERTAIN CODE SECTION 401(k) ARRANGEMENTS. If the Employer treats two plans as a unit for coverage or nondiscrimination purposes, the Employer must combine the Code Section 401(k) arrangements under such plans to determine whether either plan satisfies the ADP test. This aggregation rule applies to the ADP determination for all Eligible Employees, irrespective of whether an Eligible Employee is a Highly Compensated Employee or a Nonhighly Compensated Employee. For Plan Years beginning after December 31, 1989, an aggregation of Code Section 401(k) arrangements under this paragraph does not apply to plans which have different plan years and, for Plan Years beginning after December 31, 1988, the Administrative Committee may not aggregate an ESOP (or the ESOP portion of a plan) with a non-ESOP plan (or non-ESOP portion of a plan). (D) CHARACTERIZATION OF EXCESS CONTRIBUTIONS. If, pursuant to this Section 14.08, the Administrative Committee has elected to include qualified matching contributions in the average ADP, the Administrative Committee will treat excess contributions as attributable proportionately to deferral contributions and to qualified matching contributions allocated on the basis of those deferral contributions. If the total amount of a Highly Compensated Employee's excess contributions for the Plan Year exceeds his deferral contributions or qualified matching contributions for the Plan Year, the Administrative Committee will treat the remaining portion of his excess contributions as attributable to basic contributions. The Administrative Committee will reduce the amount of excess contributions for a Plan Year distributable to a Highly Compensated Employee by the amount of excess deferrals (as determined in Section 14.07), if any, previously distributed to that Employee for the Employee's taxable year ending in that Plan Year. (E) DISTRIBUTION OF EXCESS CONTRIBUTIONS. If the Administrative Committee determines the Plan fails to satisfy the ADP test for a Plan Year, it must distribute the excess contributions, as adjusted for allocable income, during the next Plan Year. However, the Employer will incur an excise tax equal to 10% of the amount of excess contributions for a Plan Year not distributed to the appropriate Highly Compensated Employees during the first 2 1/2 months of that next Plan Year. The excess contributions are the amount of deferral contributions made by the Highly Compensated Employees which causes the Plan to fail to satisfy the ADP test. The Administrative Committee will distribute to each Highly Compensated Employee his respective share of the excess contributions. The Administrative Committee will determine the respective shares of excess contributions by starting with the Highly Compensated Employee(s) who has the greatest ADP, reducing his ADP (but not below the next highest ADP), then, if necessary, reducing the ADP of the Highly Compensated Employee(s) at the next highest ADP level (including the ADP of the Highly Compensated Employee(s) whose ADP the Administrative Committee already has reduced), and continuing in this manner until the average ADP for the Highly Compensated Group satisfies the ADP test. If the Highly Compensated Employee is part of an aggregated family group, the Administrative Committee, in accordance with the applicable Treasury regulations, will determine each aggregated family member's allocable share of the excess contributions assigned to the family unit. 14.07 83 (F) ALLOCABLE INCOME. To determine the amount of the corrective distribution required under this Section 14.08, the Administrative Committee must calculate the allocable income for the Plan Year in which the excess contributions arose. "Allocable income" means net income or net loss. To calculate allocable income for the Plan Year, the Administrative Committee will use a uniform and nondiscriminatory method which reasonably reflects the manner used by the Plan to allocate income to Participants' Accounts. 14.09 NONDISCRIMINATION RULES FOR EMPLOYER MATCHING CONTRIBUTIONS/PARTICIPANT VOLUNTARY CONTRIBUTIONS. For Plan Years beginning after December 31, 1986, the Administrative Committee must determine whether the annual Employer matching contributions (other than qualified matching contributions used in the ADP under Section 14.08), if any, and the Employee contributions, if any, satisfy either of the following average contribution percentage ("ACP") tests: (i) The ACP for the Highly Compensated Group does not exceed 1.25 times the ACP of the Nonhighly Compensated Group; or (ii) The ACP for the Highly Compensated Group does not exceed the ACP for the Nonhighly Compensated Group by more than two percentage points (or the lesser percentage permitted by the multiple use limitation in Section 14.10) and the ACP for the Highly Compensated Group is not more than twice the ACP for the Nonhighly Compensated Group. (A) CALCULATION OF ACP. The average contribution percentage for a group is the average of the separate contribution percentages calculated for each Eligible Employee who is a member of that group. An Eligible Employee's contribution percentage for a Plan Year is the ratio of the Eligible Employee's aggregate contributions for the Plan Year to the Employee's Compensation for the Plan Year. "Aggregate contributions" are Employer matching contributions (other than qualified matching contributions used in the ADP test under Section 14.08) and employee contributions (as defined in Section 14.03). For aggregated family members treated as a single Highly Compensated Employee, the contribution percentage of the family unit is the contribution percentage determined by combining the aggregate contributions and Compensation of all aggregated family members. The Administrative Committee, in a manner consistent with Treasury regulations, may determine the contribution percentages of the Eligible Employees by taking into account basic contributions (other than basic contributions used in the ADP test under Section 14.08) or elective deferrals, or both, made to this Plan or to any other qualified Plan maintained by the Employer. The Administrative Committee may not include basic contributions in the ACP test unless the allocation of nonelective contributions is nondiscriminatory when the Administrative Committee takes into account all nonelective contributions (including the basic contributions) and also when the Administrative Committee takes into account only the nonelective contributions not used in either the ADP test described in Section 14.08 or the ACP test described in this Section 14.09. The Administrative Committee may not include elective deferrals in the ACP test, unless the Plan which includes the elective deferrals satisfies the ADP test both with and without the elective deferrals included in this ACP test. For Plan Years beginning after December 31, 1989, the Administrative Committee may not include in the ACP test any basic contributions or elective deferrals under another qualified plan unless that plan has the same plan year as this Plan. The Administrative Committee must maintain records to demonstrate compliance with the ACP test, including the extent to which the Plan used basic contributions or elective deferrals to satisfy the test. For Plan Years beginning prior to January 1, 1992, the component group testing rule permitted under Section 14.08(A) also applies to the ACP test under this Section 14.09. 14.08 84 (B) SPECIAL AGGREGATION RULE FOR HIGHLY COMPENSATED EMPLOYEES. To determine the contribution percentage of any Highly Compensated Employee, the aggregate contributions taken into account must include any matching contributions (other than qualified matching contributions used in the ADP test) and any Employee contributions made on his behalf to any other plan maintained by the Employer, unless the other plan is an ESOP. If the plans have different plan years, the Administrative Committee will determine the combined aggregate contributions on the basis of the plan years ending in the same calendar year. (C) AGGREGATION OF CERTAIN PLANS. If the Employer treats two plans as a unit for coverage or nondiscrimination purposes, the Employer must combine the plans to determine whether either plan satisfies the ACP test. This aggregation rule applies to the contribution percentage determination for all Eligible Employees, irrespective of whether an Eligible Employee is a Highly Compensated Employee or a Nonhighly Compensated Employee. For Plan Years beginning after December 31, 1989, an aggregation of plans under this paragraph does not apply to plans which have different plan years and, for Plan Years beginning after December 31, 1988, the Administrative Committee may not aggregate an ESOP (or the ESOP portion of a plan) with a non-ESOP plan (or non-ESOP portion of a plan). (D) DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS. The Administrative Committee will determine excess aggregate contributions after determining excess deferrals under Section 14.07 and excess contributions under Section 14.08. If the Administrative Committee determines the Plan fails to satisfy the ACP test for a Plan Year, it must distribute the excess aggregate contributions, as adjusted for allocable income, during the next Plan Year. However, the Employer will incur an excise tax equal to 10% of the amount of excess aggregate contributions for a Plan Year not distributed to the appropriate Highly Compensated Employees during the first 2 1/2 months of that next Plan Year. The excess aggregate contributions are the amount of aggregate contributions allocated on behalf of the Highly Compensated Employees which causes the Plan to fail to satisfy the ACP test. The Administrative Committee will distribute to each Highly Compensated Employee his respective share of the excess aggregate contributions. The Administrative Committee will determine the respective shares of excess aggregate contributions by starting with the Highly Compensated Employee(s) who has the greatest contribution percentage, reducing his contribution percentage (but not below the next highest contribution percentage), then, if necessary, reducing the contribution percentage of the Highly Compensated Employee(s) at the next highest contribution percentage level (including the contribution percentage of the Highly Compensated Employee(s) whose contribution percentage the Administrative Committee already has reduced), and continuing in this manner until the ACP for the Highly Compensated Group satisfies the ACP test. If the Highly Compensated Employee is part of an aggregated family group, the Administrative Committee, in accordance. with the applicable Treasury regulations, will determine each aggregated family member's allocable share of the excess aggregate contributions assigned to the family unit. (E) ALLOCABLE INCOME. To determine the amount of the corrective distribution required under this Section 14.09, the Administrative Committee must calculate the allocable income for the Plan Year in which the excess aggregate contributions arose. "Allocable income" means net income or net loss. The Administrative Committee will determine allocable income in the same manner as described in Section 14.08(F) for excess contributions. (F) CHARACTERIZATION OF EXCESS AGGREGATE CONTRIBUTIONS. The Administrative Committee will treat a Highly Compensated Employee's allocable share of excess aggregate contributions in the following priority: (1) first as attributable to his Employee contributions which are not mandatory contributions, if any; (2) then as matching contributions allocable with respect to excess contributions determined under the ADP test described in Section 14.08; (3) then on a pro rata basis to matching contributions and to deferral contributions relating to those matching contributions which the Administrative Committee has included in the ACP test; (4) then on a pro rata basis to Employee contributions which are mandatory contributions, if any, and to matching contributions allocated on the basis of those mandatory contributions; and (5) last to basic contributions used in the ACP test. 14.09 85 To the extent the Highly Compensated Employee's excess aggregate contributions are attributable to matching contributions, and he is not 100% vested in his Accrued Benefit attributable to matching contributions, the Administrative Committee will distribute only the vested portion and forfeit the nonvested portion. The vested portion of the Highly Compensated Employee's excess aggregate contributions attributable to Employer matching contributions is the total amount of such excess aggregate contributions (as adjusted for allocable income) multiplied by his vested percentage (determined as of the last day of the Plan Year for which the Employer made the matching contribution). The Employer will specify in Adoption Agreement Section 3.05 the manner in which the Plan will allocate forfeited excess aggregate contributions. 14.10 MULTIPLE USE LIMITATION. For Plan Years beginning after December 31, 1988, if at least one Highly Compensated Employee is includible in the ADP test under Section 14.08 and in the ACP test under Section 14.09, the sum of the Highly Compensated Group's ADP and ACP may not exceed the multiple use limitation. The multiple use limitation is the sum of (i) and (ii): (i) 125% of the greater of: (a) the ADP of the Nonhighly Compensated Group under the Code Section 401(k) arrangement; or (b) the ACP of the Nonhighly Compensated Group for the Plan Year beginning with or within the Plan Year of the Code Section 401(k) arrangement. (ii) 2% plus the lesser of (i)(a) or (i)(b), but no more than twice the lesser of (i)(a) or (i)(b). The Administrative Committee, in lieu of determining the multiple use limitation as the sum of (i) and (ii), may elect to determine the multiple use limitation as the sum of (iii) and (iv): (iii) 125% of the lesser of: (a) the ADP of the Nonhighly Compensated Group under the Code Section 401(k) arrangement; or (b) the ACP of the Nonhighly Compensated Group for the Plan Year beginning with or within the Plan Year of the Code Section 401(k) arrangement. (iv) 2% plus the greater of (iii)(a) or (iii)(b), but no more than twice the greater of (iii)(a) or (iii)(b). The Administrative Committee will determine whether the Plan satisfies the multiple use limitation after applying the ADP test under Section 14.08 and the ACP test under Section 14.09 and after making any corrective distributions required by those Sections. If, after applying this Section 14.10, the Administrative Committee determines the Plan has failed to satisfy the multiple use limitation, the Administrative Committee will correct the failure by treating the excess amount as excess contributions under Section 14.09 or as excess aggregate contributions under Section 14.09, as it determines in its sole discretion. This Section 14.10 does not apply unless, prior to application of the multiple use limitation, the ADP and the ACP of the Highly Compensated Group each exceeds 125% of the respective percentages for the Nonhighly Compensated Group. 14.11 DISTRIBUTION RESTRICTIONS. The Employer must elect in Section 6.03 of the Adoption Agreement the distribution events permitted under the Plan. The distribution events applicable to the Participant's Tax Deferred Account, Basic Contributions Account and Qualified Matching Contributions Account must satisfy the distribution restrictions described in paragraph (m) of Section 14.03. (A) HARDSHIP DISTRIBUTIONS FROM TAX DEFERRED ACCOUNT. The Employer must elect in Adoption Agreement Section 6.03 whether a Participant may receive hardship distributions from his Tax Deferred Account prior to the Participant's Separation from Service. Hardship distributions from the Deferral Contributions Account must satisfy the requirements of this Section 14.11. A hardship distribution option may not apply to the Participant's Basic Contributions Account or Qualified Matching Contributions Account. 14.10 86 (1) DEFINITION OF HARDSHIP. A hardship distribution under this Section 14.11 must be on account of one or more of the following immediate and heavy financial needs: (1) medical care described in Code Section 213(d) incurred by the Participant, by the Participant's spouse, or by any of the Participant's dependents; (2) the purchase (excluding mortgage payments) of a principal residence for the Participant; (3) the payment of post-secondary education tuition and related educational fees, for the next 12-month period, for the Participant, for the Participant's spouse, or for any of the Participant's dependents (as defined in Code Section 152); (4) to prevent the eviction of the Participant from his principal residence or the foreclosure on the mortgage of the Participant's principal residence; or (5) any need prescribed by the Revenue Service in a revenue ruling, notice or other document of general applicability which satisfies the safe harbor definition of hardship (2) RESTRICTIONS. The following restrictions apply to a Participant who receives a hardship distribution: (a) the Participant may not make elective deferrals or employee contributions to the Plan for the 12-month period following the date of his hardship distribution; (b) the distribution is not in excess of the amount of the immediate and heavy financial need (including any amount necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution); (c) the Participant must have obtained all distributions, other than hardship distributions, and all nontaxable loans (determined at the time of the loan) currently available under this Plan and all other qualified plans maintained by the Employer and (d) the Participant agrees to limit elective deferrals under this Plan and under any other qualified Plan maintained by the Employer, for the Participant's taxable year immediately following the taxable year of the hardship distribution, to the 402(g) limitation (as described in Section 14.07), reduced by the amount of the Participant's elective deferrals made in the taxable year of the hardship distribution. The suspension of elective deferrals and employee contributions described in clause (a) also must apply to all other qualified plans and to all nonqualified plans of deferred compensation maintained by the Employer, other than any mandatory employee contribution portion of a defined benefit plan, including stock option, stock purchase and other similar plans, but not including health or welfare benefit plans (other than the cash or deferred arrangement portion of a cafeteria plan). (3) EARNINGS. For Plan Years beginning after December 31, 1988, a hardship distribution under this Section 14.11 may not include earnings on an Employee's elective deferrals credited after December 31, 1988. Qualified matching contributions and basic contributions, and any earnings on such contributions, credited as of December 31, 1988, are subject to the hardship withdrawal only if the Employer specifies in an addendum to this Section 14.11. The addendum may modify the December 31, 1988, date for purposes of determining credited amounts provided the date is not later than the end of the last Plan Year ending before July 1, 1989. (B) DISTRIBUTIONS AFTER SEPARATION FROM SERVICE. Following the Participant's Separation from Service, the distribution events applicable to the Participant apply equally to all of the Participant's Accounts, except as elected in Section 6.03 of the Employer's Adoption Agreement, (C) CORRECTION OF ANNUAL ADDITIONS LIMITATION. If, as a result of reasonable error in determining the amount of elective deferrals an Employee may make without violating the limitations of Part 2 of Article III, an Excess Amount results, the Administrative Committee will return the Excess Amount (as adjusted for allocable income) attributable to the elective deferrals. The Administrative Committee will make this distribution before taking any corrective steps pursuant to Section 3.10 or to Section 3.16. The Administrative Committee will disregard any elective deferrals returned under this Section 14.11(C) for purposes of Sections 14.07, 14.08 and 14.09. 14.12 SPECIAL ALLOCATION RULES. If the Code Section 401(k) arrangement provides for tax deferred contributions, if the Plan accepts Employee contributions, pursuant to Adoption Agreement Section 4.01, of if the Plan allocates matching contributions as of any date other than the last day of the Plan Year, the Employer must elect in Adoption Agreement 9.11 whether any special allocation provisions will apply under Section 9.11 of the Plan. For purposes of the elections: 14.11 87 (a) A "segregated Account" direction means the Administrative Committee will establish a segregated Account for the applicable contributions made on the Participant's behalf during the Plan Year. The Trustee must invest the segregated Account in Federally insured interest bearing savings account(s) or time deposits, or a combination of both, or in any other fixed income investments, unless otherwise specified in the Employer's Adoption Agreement. As of the last day of each Plan Year (or, if earlier, an allocation date coinciding with a valuation date described in Section 9.11), the Administrative Committee will reallocate the segregated Account to the Participant's appropriate Account, in accordance with Section 3.04 or Section 4.06, whichever applies to the contributions. (b) A "weighted average allocation" method will treat a weighted portion of the applicable contributions as if includible in the Participant's Account as of the beginning of the valuation period. The weighted portion is a fraction, the numerator of which is the number of months in the valuation period, excluding each month in the valuation period which begins prior to the contribution date of the applicable contributions, and the denominator of which is the number of months in the valuation period. The Employer may elect in its Adoption Agreement to substitute a weighting period other than months for purposes of this weighted average allocation. 14.12 88 ARTICLE A APPENDIX TO BASIC PLAN DOCUMENT This Article is necessary to comply with the Unemployment Compensation Amendments of 1992 and is an integral part of the basic plan document. A-1. APPLICATION. This Article applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Article, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. A-2. DEFINITIONS. (a) "Eligible rollover distribution." An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion of net unrealized appreciation with respect to employer securities). (b) "Eligible retirement plan." An eligible retirement plan is an individual retirement account described in Code Section 401(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (c) "Distributee." A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributees with regard to the interest of the spouse or former spouse. (d) "Direct rollover." A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. 89 ARTICLE B APPENDIX TO BASIC PLAN DOCUMENT This Article is necessary to comply with the Omnibus Budget Reconciliation Act of 1993 (0BRA '93) and is an integral part of the basic plan document. Section 12.08 applies to any modification or amendment of this Article. In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual Compensation limit. The OBRA '93 annual Compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA '93 annual Compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Section 401(a)(17) of the Code shall mean the OBRA '93 annual Compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA '93 annual Compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual Compensation limit is $150,000.
EX-21 3 EXHIBIT 21 1 EXHIBIT 21 SUMMIT CARE CORPORATION Significant Subsidiaries ------------------------
State of Incorporation Subsidiary or Organization Doing Business As: ---------- --------------- ------------------ Summit Care - California, Inc. California Sharon Care Center Bay Crest Care Center Royalwood Care Center Palm Grove Care Center Willow Creek Care Center Woodland Care Center Anaheim Terrace Care Center Carehouse Convalescent Center Hemet Retirement Center Summit Care - Texas No. 2, Inc. Texas Summit Care Pharmacy, Inc. California Skilled Care Pharmacy Summit Care - Texas No. 3, Inc. Texas The Woodlands Health Care Center Skilled Care Network California Summit Care Texas Management, Inc. Texas Summit Care Texas Equity, Inc. California Summit Care Texas, L.P. Texas Coronado Nursing Center Lubbock Hospitality House Colonial Manor Care Center Colonial Manor Town & Country Manor Southwood Care Center Oak Manor Nursing Center The Clairmont-Tyler West Side Care Center Monument Hill Nursing Center The Clairmont-Beaumont Guadalupe Valley Nursing Center Comanche Trail Nursing Center Oak Crest Nursing Center Southern Manor Nursing Center Oakland Manor Nursing Center Live Oak Nursing Center Heritage Oaks Nursing and Rehabilitation Center The Clairmont-Longview Cityview Care Center
EX-23 4 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-30967 and Form S-8 No. 333-29845), of our report dated August 22, 1997, with respect to the consolidated financial statements and schedule of Summit Care Corporation included in its Annual Report (Form 10-K) for the year ended June 30, 1997, filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Los Angeles, California September 23, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-30-1997 JUL-01-1996 JUN-30-1997 3,994 0 35,777 (2,028) 2,690 52,789 210,518 (28,605) 250,516 40,141 0 0 0 51,543 0 250,516 197,927 197,927 0 197,739 15,722 2,530 7,973 188 119 0 0 0 0 69 0.01 0
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