Employee Pension Plan

6 Months Ended

Jun. 30, 2011

Employee Pension Plan

Note 7.  Employee Pension Plan

Prior to December 30, 2002, the Company owned 100% of the common stock of Osley & Whitney, Inc. (O&W).  On December 30, 2002, the Company sold 100% of the O&W common stock to a third party, but continued to act as the sponsor of the O&W Retirement Plan (the O&W Plan).  Although the Company continued to act as the sponsor of the O&W Plan after the sale, during 2007 management determined that it had no legal obligation to do so.

During 2007, the Company submitted information to the Department of Treasury (Treasury) advocating that it had no legal obligation to act as the sponsor of the O&W Plan to ascertain whether the Treasury concurred or disagreed with this position.  The Company subsequently provided responses to Treasury inquiries related to this determination.  In October 2009, the Company received a report from the Treasury that stated that the Treasury staff disagreed with the Company’s position and as a result, the Company is responsible for excise taxes attributed to the funding deficiency of $1,836,359 for the years 2003 through 2007 which funding deficiency can only be corrected by contributing $1,836,359 to the O&W Plan.  The report also stated that proposed 10% excise taxes of $348,500, penalties for late payment of excise taxes of approximately $1.2 million and 100% excise taxes of approximately $3.5 million related to the years ended December 31, 2006 and 2007 may be imposed.  Penalties for late payment may be removed if the Company provides reasonable cause for not paying the excise taxes and the Treasury concurs with the Company’s position.  The Company and its outside legal counsel disagree with significant aspects of both the factual findings and legal conclusions set forth in the report and, in accordance with Treasury procedures, have responded with a detailed analysis of its opposition to the findings.  The Company plans to diligently pursue all appropriate steps to perfect its appeal rights and attempt to prevail on the merits of its position, which will include filing a protest, requesting an appeals conference, and, if needed, petitioning the tax court and advocating its position in that forum.

If the Company does not ultimately prevail, it will become obligated for O&W Plan contributions of approximately $2.2 million as of June 30, 2011 and 10% excise taxes on accumulated unfunded contributions for the years ended December 31, 2006 and 2007 of approximately $348,500, as stated above, and potentially additional 10% excise taxes of approximately $440,000 for the years ended December 31, 2009 and 2008, which have not been accrued based upon the Company’s determination that it has no legal obligation to act as the O&W Plan sponsor and the Company’s belief that the likelihood is not probable that it will be required to pay these excise taxes.  Further, if the Company does not ultimately prevail, it may be required to pay interest on these excise taxes and potentially incur penalties for late payment of excise taxes and additional excise taxes up to 100% of each year’s funding deficiency.  The Company has accrued amounts related to excise taxes, including late fees and interest, on unfunded contributions for 2003, 2004 and 2005 of approximately $475,000 as of June 30, 2011 ($470,000 at December 31, 2010).  No excise taxes, late fees or interest for 2006, 2007, 2008, 2009, and 2010 have been accrued at June 30, 2011 or December 31, 2010.  The Company does not have the funds available to make required contributions which approximate $2.2 million and does not intend to make any contributions to the O&W Plan during 2011.

During 2006, the Pension Benefit Guarantee Corporation (PBGC) placed a lien on all of the Company’s assets to secure the contributions due to the O&W Plan.  This lien is subordinate to liens that secure accounts receivable financing and certain notes payable.

On April 29, 2009, acting for the O&W Plan, the Company sent the O&W Plan participants a notice of intent to terminate the O&W Plan in a distress termination with a proposed termination date of June 30, 2009.  The Company also provided additional documentation regarding the Company’s status and the status of the O&W Plan.  The termination of the O&W Plan is subject to approval by the PBGC.  The Company has provided information to the PBGC which Company management believes satisfies the requirements of the PBGC.  During the six months ended June 30, 2011, the Company discussed terminating the O&W Plan with the PBGC, which included a cap on the Company’s potential financial obligation with respect to the O&W Plan and the PBGC, which may have the effect of reducing the Company’s potential Treasury obligations as summarized above.  However, there are no assurances that an agreement satisfactory to the PBGC and the Company will be concluded.

At June 30, 2011, the O&W Plan had an accrued pension obligation liability of $4,556,883 ($4,314,883 at December 31, 2010), which included the underfunded amount plus interest on past due payments and excise taxes including penalties and interest of approximately $475,000 as discussed above.  Accumulated other comprehensive loss of $2,961,147 at June 30, 2011 ($2,961,147 at December 31, 2010) has been recorded as a reduction of stockholders’ deficiency.

The market value of the O&W Plan assets decreased from $1,601,276 at December 31, 2010 to $1,449,998 at June 30, 2011.  The decrease was comprised of investment gains of $108,285 offset by benefit payments of $225,686 and expenses of $33,877.

Net periodic pension cost recorded in the accompanying statements of operations includes the following components of expense (benefit) for the periods presented.

	Three Months  ended June 30, 2011			Three Months ended June 30, 2010			Six Months ended June 30, 2011			Six Months ended June 30, 2010
Interest cost	$	67,878		$	72,531		$	135,756		$	145,062
Expected return on plan assets		(30,193	)		(39,148	)		(60,386	)		(78,296	)
Service cost		10,500			12,500			21,000			25,000
Actuarial loss		33,960			31,882			67,921			63,764
Net periodic pension cost	$	82,145		$	77,765		$	164,291		$	155,530

There were no holdings of Level 3 investments and there were no purchases, sales, issuances, and settlements of Level 3 investments during the three and six months ended June 30, 2011 and 2010.  Additionally, there were no transfers between Level 1 and Level 2 assets during the six months ended June 30, 2011.