-----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, SalG9G5sk6c4tcnEZFmMX8BZqepDUKg8o8XOOVXJJgR1wnz0s94ambG7WqQj3U07 AN6IZyx6UnQCzPIXoCB/xA== 0000950135-96-001533.txt : 19960329 0000950135-96-001533.hdr.sgml : 19960329 ACCESSION NUMBER: 0000950135-96-001533 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIMBERLAND CO CENTRAL INDEX KEY: 0000814361 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 020312554 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09548 FILM NUMBER: 96540182 BUSINESS ADDRESS: STREET 1: 200 DOMAIN DR CITY: STRATHAM STATE: NH ZIP: 03885 BUSINESS PHONE: 6037729500 MAIL ADDRESS: STREET 1: 200 DOMAIN DR CITY: STRATHAM STATE: NH ZIP: 03885 10-K 1 TIMBERLAND COMPANY FORM 10-K ANNUAL REPORT 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ------------------------ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 1-9548 THE TIMBERLAND COMPANY (Exact name of registrant as specified in its charter) ------------------------ DELAWARE 02-0312554 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 200 DOMAIN DRIVE STRATHAM, NEW HAMPSHIRE 03885 (Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE, IS (603) 772-9500 ------------------------ Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Class A Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None ------------------------ Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Class A Common Stock of the Registrant held by non-affiliates of the Registrant was approximately $169,421,492 on March 1, 1996. For purposes of the foregoing sentence the term "affiliate" includes each director and executive officer of the Registrant. See Item 12 of this Form 10-K. 8,306,239 shares of Class A Common Stock and 2,734,451 shares of Class B Common Stock of the Registrant were outstanding on March 1, 1996. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Annual Report to security holders for the fiscal year ended December 31, 1995 are incorporated by reference in Part I, Item 1 regarding foreign and domestic sales and Part II, Items 5, 6, 7 and 8 of this report. Portions of the Registrant's definitive Proxy Statement for the 1995 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are incorporated by reference in Part III of this report. The Exhibits Index appears on page 10 of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS OVERVIEW The Timberland Company was incorporated in Delaware on December 20, 1978, and is the successor to Abington Shoe Company, which was incorporated in Massachusetts in 1933 (The Timberland Company, together with its subsidiaries, is referred to herein as "Timberland" or the "Company," unless the context indicates otherwise). The Company designs, develops, engineers, markets and distributes men's and women's premium-quality footwear, apparel and accessories under the Timberland(R) brand. Timberland(R) products are sold primarily through better-grade department stores, independent retailers, athletic stores and other retail stores in the United States and in more than 60 countries worldwide. Timberland products are also sold through Timberland(R) specialty stores and factory outlet stores devoted exclusively to Timberland products. These two types of stores are operated by the Company in the United States and in parts of Europe and by certain of the Company's distributors in parts of Europe, South America, Mexico, the Middle East and the Asia/Pacific region. The Company offers high-quality products that provide durability, functional performance, comfort, classic styling and lasting protection from the elements. The Company believes that the combination of these features distinguishes the Timberland brand from competing brands and makes Timberland products an outstanding value. During 1995, the Company focused on improving its balance sheet through better working capital management. As part of this focus, the Company enhanced its business controls and exercised greater discipline in the day-to-day operation of its business. The Company reorganized into profit centers for its footwear, apparel and accessories, retail and international divisions. The Company also realigned the structure of its domestic wholesale sales organization from a structure organized by geographic regions to a structure organized by distribution channels. In addition, the Company strengthened its credit and cash collection procedures and policies. The Company closed two of its manufacturing facilities, downsized a third facility, and reorganized and consolidated the management of its remaining manufacturing facilities. The Company shifted the production which was performed formerly by these facilities to third party manufacturers. As a result of these actions, at the end of 1995, the Company reported a reduction in inventory, debt levels and days sales outstanding and an improvement in its cash position compared to the end of 1994. In 1995, the Company also developed a marketing and merchandising strategy that defines its footwear and apparel and accessories products within the dress casual, rugged casual and performance categories. This strategy is designed to further integrate the Timberland brand and make it easier for wholesale customers to sell Timberland products to consumers based on end-user needs. CURRENT PRODUCTS The Company's products fall into two broad categories -- footwear (shoes, boots and sandals) and apparel and accessories. The Company's footwear sales represented 74.9%, 80.5% and 83.4% of total product sales for 1995, 1994 and 1993, respectively. Sales of apparel and accessories represented 25.1%, 19.5% and 16.6% of total product sales for 1995, 1994 and 1993, respectively. Footwear In 1973, the first pair of waterproof leather boots under the Timberland brand were produced. The Company currently offers a broad variety of footwear products for men and women featuring premium waterproof or water resistant leathers, fabric uppers, selected use of waterproof fabric linings and, in certain models, hand-sewn construction. The Company's footwear lines included over 240 models and colors for Spring 1995 and over 250 models and colors for Fall 1995. New footwear product introductions in 1995 included a dressier line of waterproof Pinnacle Weatherbucks, Gore-Tex(R) chukka boots, canvas boots and shoes, performance sandals and the Treeline(TM) Aggressive Series of multi-purpose outdoor footwear, which will be available at retail in Spring 1 3 1996. The Company also expanded the number and levels of products featuring the Active Comfort Technology(TM) (ACT(TM)) system, a moisture management and climate control system developed by the Company. In 1995, the Company focused the design and development of its footwear lines for Fall 1996 into the dress casual, rugged casual and performance categories. The dress casual category has been expanded from the classic Weatherbuck collection and loafers to include cap toes, wing tips, tassel slip-ons and oxfords for men and more fashion-focused hand-sewn wovens, pumps, slip-ons and loafers for women. The rugged casual category includes rugged hand-sewn shoes, Bush Hikers, classic work boots and boat shoes. Timberland(R) performance footwear products include hiking boots, field boots and multi-purpose outdoor footwear featuring the ACT system and other advanced technologies. The Company also designs, develops, engineers, markets and distributes, under the Timberland(R) Work Division, a line of boots designed to fit the needs of construction workers, carpenters, assembly-line workers and skilled workers in other crafts and trades. These boots are sold in the United States and Italy through leading consumer product and independent retail stores. The Company expects to market these products under the name Timberland Mill River(TM) beginning in Fall 1996. Apparel and Accessories Timberland(R) apparel products consist primarily of rugged outerwear, sweaters, shirts, pants, shorts and skirts. These products feature, in certain models, premium waterproof leathers, waterproof and water resistant fabric, rust-proof hardware, canvas, denim, high-quality specialty cotton, wool and other quality performance materials. During 1995, the Company implemented a forecasting and delivery system designed specifically for its apparel products. The Company's men's apparel offerings for 1995 were coordinated and merchandised into apparel collections to compete in the collection sportswear market. The Company targeted its women's apparel offerings for 1995 to focus on classic items distributed principally through Timberland(R) specialty stores and several premium retailers. For 1996, the Company plans to expand its Men's Collection Sportswear line and to continue the limited focus of its women's line. The Company plans to promote its apparel products in a manner consistent with its dress casual, rugged casual and performance product categories. Timberland(R) accessories products for 1995 focused principally on leather goods -- luggage, briefcases, handbags, wardrobe accessories and other small leather goods -- with a lesser focus on caps, hats and leather care products and, through Timberland specialty stores only, gloves and socks. Beginning in the second half of 1996, many Timberland accessories, including day packs, travel gear, socks, legwear, gloves and leather care products, will be more widely distributed through licensing arrangements with third parties, as further described in the "Licensing" section of this report. In 1995, the Company introduced City Year Gear(TM), a limited line of T-shirts, caps and bags. City Year Gear products are sold exclusively through Timberland specialty stores. Any profits from the sale of these products will help support City Year(R), an urban youth corps sponsored partially by the Company, and other Company-sponsored community service activities. DISTRIBUTION The Company's strategy is to distribute its products through its specialty stores and through better-grade department stores, independent retailers and athletic stores which reinforce the Timberland image of quality, performance and service. For 1996, the Company plans to continue the integrated presentation of the Timberland(R) brand, which will be based on showcasing Timberland(R) footwear, apparel and accessories within the dress casual, rugged casual and performance categories. The Company also plans to expand the presentation of its Men's Collection Sportswear apparel offerings in selected collection sportswear locations during 1996. United States Operations In 1995, 1994 and 1993, 70.2%, 73.5% and 70.8%, respectively, of the Company's revenues were generated in the United States. The Company's wholesale customer accounts within the United States range 2 4 from better-grade department stores and retail stores to athletic and sporting goods stores, marinas and specialty retailers. These accounts are serviced through a combination of field and corporate-based sales teams and through the Company's six showrooms. The Company's principal showroom is located on Fifth Avenue in New York City. The Company's regional showrooms are located in Chicago, Dallas, Atlanta, Denver and Seattle. At the end of 1995, the Company had 157 concept shops featuring Timberland(R) footwear and apparel, including 82 apparel shops in men's collection sportswear departments. Concept shops are areas of third-party stores dedicated exclusively to the presentation, merchandising and sale of Timberland(R) products. Some existing concept shops were also expanded during 1995. The Company operates footwear distribution facilities in Danville, Kentucky and Hampton, New Hampshire. The Company also fills footwear orders from a third-party operated distribution facility in Industry, California. All apparel and accessories orders are centrally distributed from the Company's facility in Grove City, Ohio. In 1995 and early 1996, the Company closed its Portsmouth, New Hampshire and Wilmington, Massachusetts distribution facilities, as part of the consolidation of its domestic distribution operations. International Operations In 1995, international revenues accounted for 29.8% of the Company's revenues, compared to 26.5% in 1994 and 29.2% in 1993. Timberland products are sold internationally through distributors and commission agents and by the Company through its operating divisions in England, France, Germany, Italy, Spain and Austria. The Company's European operating divisions provide sales, administrative and, in some cases, warehousing support for the sale of Timberland products to wholesale customers in their respective countries, and in certain instances, to distributors and commission agents in other countries. Additionally, certain of the Company's international distributors operate specialty stores and concept shops devoted exclusively to Timberland products in Europe, South America and the Asia/Pacific region. The Company's international distributors opened nine such specialty stores and 24 such concept shops in 1995. Reference is made to the information set forth in Note 13 to the Company's consolidated financial statements, entitled "Industry Segment and Geographical Area Information," appearing in the Company's 1995 Annual Report to security holders, which information is incorporated herein by reference. RETAIL In 1995, revenues from the specialty and outlet stores operated by the Company accounted for 19.6% of the Company's revenues, compared to 11.3% in 1994 and 10.2% in 1993. This increase reflects the expansion of the Company's retail operations. In 1995, the Company opened six specialty stores, bringing to 29 the total number of specialty stores operated by the Company worldwide. In addition to providing an environment to showcase the Timberland(R) brand as an integrated source of footwear, apparel and accessories, these specialty stores provide sales and consumer-trend information which assists the Company in developing its marketing strategies, including point-of-purchase marketing materials. The training and customer service programs established in the Company's specialty stores also serve as a model which may be adopted by the Company's other retail accounts. In 1995, the Company opened fifteen outlet stores, bringing to 33 the total number of outlet stores operated by the Company worldwide. These outlet stores serve as the primary channel for the sale of factory-second and close-out product offerings, and enable the Company to protect and control the integrity of the Timberland brand and maximize the return associated with the sale of such products. LICENSING In 1995, the Company sought to broaden the reach of the Timberland brand by capitalizing on several licensing opportunities. These licensing agreements enable the Company to expand the Timberland brand to appropriate and well-defined product categories and geographical territories in which the Company has not had an appreciable presence, in a manner designed to reduce the risk and investment associated with pursuing such opportunities. 3 5 Product Licensing Under a licensing agreement with Timex Nederland B.V., Timberland offers a line of outdoor watches which were available for distribution in late 1995. During 1995 and early 1996, the Company entered into licensing agreements with other industry leaders for the manufacture and distribution of several new product categories, including: The Coleman Company for fabric and leather-accented day packs and travel gear, Kayser-Roth Corporation for socks and legwear and SWANY America for gloves. The Company anticipates that products under each of these new licensing agreements will be available for distribution beginning in late 1996. Territory Licensing In 1995, the Company entered into two license agreements with distributors to expand the reach of the Timberland(R) brand. The Company appointed Inchcape plc as the exclusive distributor and retailer of Timberland(R) products throughout most of the Asia/Pacific region. The transaction also included Inchcape's acquisition of the Company's Australian and New Zealand subsidiaries and the operation of existing Timberland(R) specialty stores and concept shops in these countries. In 1995, the Company also appointed Sao Paulo Alpargatas S.A. as the exclusive distributor and retailer, as well as a non-exclusive manufacturer, of Timberland products throughout much of South America. Both of these agreements provide for the opening of new specialty stores and concept shops devoted exclusively to Timberland products and require the licensee to exceed minimum purchases of Timberland products during each year. The license agreement with Sao Paulo Alpargatas S.A. also requires the licensee to achieve specified annual minimum sales increases. ADVERTISING AND MARKETING The Company's advertising campaigns are designed to increase brand awareness among consumers and to emphasize the features that distinguish the Timberland brand from competing brands and make Timberland products an outstanding value. During 1995, the Company's national and regional advertising campaigns appeared mainly in various trade press outlets and active-lifestyle, fashion and sports-focused consumer periodicals. The Company reinforced these advertising campaigns with a variety of in-store promotions, point-of-purchase marketing materials and a cooperative advertising program with its retailers, as well as retail sales clerk training and other sales incentive programs and promotional campaigns. Timberland's product and territory licensing arrangements also require licensees to fund marketing campaigns, over which Timberland maintains approval and design rights to ensure consistent and effective brand presentation. During 1995, the Company expanded its internal creative resource staff to enhance the Company's corporate and promotional communication capabilities and to better manage the presentation of the Timberland brand. The Company plans to produce internally all advertising, product catalogs and point-of-purchase marketing materials and all packaging and hang-tag designs for its 1996 product offerings. SEASONALITY In 1995, as has traditionally been the case, the Company's revenues were higher in the last two quarters of the year than in the first two quarters. The Company expects this seasonality to continue in 1996. BACKLOG At December 31, 1995, Timberland's backlog of orders from its customers was approximately $102 million, compared to $132 million at December 31, 1994 and $69 million at December 31, 1993. While all orders in the backlog are subject to cancellation by customers, the Company expects that the majority of such orders will be filled in 1996. The Company does not believe that its backlog of orders at year-end is representative of the orders which will be filled during 1996, due to the shift towards "at-once orders" being adopted by many retailers. 4 6 MANUFACTURING During 1995, approximately 40% of the unit volume of the Company's footwear products was manufactured by the Company, compared to approximately 60% during 1994. The remainder of the Company's footwear products and all of its apparel and accessories were produced by independent manufacturers in Asia, Europe and the Americas. Over 20% and 15% of the unit volume of the Company's footwear products was produced in Thailand and Taiwan, respectively. During 1995, the Company closed its footwear manufacturing facilities located in Boone, North Carolina and Mountain City, Tennessee, and downsized its footwear manufacturing facility in the Dominican Republic. The Company increased its use of independent manufacturers to replace most of the manufacturing operations conducted formerly at its manufacturing facilities. This restructuring was a result of the Company's overall effort to improve product quality, to reduce manufacturing overhead and product costs, and to increase the Company's flexibility to meet consumer demand for particular product lines. The Company currently plans to retain its internal manufacturing capability in order to continue benefiting from expertise the Company has gained with respect to the footwear manufacturing methods and from the research and development activities conducted at its manufacturing facilities. As part of the Company's efforts to improve the reliability and quality of the manufacturing operations conducted by the Company and its independent manufacturers, the Company in 1995 reorganized and consolidated the management of these functions and expanded its quality control group. The Company's quality and production standards were reviewed and updated, and product quality audits were conducted at the factories and distribution centers to ensure such standards were being met. In 1995, the Company also opened offices in Bangkok, Thailand and Taichung, Taiwan in order to more closely supervise the Company's sourcing activities conducted in the Asia/Pacific region. In addition, the Company enhanced and expanded the data available through its information systems to enable the Company to better match product supply and demand. To the extent the Company manufactures its products outside the United States or is dependent upon foreign operations with unaffiliated parties, the Company is subject to the usual risks of doing business abroad. These risks potentially include, among other risks, import restrictions, anti-dumping investigations, political or labor disturbances, expropriation and acts of war. RAW MATERIALS During 1995, the Company consolidated its base of raw materials suppliers; however, only two suppliers provided more than 10% each of the Company's leather purchases for 1995. The Company has no reason to believe that leather will not continue to be available from these or alternative sources. The Company also began to establish a central network of suppliers through which the Company's manufacturing facilities and independent manufacturers could purchase raw materials. The Company believes that this approach will reduce the cost and provide greater consistency of the raw materials procured to produce Timberland(R) products, and increase compliance with the Company's production standards. TRADEMARKS AND TRADE NAMES; PATENTS; RESEARCH & DEVELOPMENT The Company's principal trade name is The Timberland Company and the Company's principal trademarks are Timberland and [TIMBERLAND LOGO], which have been registered in the United States and in certain foreign countries. Other Company trademarks or registered trademarks are Treeline; Weathergear; [WORK LOGO]; [MILL RIVER LOGO]; More Quality Than You May Ever Need; Active Comfort Technology; ACT; Mountain to River; Toporelief; Topozoic; Boots, Shoes, Clothing, Wind, Water, Earth & Sky; Wind, Water, Earth & Sky; Elements; The Elements of Design are the Elements themselves, Wind, Water, Earth and Sky; Nothing Can Stop You; Blackridge Mountain; Blackridge Mountain Logo Design; Mill River; Mill River Logo Design; TBL 30; Timberland 1049; Trail Grip; and Tims. The Company regards its trade name and trademarks as valuable assets and believes that they are important factors in marketing its products, particularly in the case of the Timberland(R) brand. It is the policy of the Company to protect and defend vigorously its trade name and 5 7 trademarks against infringement under the laws of the United States and other countries. In addition, the Company seeks to protect and defend vigorously its patents, designs, copyrights and all other of its proprietary rights under applicable laws. The Company conducts research, design and development efforts for its footwear, apparel and accessories. The Company tests a number of its products under actual field conditions to evaluate and improve product performance. The Company's expenses relating to research, design and development, however, have not represented a material expenditure relative to its other expenses. COMPETITION The Company does not believe any of its principal competitors offers a complete line of products that provide the same quality and performance as the complete line of Timberland(R) footwear, apparel and accessories products. The Company does, however, have a variety of major competitors in each of its separate footwear, apparel and accessories product offerings. The Company's footwear and apparel and accessories products are marketed in highly competitive environments which are subject to rapid changes in consumer preference. Although the footwear industry is fragmented to a great degree, many of the Company's competitors are larger and have substantially greater resources than the Company, including athletic shoe companies, many of which compete directly with some of the Company's products. In addition, the Company faces competition from retailers that are establishing products under private labels which compete with the Company's products. The Company has at least nine major competitors in classic work boot sales, at least seven major competitors in sales of rugged casual footwear sales, at least twelve major competitors in sales of performance boots and sandals, and at least thirteen major competitors in sales of dress casual footwear. The Company's major competitors for its footwear products are located principally in the United States. The Company also faces competition from many international footwear manufacturers. The Company's line of men's and women's apparel faces competition from at least ten major apparel companies in the United States and from a variety of major apparel companies internationally. The Company's men's and women's lines of footwear and apparel face competition from at least two direct mail companies in the United States. The Company's accessories products line faces competition from at least seven major companies in the United States and from several major accessories companies internationally. Product quality, performance, design, styling and pricing, as well as consumer awareness, are all important elements of competition in the footwear, apparel and accessories markets served by the Company. Although changing fashion trends generally affect demand for particular footwear, apparel and accessories products, the Company believes that, because Timberland(R) products are designed primarily for functionality and performance, demand for Timberland products (except for the new, more fashion-focused models introduced under Timberland's Fall 1996 dress casual footwear line) is less sensitive to changing trends in fashion than other products that are designed specifically to meet such trends. ENVIRONMENTAL MATTERS Compliance with federal, state and local environmental regulations have not had, nor are they expected to have, any material effect on the capital expenditures, earnings or competitive position of the Company, based on information and circumstances currently known to the Company. EMPLOYEES As of December 31, 1995, the Company had approximately 5,500 employees worldwide. Management considers its employee relations to be good. None of the Company's employees is represented by a labor union, and the Company has never suffered a material interruption of business caused by labor disputes. 6 8 ITEM 2. PROPERTIES The Company owns a facility in Hampton, New Hampshire, which served as the Company's headquarters until November 1994 and currently is used for warehousing and distribution of certain of the Company's products. In connection with the purchase financing for such property, industrial revenue bonds are outstanding in the principal amount of $5,345,000, which are due in 2014. These bonds bear interest at 6.20% through 1999 and thereafter at rates adjusted every five years, through maturity. These bonds are secured by a mortgage on such real estate and by a security interest on assets located there. The Company also leases distribution facilities in Grove City, Ohio and Wilmington, Massachusetts, for the distribution of certain products, under lease agreements which expire in May 1998 and April 1996, respectively. In February 1996, the Company acquired its distribution facility in Danville, Kentucky. Since April 1994, the Company has leased property in Stratham, New Hampshire that serves as its worldwide headquarters, under a lease which expires in July 1999, with options to extend the expiration. The Company considers its current headquarters facilities adequate and suitable for its present needs. The Company leases its manufacturing facilities which are located in Isabela, Puerto Rico and Santiago, Dominican Republic. These manufacturing facilities are occupied under 11 leasing arrangements which expire at various times through February 1998. The Company leases 19 domestic specialty stores, ten international specialty stores, six domestic showrooms, 29 domestic factory outlet stores, and four international factory outlet stores. The Company's subsidiaries also lease office and warehouse space to meet their individual requirements. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various litigation and legal matters which have arisen in the ordinary course of business. Management believes that the ultimate resolution of any existing matter will not have a material adverse effect on the Company's consolidated financial statements. The Company and two of its officers and directors have been named as defendants in two actions filed in the United States District Court for the District of New Hampshire, one filed by Jerrold Schaffer on December 12, 1994, and the other filed by Gershon Kreuser on January 4, 1995. On April 24, 1995, the District Court granted plaintiffs' motion, assented to by defendants, to consolidate the two actions. On June 23, 1995, plaintiffs filed a consolidated amended complaint (the "Amended Complaint") with the District Court. The Amended Complaint alleges that defendants violated the federal securities laws by making material misstatements and omissions in certain of the Company's public filings and statements in 1994. Specifically, the Amended Complaint alleges that such statements and omissions had the effect of artificially inflating the market price for the Company's Class A Common Stock until the disclosure by the Company on December 9, 1994 of its expectation that results for the fourth quarter were not likely to meet analysts' anticipated levels. Damages are unspecified. On March 18, 1996, the Court denied defendants' motion to dismiss the Amended Complaint. On March 19, 1996, the Court granted plaintiffs' motion for class certification for all purchasers of the Company's Class A Common Stock between May 12, 1994 and December 9, 1994. Management believes this action is without merit and intends to defend it vigorously. Accordingly, at this time, management does not expect the outcome of such litigation to have a material adverse effect on the Company's consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise. 7 9 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following information is submitted as to the executive officers of the Company:
NAME AGE POSITION ---- --- -------- Sidney W. Swartz..................... 60 Chairman of the Board, President, Chief Executive Officer and Director Jeffrey B. Swartz.................... 36 Executive Vice President, Chief Operating Officer and Director Keith D. Monda....................... 49 Senior Vice President-Finance and Administration and Chief Financial Officer Gregory W. VanWormer................. 40 Senior Vice President-General Manager Apparel/Retail Dennis W. Hagele..................... 52 Vice President-Finance and Corporate Controller (Chief Accounting Officer) Jane E. Owens........................ 42 Vice President and General Counsel
All executive officers serve at the discretion of the Board of Directors. Sidney W. Swartz has served the Company as Chairman of the Board, Chief Executive Officer and President since June 1986 when he and his family trust became the then sole security holders of the Company. During the prior 20 years, Mr. Swartz, as the owner of 50% of the Company, was responsible for the manufacturing, marketing, distribution and financial aspects of the Company. Jeffrey B. Swartz has served the Company as Executive Vice President since March 1990 and as Chief Operating Officer since May 1991. From June 1986 to February 1990, Mr. Swartz served the Company in a variety of positions, including Senior Vice President of International Operations, Vice President-Operations/Manufacturing, Vice President-International and General Manager of International Business. Jeffrey Swartz is the son of Sidney W. Swartz. Keith D. Monda joined the Company in December 1993 as Senior Vice President-Finance and Administration and Chief Financial Officer. From May 1990 to December 1993, Mr. Monda was Executive Vice President of Finance and Administration of J. Crew Group, Inc.; from July 1989 to May 1990, he was Senior Vice President and Chief Financial Officer of Bunge Corporation (an integrated food company); and from April 1986 to July 1989, he was Vice President of Finance and Chief Financial Officer of the chemical division of Pfizer, Inc. Gregory W. VanWormer joined the Company in May 1994 as Senior Vice President-Retail. Effective January 1, 1995, Mr. VanWormer's title was changed to Senior Vice President-General Manager Apparel/Retail. From August 1991 to April 1994, Mr. VanWormer was the Vice President-General Merchandise Manager of G.H. Bass & Co.; and from June 1988 to June 1991, he held the following positions with C.M.L. Inc.: Vice President-General Merchandise Manager of Carroll Reed (a retail company) and President of The Gokey Company (a retail, catalog and manufacturing company). Dennis W. Hagele joined the Company in October 1994 as Vice President-Finance and Corporate Controller. From July 1993 to September 1994, Mr. Hagele was an independent financial consultant; and from August 1981 to June 1993, he was Assistant Controller of Sara Lee Corporation. Jane E. Owens joined the Company in September 1992 as Vice President and General Counsel. From June 1990 to August 1992, Ms. Owens was Counsel for Reebok International Ltd.; and from March 1988 to June 1990, she was a partner in the law firm of Gaston & Snow. 8 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is included in the Registrant's 1995 Annual Report to security holders under the caption "Quarterly Market Information and Related Matters" and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included in the Registrant's 1995 Annual Report to security holders under the caption "Five Year Summary of Selected Financial Data" and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is included in the Registrant's 1995 Annual Report to security holders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is included in the Registrant's 1995 Annual Report to security holders and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the information set forth under the caption, "Executive Officers of the Registrant," in Item 4A of Part I of this report and to information under the caption, "Information with Respect to Nominees" in the Registrant's definitive proxy statement (the "Registrant's 1996 Proxy Statement") relating to its 1996 Annual Meeting of Stockholders, to be filed with the Commission within 120 days after the close of the Registrant's fiscal year ended December 31, 1995, which information is incorporated herein by reference. Reference is also made to the information set forth in the Registrant's 1996 Proxy Statement with respect to compliance with Section 16(a) of the Exchange Act, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the information set forth under the caption "Executive Compensation," in the Registrant's 1996 Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the information set forth under the caption, "Security Ownership of Certain Beneficial Owners and Management," in the Registrant's 1996 Proxy Statement, which information is incorporated herein by reference. For purposes of calculating the aggregate market value of the Class A Common Stock on March 1, 1996, the shares owned by The Sidney W. Swartz 1982 Family Trust, The Swartz Foundation and The Sidney and Judith Swartz Charitable Remainder Unitrust have not been considered owned by an affiliate. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the information set forth under the caption, "Certain Relationships and Related Transactions," in the Registrant's 1996 Proxy Statement, which information is incorporated herein by reference. 9 11 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K List of Financial Statements and Financial Statement Schedules. (a)(1) Financial Statements. The following financial statements appearing in the Company's 1995 Annual Report to security holders are incorporated by reference in this report:
PAGE ---- ANNUAL REPORT Consolidated Balance Sheets as of December 31, 1995 and December 31, 1994.................................................................. 18 For the years ended December 31, 1995, 1994 and 1993: Consolidated Statements of Operations.............................. 19 Consolidated Statements of Changes in Stockholders' Equity......... 20 Consolidated Statements of Cash Flows.............................. 21 Notes to Consolidated Financial Statements......................... 22 Independent Auditors' Report............................................ 35
(a)(2) Financial Statement Schedule. The following additional financial data should be read in conjunction with the Consolidated Financial Statements in the Registrant's 1995 Annual Report to security holders:
FORM 10-K PAGE --------- Report of Independent Public Accountants on Schedule................ F-1 Schedule VIII -- Valuation and Qualifying Accounts.................. F-2
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and have therefore been omitted. (b) No reports on Form 8-K were filed by the Company during the fourth quarter of 1995. (c) Listed below are all the Exhibits filed as part of this report, some of which are incorporated by reference from documents previously filed by the Company with the Securities and Exchange Commission in accordance with the provisions of Rule 12b-32 of the Securities Exchange Act of 1934, as amended.
EXHIBIT DESCRIPTION PAGE NO. - ------- ------------ -------- (3) Articles of incorporation and by-laws 3.1 Restated Certificate of Incorporation (1) 3.2 By-Laws, as amended May 19, 1993 (5) (4) Instruments defining the rights of security holders, including indentures (See also Exhibits 3.1 and 3.2) 4.1 Specimen stock certificate for shares of the Company's Class A Common Stock(3) (10) Material Contracts 10.1 Agreement dated as of August 29, 1979 between The Timberland Company and Sidney W. Swartz(1) 10.2 The Company's 1987 Stock Option Plan, as amended(8) 10.3 The Company's 1991 Employee Stock Purchase Plan, as amended(2) 10.4 The Company's 1991 Stock Option Plan for Non-Employee Directors(3) 10.5 The Timberland Company Long Term Incentive Plan for Senior Management(5) 10.6 The Timberland Company Annual Bonus Plan for Exempt Employees(5)
10 12
EXHIBIT DESCRIPTION PAGE NO. - ------- ----------- -------- 10.7 The Timberland Company Retirement Earnings 401(k) Plan and Trust Agreements, filed herewith 10.8 The Timberland Company Profit Sharing Plan and Trust Agreements, filed herewith 10.9 (a) Lease dated March 23, 1987 between The Outdoor Footwear Company and Corporacion Sublistatica, S.A.(1) (b) Lease dated November 21, 1988 between 745 Associates and The Timberland Company(4) (c) (i) Lease dated July 20, 1992 among Louise Minges, Mitchell Minges and The Timberland Company(4) (ii) Amendment dated July 16, 1993 to Lease(5) (d) Lease dated March 31, 1981 between the Puerto Rico Industrial Development and The Timberland Company(4) (e) Lease dated September 7, 1992 between Corporacion Zona Franca Industrial De Santiago, Inc. and The Recreational Footwear Company(4) (f) Lease dated December 2, 1992 between Corporacion Zona Franca Industrial De Santiago, Inc. and The Recreational Footwear Company(4) (g) Lease dated as of June 29, 1993 between Timberland Dominicana, S.A. and Santiago Norte, S.A. (Pisano) Industrial Park(5) (h) Lease dated as of November 30, 1993 between Timberland Dominicana, S.A. and Santiago Norte, S.A. (Pisano) Industrial Park(5) (i) Lease dated as of December 16, 1993 between Timberland Dominicana, S.A. and Santiago Norte, S.A. (Pisano) Industrial Park(5) (j) Lease dated as of March 31, 1993 between Talbot Operations, Inc. and The Timberland Company(5) (k) (i) Sublease dated March 31, 1994 between Hewlett-Packard Company and The Timberland Company(6) (ii) Amendment No. 1 dated July 15, 1994 to Sublease(7) 10.10 (a) Amended and Restated Note Agreements dated as of April 1, 1994 regarding $35,000,000 9.70% Senior Notes due December 1, 1999(6) (b) Amendment No. 1 dated as of April 1, 1995 to Amended and Restated Note Agreements(9) (c) Amendment No. 2 dated as of June 28, 1995 to Amended and Restated Note Agreements(9) 10.11 Termination of Credit Agreement among The Timberland Company, certain banks and Chase Manhattan Bank, N.A. as Agent, dated as of December 15, 1994(7) 10.12 (a) Note Agreements dated as of April 1, 1994 regarding $65,000,000 7.16% Senior Notes due April 15, 2000(6) (b) Amendment No. 1 dated as of April 1, 1995 to Note Agreements(9) (c) Amendment No. 2 dated as of June 28, 1995 to Note Agreements(9) 10.13 (a) Amended and Restated Credit Agreement dated as of March 14, 1995 among The Timberland Company, certain banks listed therein and Morgan Guaranty Trust Company of New York, as Agent(7) (b) Amendment No. 3 dated as of July 21, 1995 to the Amended and Restated Credit Agreement, which also incorporates Amendment No. 1 dated as of April 19, 1995 and Amendment No. 2 dated as of June 28, 1995(9) 10.14 (a) Note Agreements dated as of December 15, 1994 regarding $106,000,000 8.94% Senior Notes due December 15, 2001(7) (b) Amendment No. 1 dated as of April 1, 1995 to Note Agreements(9) (c) Amendment No. 2 dated as of June 28, 1995 to Note Agreements(9)
11 13
EXHIBIT DESCRIPTION PAGE NO. - ------- ----------- -------- (13) Annual Report to security holders 13. Portions of 1995 Annual Report to security holders as incorporated herein by reference, filed herewith (21) Subsidiaries 21. List of subsidiaries of the Registrant, filed herewith (23) Consent of experts and counsel 23. Consent of Deloitte & Touche LLP to the incorporation by reference of their report included in the Registrant's 1995 Annual Report to security holders (27) Financial Data Schedule 27. Financial Data Schedules, filed herewith (99) Additional Exhibit 99. Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 - --------------- (1) Filed as exhibits to Registration Statement on Form S-1, numbered 33-14319, and incorporated herein by reference. (2) Filed on June 21, 1995, as an exhibit to Registration Statement on Form S-8, numbered 33-60459, and incorporated herein by reference. (3) Filed as exhibits to the Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference. (4) Filed as exhibits to the Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference. (5) Filed as exhibits to the Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference. (6) Filed as exhibits to the Quarterly Report on Form 10-Q for the fiscal period ended July 1, 1994, and incorporated herein by reference. (7) Filed as exhibits to the Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference. (8) Filed on June 21, 1995, as an exhibit to Registration Statement on Form S-8, numbered 33-60457, and incorporated herein by reference. (9) Filed as exhibits to the Quarterly Report on Form 10-Q for the fiscal period ended June 30, 1995, and incorporated herein by reference.
Pursuant to paragraph 4(iii) of Item 601, Regulation S-K, the Registrant has filed as Exhibits only the instruments defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries with respect to which the total amount of securities authorized thereunder exceeds 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees to furnish to the Commission upon its request copies of other instruments defining the rights of holders of long-term debt of the Registrant and its subsidiaries, with respect to which the total amount does not exceed 10% of such assets. The Registrant also agrees to furnish to the Commission upon its request copies of any omitted schedule or exhibit to any Exhibit filed herewith. 12 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE TIMBERLAND COMPANY /S/ SIDNEY W. SWARTZ By:................................. SIDNEY W. SWARTZ, PRESIDENT March 28, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------ --------------- SIDNEY W. SWARTZ Chairman of the Board, March 28, 1996 ........................................ President and Chief (SIDNEY W. SWARTZ) Executive Officer (Principal Executive Officer) JEFFREY B. SWARTZ Executive Vice President, March 28, 1996 ........................................ Chief Operating Officer and (JEFFREY B. SWARTZ) Director KEITH D. MONDA Senior Vice President-Finance March 28, 1996 ........................................ and Administration and Chief (KEITH D. MONDA) Financial Officer DENNIS W. HAGELE Vice President-Finance and March 28, 1996 ........................................ Corporate Controller (Chief (DENNIS W. HAGELE) Accounting Officer) ROBERT M. AGATE Director March 28, 1996 ........................................ (ROBERT M. AGATE) JOHN F. BRENNAN Director March 28, 1996 ........................................ (JOHN F. BRENNAN) ABRAHAM ZALEZNIK Director March 28, 1996 ........................................ (ABRAHAM ZALEZNIK)
13 15 ITEM 14(d) INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of The Timberland Company: We have audited the consolidated financial statements of The Timberland Company as of December 31, 1995 and 1994 and for the three years in the period ended December 31, 1995, and have issued our report thereon dated February 7, 1996; such consolidated financial statements and report are included in your 1995 Annual Report to security holders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of The Timberland Company, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Boston, Massachusetts February 7, 1996 F-1 16 SCHEDULE VIII THE TIMBERLAND COMPANY VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS ------------------------- BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT BEGINNING COSTS AND OTHER NET OF END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD ----------- --------- ---------- ---------- ---------- ---------- Allowance for doubtful accounts: Year ended December 31, 1995............... $2,704 $3,697 -- $3,743 $2,658 December 31, 1994............... 1,014 1,938 -- 248 2,704 December 31, 1993............... 1,821 1,131 -- 1,938 1,014 Group insurance reserve: Year ended December 31, 1995............... $1,810 $5,467 -- $4,503 $2,774 December 31, 1994............... 1,319 7,983 -- 7,492 1,810 December 31, 1993............... 1,401 5,752 -- 5,834 1,319
F-2 17 Timberland; [TIMBERLAND LOGO]; Treeline; Weathergear; [WORK LOGO]; [MILL RIVER LOGO]; More Quality Than You May Ever Need; Active Comfort Technology; ACT; Mountain to River; Toporelief; Topozoic; Boots, Shoes, Clothing, Wind, Water, Earth & Sky; Wind, Water, Earth & Sky; Elements; The Elements of Design are the Elements themselves, Wind, Water, Earth and Sky; Nothing Can Stop You; Blackridge Mountain; Blackridge Mountain Logo Design; Mill River; Mill River Logo Design; TBL 30; Timberland 1049; Trail Grip; and Tims are trademarks or registered trademarks of The Timberland Company. Gore-Tex is a registered trademark of W.L. Gore & Associates, Inc. (C) The Timberland Company 1996 All Rights Reserved. EX-10.7 2 TIMBERLAND CO. 401K AND TRUST AGREEMENTS 1 EXHIBIT 10.7 STATE STREET SOLUTIONS ---------------------- PROTOTYPE DEFINED CONTRIBUTION PLAN ----------------------------------- (Basic Plan Document 01) 2 TABLE OF CONTENTS -----------------
PAGE ---- SECTION 1.....................................................................................................1 - --------- Introduction................................................................................................1 ------------ Purpose...............................................................................................1 ------- Adoption of the Plan..................................................................................1 -------------------- Administration........................................................................................1 -------------- Notices...............................................................................................2 ------- SECTION 2.....................................................................................................3 - --------- Definitions.................................................................................................3 ----------- Adoption Agreement....................................................................................3 ------------------ Code................................................................................................. 3 ---- Compensation..........................................................................................3 ------------ Disability............................................................................................4 ---------- Earned Income.........................................................................................4 ------------- Effective Date........................................................................................4 -------------- Employee..............................................................................................4 -------- Employer..............................................................................................5 -------- Entry Date............................................................................................5 ---------- ERISA.................................................................................................5 ----- Fiscal Year...........................................................................................5 ----------- Highly Compensated Employee...........................................................................5 --------------------------- Hour of Service.......................................................................................6 --------------- Leased Employee.......................................................................................8 --------------- Leave of Absence......................................................................................8 ---------------- Limitation Year.......................................................................................8 --------------- Maternity or Paternity Absence........................................................................8 ------------------------------ One-Year Break in Service.............................................................................9 ------------------------- Participant..........................................................................................10 ----------- Plan................................................................................................ 10 ----- Plan Year............................................................................................10 --------- Predecessor Employer.................................................................................10 -------------------- Related Employer.....................................................................................10 ---------------- Self-Employed Individual.............................................................................10 ------------------------ Trust................................................................................................11 ----- Trust Fund...........................................................................................11 ---------- Trustee..............................................................................................11 ------- Year of Service......................................................................................11 --------------- SECTION 3....................................................................................................12 - --------- Eligibility and Participation..............................................................................12 ----------------------------- Eligibility..........................................................................................12 ----------- Notice of Participation..............................................................................12 ----------------------- Leave of Absence.....................................................................................13 ---------------- Employer Records.....................................................................................13 ---------------- SECTION 4....................................................................................................14 - ---------
-i- 3
PAGE ---- Compensation Deferral Contributions.........................................................................14 ----------------------------------- Compensation Deferral Contributions..................................................................14 ----------------------------------- Deduction of Compensation Deferral Contributions.....................................................14 ------------------------------------------------ Variation, Discontinuance and Resumption of Compensation Deferral Contributions......................14 ------------------------------------------------------------------------------- Calendar Year Dollar Limitation on Compensation Deferral Contributions...............................15 ---------------------------------------------------------------------- Limitation on Compensation Deferral Contributions....................................................16 ------------------------------------------------- Limitation on Voluntary and Employer Matching Contributions..........................................18 ----------------------------------------------------------- Prohibition of Contributions by Highly Compensated Employees.........................................20 ------------------------------------------------------------ Two or More Plans....................................................................................20 ----------------- Distribution Restrictions............................................................................21 ------------------------- Other Requirements...................................................................................22 ------------------ SECTION 5....................................................................................................25 - --------- Participant Contributions..................................................................................25 ------------------------- Voluntary Participant Contributions..................................................................25 ----------------------------------- Deduction or Payment of Voluntary Contributions......................................................25 ----------------------------------------------- Variation, Discontinuance and Resumption of Voluntary Contributions..................................25 ------------------------------------------------------------------- No Deductible Employee Contributions.................................................................25 ------------------------------------ SECTION 6....................................................................................................27 - --------- Employer Contributions.....................................................................................27 ---------------------- Employer Contributions...............................................................................27 ---------------------- Compensation Deferral Contributions..................................................................27 ----------------------------------- Employer Matching Contributions......................................................................27 ------------------------------- Payment of Employer Contributions....................................................................28 --------------------------------- Verification of Employer Contributions...............................................................28 -------------------------------------- No Responsibility for Collection or Verification.....................................................28 ------------------------------------------------ Limitations on Employer Contributions................................................................28 ------------------------------------- SECTION 7....................................................................................................29 - --------- Period of Participation....................................................................................29 ----------------------- Settlement Dates.....................................................................................29 ---------------- Restricted Participation.............................................................................29 ------------------------ SECTION 8....................................................................................................31 - --------- Accounting.................................................................................................31 ---------- Separate Accounts....................................................................................31 ----------------- Accounting Dates.....................................................................................32 ---------------- Adjustment of Accounts...............................................................................32 ---------------------- Valuation Date.......................................................................................32 -------------- Crediting of Compensation Deferral Contributions and Voluntary Contributions.........................33 ---------------------------------------------------------------------------- Allocation and Crediting of Employer Matching Contributions..........................................33 ----------------------------------------------------------- Allocation and Crediting of Employer Contributions...................................................33 -------------------------------------------------- Allocation and Crediting of Forfeitures..............................................................35 --------------------------------------- Charging Withdrawals and Distributions...............................................................36 -------------------------------------- Rollovers............................................................................................36 ---------
-ii- 4
PAGE ---- Statements...........................................................................................36 ---------- SECTION 9....................................................................................................38 - --------- Investments................................................................................................38 ----------- Investment Option Selection..........................................................................38 --------------------------- Investment Option Subaccounts........................................................................38 ----------------------------- Elections to Change Investments......................................................................39 ------------------------------- Accounting for Investments...........................................................................39 -------------------------- Participant Directed Brokerage Accounts..............................................................39 --------------------------------------- Investment Restrictions..............................................................................41 ----------------------- SECTION 10...................................................................................................42 - ---------- Payment of Account Balances................................................................................42 --------------------------- Retirement or Death..................................................................................42 ------------------- Resignation or Dismissal.............................................................................42 ------------------------ Manner of Distribution...............................................................................42 ---------------------- Death Distribution Provisions........................................................................44 ----------------------------- Commencement of Distributions........................................................................45 ----------------------------- Distribution Requirements............................................................................45 ------------------------- Consent to Distribution..............................................................................46 ----------------------- Beneficiary Designation..............................................................................47 ----------------------- Missing Participants or Beneficiaries................................................................48 ------------------------------------- Facility of Payment..................................................................................49 ------------------- Definitions..........................................................................................49 ----------- Distribution to Alternate Payees.....................................................................52 -------------------------------- SECTION 11...................................................................................................53 - ---------- Joint and Survivor Annuity Requirements....................................................................53 --------------------------------------- Qualified Joint and Survivor Annuity.................................................................53 ------------------------------------ Qualified Preretirement Survivor Annuity.............................................................53 ---------------------------------------- Definitions..........................................................................................54 ----------- Notice Requirements..................................................................................56 ------------------- Exceptions to Notice Requirements....................................................................57 --------------------------------- Safe Harbor Rules....................................................................................57 ----------------- SECTION 12...................................................................................................59 - ---------- Withdrawals and Distributions During Employment............................................................59 ----------------------------------------------- Withdrawal of Voluntary Participant Contributions....................................................59 ------------------------------------------------- Pre-Termination Distributions........................................................................59 ----------------------------- Charging and Payment of Withdrawals..................................................................59 ----------------------------------- Loans to Participants................................................................................60 --------------------- Hardship Withdrawals.................................................................................63 -------------------- SECTION 13...................................................................................................66 - ---------- No Reversion in Employer...................................................................................66 ------------------------ SECTION 14...................................................................................................67 - ---------- Reemployment and Employment With Related Employers.........................................................67 --------------------------------------------------
-iii- 5
PAGE ---- Reemployment Before Break in Service.................................................................67 ------------------------------------ Reemployment After Break in Service..................................................................67 ----------------------------------- Restoration of Forfeitures...........................................................................68 -------------------------- Employment With Related Employers....................................................................68 --------------------------------- SECTION 15...................................................................................................70 - ---------- General Provisions.........................................................................................70 ------------------ Information Furnished by Participants................................................................70 ------------------------------------- Information Furnished to Trustee.....................................................................70 -------------------------------- Inalienability of Benefits...........................................................................70 -------------------------- Absence of Guaranty..................................................................................70 ------------------- Employment Rights....................................................................................70 ----------------- Gender and Number....................................................................................70 ----------------- Administrative Decisions Final.......................................................................70 ------------------------------ Evidence.............................................................................................71 -------- Action by Employer...................................................................................71 ------------------ Uniform Rules........................................................................................71 ------------- Controlling Law......................................................................................71 --------------- Waiver of Notice.....................................................................................71 ---------------- Successor to an Employer.............................................................................71 ------------------------ Claims Procedure.....................................................................................72 ---------------- Litigation by Participants...........................................................................73 -------------------------- Amendments of Vesting Schedule.......................................................................73 ------------------------------ Qualification of Plan................................................................................73 --------------------- Compliance with ERISA and Severability...............................................................74 -------------------------------------- Control of Trades or Businesses by Owner-Employee....................................................74 ------------------------------------------------- Portability..........................................................................................75 ----------- SECTION 16...................................................................................................76 - ---------- Amendment and Termination..................................................................................76 ------------------------- Amendment by the Employer............................................................................76 ------------------------- Amendment by Sponsor.................................................................................77 -------------------- Termination..........................................................................................78 ----------- Notice of Amendment or Termination...................................................................79 ---------------------------------- Vesting and Distribution on Termination..............................................................79 --------------------------------------- Merger or Consolidation..............................................................................79 ----------------------- SECTION 17...................................................................................................80 - ---------- Benefit Limitations........................................................................................80 ------------------- Single Plan..........................................................................................80 ----------- Estimated Compensation...............................................................................80 ---------------------- Actual Compensation..................................................................................80 ------------------- Excess Amount in Single Plan.........................................................................80 ---------------------------- Two or More Qualified Plans (Master or Prototype Plans)..............................................82 ------------------------------------------------------- Estimated Compensation (Two or More Plans)...........................................................82 ------------------------------------------ Actual Compensation (Two or More Plans)..............................................................82 --------------------------------------- Treatment of Excesses (Two or More Plans)............................................................82 ----------------------------------------- Coincident Allocations (Two or More Plans)...........................................................83 ------------------------------------------ Two or More Qualified Plans (Other than Master or Prototype Plans)...................................83 ------------------------------------------------------------------ Combined Plan Limitation.............................................................................83 ------------------------
-iv- 6
PAGE ---- Definitions Relative to Benefit Limitations..........................................................83 ------------------------------------------- SECTION 18...................................................................................................89 - ---------- Predecessor Plan...........................................................................................89 ---------------- SECTION 19...................................................................................................90 - ---------- Special Rules Applicable When Plan is Top-Heavy............................................................90 ----------------------------------------------- Purpose and Effect...................................................................................90 ------------------ Top-Heavy Plan.......................................................................................90 -------------- Key Employee.........................................................................................91 ------------ Aggregation of Plans.................................................................................92 -------------------- Minimum Vesting......................................................................................92 --------------- Minimum Employer Contribution........................................................................93 ----------------------------- Coordination of Benefits.............................................................................93 ------------------------ Adjustment of Combined Benefit Limitations...........................................................93 ------------------------------------------ Benefit Accrual......................................................................................94 --------------- SECTION 20...................................................................................................95 - ---------- Direct Transfer of Eligible Rollover Distributions.........................................................95 -------------------------------------------------- Purpose..............................................................................................95 ------- Definition of Eligible Rollover Distribution.........................................................95 -------------------------------------------- Definition of Eligible Retirement Plan...............................................................95 -------------------------------------- Definition of Distributee............................................................................95 ------------------------- Definition of Direct Rollover........................................................................96 -----------------------------
-v- 7 DEFINED TERMS -------------
TERMS SECTION PAGE - ----- ------- ---- Account 8.1 37 Accounting Date 8.2 37 Actual Deferral Percentage 4.5 19 Administrator 1.3 1 Adoption Agreement 2.1 3 Annual Addition 17.12 97 Code 2.2 3 Compensation 2.3 3 Compensation Deferral Contributions 4.1 16 Compensation Deferral Contribution Account 8.1 36 Disability 2.4 4 Earned Income 2.5 5 Effective Date 2.6 5 Employee 2.7 5 Employer 2.8 5 Employer Contributions 6.1 31 Employer Contribution Account 8.1 36 Employer Matching Contributions 6.3 32 Employer Matching Contribution Account 8.1 36 Entry Date 2.9 5 ERISA 2.10 6 Excess Aggregate Contributions 4.6 23 Fiscal Year 2.11 6 Forfeiture 8.8 41 Highly Compensated Employee 2.12 6 Hour of Service 2.13 7 Key Employee 19.3 106 Leased Employee 2.14 9 Leave of Absence 2.15 9 Limitation Year 2.16 9 Maternity or Paternity Absence 2.17 10 Normal Retirement Age 7.1 34 One-Year Break in Service 2.18 10 Owner-Employee 2.7 5 Participant 2.19 11 Participant Rollover Account 8.1 37 Plan 2.20 11 Plan Year 2.21 11
-vi- 8 DEFINED TERMS -------------
TERMS SECTION PAGE - ----- ------- ---- Predecessor Employer 2.22 12 Predecessor Plan 18 104 Qualified Matching Contributions 6.3 32 Qualified Nonelective Contributions 4.5 20 Related Employer 2.23 12 Regular Accounting Date 8.2 37 Self-Employed Individual 2.24 12 Special Accounting Date 8.2 37 Sponsor 1.1 1 Super Top Heavy Plan 19.8 110 Top Heavy Plan 19.2 105 Trust 2.25 12 Trust Fund 2.26 12 Trustee 2.27 13 Valuation Date 8.4 38 Vested Percentage 10.2 49 Vesting Period 10.2 49 Voluntary Contributions 5.1 29 Voluntary Contributions Account 8.1 36 Year of Service 2.28 13
-vii- 9 STATE STREET SOLUTIONS ---------------------- PROTOTYPE DEFINED CONTRIBUTION PLAN ----------------------------------- SECTION 1 --------- Introduction ------------ 1.1. PURPOSE. This plan is a prototype defined con- tribution plan sponsored by State Street Bank and Trust Company (the "sponsor") which may be adopted as a money purchase pen- sion plan or a profit sharing plan, including a salary reduc- tion arrangement under Code Section 401(k). With the consent of the sponsor, the employer (as defined in subsection 2.8) may adopt the plan by executing the adoption agreement (as defined in subsection 2.1) in the form attached hereto. The purpose of the plan is to enable the eligible employees of the employer to provide for their future security by accumulating funds and sharing in the contributions of the employer. 1.2. ADOPTION OF THE PLAN. With the sponsor's con- sent, the employer may adopt the plan and become a party to the trust which forms a part of the plan by completing and signing the adoption agreement in the form attached hereto. The plan may be adopted by the employer as a single-employer plan, a plan of a controlled group of corporations, a plan of trades or business under common control or a plan of an affiliated ser- vice group, as the employer has specified in its adoption agreement. The plan contains certain variable features which the employer has specified in the adoption agreement. Only those variable features specified by the employer in the adop- tion agreement will be applicable to the employer. 1.3. ADMINISTRATION. The plan shall be administered by a plan administrator (the "administrator") designated by the employer in the adoption agreement and, for purposes of Section 3(16)(A) of the Employee Retirement Income Security Act of 1974, the administrator shall be considered the "plan adminis- trator." The administrator has the discretionary authority to construe and interpret the provisions of the plan and make factual determinations thereunder, including the power to de- termine the rights or eligibility of employees or participants and any other persons, and the amounts of their benefits under the plan, and to remedy ambiguities, inconsistencies or omis- sions, and such determinations shall be binding on all parties. The administrator from time to time may adopt such rules and regulations as may be necessary or desirable for the proper and -1- 10 efficient administration of the plan and as are consistent with the terms of the plan. The administrator may designate other persons to carry out fiduciary responsibilities (other than those relating to the management or control of plan assets as provided in the trust agreement). The employer shall certify from time to time to the trustee any change in the identity of the administrator. 1.4. NOTICES. Any notices, documents or forms re- quired to be given to or filed with an employer may be deliv- ered or mailed by certified mail, postage prepaid, to the em- ployer at its principal place of business, as specified in the adoption agreement. -2- 11 SECTION 2 --------- Definitions ----------- 2.1. "ADOPTION AGREEMENT" shall mean the form designed by the sponsor, executed by the employer and attached hereto, which agreement shall constitute a part of the plan. 2.2. "CODE" shall mean the Internal Revenue Code of 1986, as amended. 2.3. "COMPENSATION" shall mean a participant's earn- ings paid to him by the employer for the plan year, as reported on the participant's Federal Income Tax Withholding Statement (Form W-2). The employer may elect in the adoption agreement to modify the foregoing definition of compensation to include any amount which is not includible in the gross income of the employee under Code Sections 125, 402(e)(3), 402(h), 457(b), 403(b) or 414(h)(2). The employer may also separately elect in the adoption agreement to reduce a participant's compensation for purposes of the plan by such items as the employer may elect. Notwithstanding the foregoing, the compensation of a self-employed individual (as defined in subsection 2.24) shall mean his earned income (as defined in subsection 2.5). For plan years beginning on or after January 1, 1989 and before January 1, 1994, the annual compensation of each participant taken into account under the plan for any plan year shall not exceed $200,000, as adjusted by the Secretary of Treasury at the same time and in the same manner as under Section 415(d) of the Code. For plan years beginning on or after January 1, 1994, the annual compensation of each participant taken into account under the plan shall not exceed $150,000, as adjusted for increases in the cost of living in accordance with Section 401(a)(17)(B) of the 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 annual compensa- tion 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. In determining the compensation of a participant for purposes of this limitation, the rules of Section 414(q)(6) of the Code shall apply, except in applying such rules, the term "family" shall include only the spouse of the participant and any lineal descendants of the participant who have not attained age 19 before the close of the year. If as a result of the applica- -3- 12 tion of such rules, the adjusted annual compensation limitation is exceeded, then (except for purposes of determining the por- tion of compensation up to the integration level if this plan provides for permitted disparity) the limitation shall be pro- rated among the affected individuals in proportion to each such individual's compensation, as determined under this subsection prior to the application of the limitation. If the compensation for any prior determination period is taken into account in determining a participant's benefits accruing in the current plan year, the compensation for that prior determination period is subject to the applicable annual com- pensation limit in effect for that prior determination period. For this purpose, in determining allocations in plan years beginning on or after January 1, 1989, the annual compensation limit in effect for determination periods beginning before that date is $200,000; and in determining allocations in plan years beginning on or after January 1, 1994, the annual compensation limit in effect for determination periods beginning before that date is $150,000. 2.4. "DISABILITY" shall mean an inability to perform any of the duties assigned by an employer because of a medical- ly determinable physical or mental impairment which can be expected to result in death or which has lasted or can be ex- pected to last for a continuous period of at least twelve months. The permanence and degree of such impairment shall be determined by a qualified physician selected or approved by the administrator. If a participant is eligible for and receives Social Security disability benefits, the participant will be deemed to be disabled for purposes of this subsection 2.4. 2.5. "EARNED INCOME" shall mean the net earnings from self-employment in the trade or business with respect to which the plan is established, for which personal services of the individual are a material income-producing factor. Net earnings will be determined without regard to items not includ- ed in gross income and the deductions allocable to such items. Net earnings are reduced by contributions by the employer to a qualified plan to the extent deductible under Code Section 404. Net earnings shall be determined with regard to the deduction allowed to the employer by Section 164(f) of the Code. 2.6. "EFFECTIVE DATE" shall mean the date specified by the employer in the adoption agreement as the effective date of the plan. 2.7. "EMPLOYEE" shall mean any person who is employ- -4- 13 ed by an employer maintaining the plan in the conduct of the business to which the plan relates, or by any other employer required to be aggregated with such employer under Sections 414(b), (c), (m) or (o) of the Code. The term employee shall also include any partner of an employer, a sole proprietor who is an employer, and any leased employee deemed to be an employ- ee of any employer described in the previous sentence as pro- vided in Sections 414(n) or (o) of the Code. The term "owner- employee" shall mean an individual who is a sole proprietor, or who is a partner owning more than 10 percent of either the capital or profits interest of the partnership. 2.8. "EMPLOYER" shall mean the employer and any related employer which adopts the plan and becomes a party to the trust with the consent of the employer (also referred to herein collectively as the "employers" or singularly as the "employer"). 2.9. "ENTRY DATE" shall mean the day or dates in each plan year on which eligible employees become participants in the plan, as specified by the employer in the adoption agreement. 2.10. "ERISA" shall mean the Employee Retirement Income Security Act of 1974. 2.11. "FISCAL YEAR" shall mean the taxable year of the employer for federal income tax purposes. 2.12. "HIGHLY COMPENSATED EMPLOYEE" shall mean high- ly compensated active employees and highly compensated former employees. A highly compensated active employee includes any employee who performs service for the employer during the de- termination year and who, during the look-back year: (i) re- ceived compensation from the employer in excess of $75,000 (as adjusted pursuant to Section 415(d) of the Code); (ii) received compensation from the employer in excess of $50,000 (as adjust- ed pursuant to Section 415(d) of the Code) and was a member of the top-paid group for such year; or (iii) was an officer of the employer and received compensation during such year that is greater than 50 percent of the dollar limitation in effect under Section 415(b)(1)(A) of the Code. The term highly com- pensated employee also includes: (i) employees who are both described in the preceding sentence if the term "determination year" is substituted for the term "look-back year" and the employee is one of the 100 employees who received the most compensation from the employer during the determination year; -5- 14 and (ii) employees who are 5-percent owners at any time during the look-back year or the determination year. If no officer has satisfied the compensation requirement of (iii) above during either a determination year or look-back year, the highest paid officer for such year shall be treated as a highly compensated employee. For purposes of this subsec- tion, the determination year shall be the plan year. The look- back year shall be the twelve-month period immediately preced- ing the determination year or, if the administrator so elects, the calendar year ending with or within the determination year. A highly compensated former employee includes any employee who separated from service (or was deemed to have separated) prior to the determination year, performs no service for the employer during the determination year, and was a highly compensated active employee for either the separation year or any determi- nation year ending on or after the employee's 55th birthday. If an employee is, during a determination year or look-back year, a family member of either a 5-percent owner who is an active or former employee or a highly compensated employee who is one of the 10 most highly compensated employees ranked on the basis of compensation paid by the employer during such year, then such family member and the 5-percent owner or top- ten highly compensated employee shall be aggregated. In such case, the family member and 5-percent owner or top-ten highly compensated employee shall be treated as a single employee receiving compensation and plan contributions or benefits equal to the sum of such compensation and contributions or benefits of the family member and 5-percent owner or top-ten highly com- pensated employee. For purposes of this subsection, family member includes the spouse, lineal ascendants and descendants of the employee or former employee and the spouses of such lineal ascendants and descendants. The determination of who is a highly compensated employee, including the determinations of the number and identity of employees in the top-paid group, the top 100 employees, the number of employees treated as officers and the compensation that is considered, will be made in accor- dance with Section 414(q) of the Code and the regulations thereunder. 2.13. "Hour of Service" shall mean: (a) Each hour for which an employee is paid or entitled to payment by an employer for the performance of duties. These hours shall be credited to the employee for the period or periods in which such duties are per- formed; -6- 15 (b) Each hour for which an employee is paid or entitled to payment by an employer for a period during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vaca- tion, holiday, illness, incapacity (includ- ing disability), layoff, jury duty, mili- tary duty or leave of absence, provided that no more than 501 hours will be credit- ed for any single continuous period of absence. Hours under this subparagraph will be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference; (c) Each hour for which an employee has been credited with back pay awarded or agreed to by the employer, irrespective of mitigation of damages. The same hours of service will not be credited under both subparagraph (a) or (b) above, as the case may be, and under this subparagraph (c). These hours will be credited to the employee for the period to which the award or agreement relates rather than the period in which the award, agree- ment or payment is made; and (d) Hours of service will be credited for em- ployment with other members of an affil- iated service group (under Code Section 414(m)), a controlled group of corporations (under Code Section 414(b)), or a group of trades or businesses under common control (under Code Section 414(c)) of which an adopting employer is a member, and any other entity required to be aggregated with such employer pursuant to Code Section 414(o) and the regulations thereunder. Hours of service will also be credited for any individual considered an employee for purposes of this plan under Code Section 414(n) or Code Section 414(o) and the regu- lations thereunder. In computing hours of service for purposes of this subsection 2.13, each employee shall be credited with (i) his actual hours of service, (ii) ten hours of service for each day in which the employee completes at least one hour of service, (iii) 45 hours of service for each week in which the employee completes at least one hour of service, or (iv) 190 hours of service for each month in which the employee completes at least one hour of -7- 16 service, whichever the employer specifies in the adoption agreement. 2.14. "LEASED EMPLOYEE" shall mean any person (other than an employee of the recipient employer) who pursuant to an agreement between the recipient employer and any other person ("leasing organization") has performed services for the recipi- ent employer (or for the recipient and related persons deter- mined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the recipient employer. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services per- formed for the recipient employer shall be treated as provided by the recipient employer. A leased employee shall not be con- sidered an employee of the recipient employer if: (i) such employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined in Section 415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross income under Section 125, Section 402(e)(3), Section 402(h)(1)(B) or Section 403(b) of the Code, (2) immediate par- ticipation, and (3) full and immediate vesting; and (ii) leased employees do not constitute more than 20 percent of the recipi- ent employer's nonhighly compensated workforce. 2.15. "LEAVE OF ABSENCE" shall mean an absence from work which is not treated by the employer as a termination of the employee's employment or association with the employer or an absence from work that is required by law to be treated as a leave of absence. Leaves of absence will be granted under rules of the employer applied uniformly to all employees simi- larly situated. 2.16. "LIMITATION YEAR" shall mean the plan year. 2.17. "MATERNITY OR PATERNITY ABSENCE" shall mean an employee's absence from work because of the pregnancy of the employee or birth of a child of the employee, the placement of a child with the employee in connection with the adoption of such child by the employee, or for purposes of caring for the child immediately following such birth or placement. The ad- ministrator may require the employee to furnish such informa- tion as the administrator considers necessary to establish that the employee's absence was for one of the reasons specified above. -8- 17 2.18. "ONE-YEAR BREAK IN SERVICE" shall mean one of the following, depending on the method of calculating years of service selected by the employer in its adoption agreement: (a) If the employer has specified that years of service will be based upon hours of ser- vice, then, for purposes of eligibility, a one-year break in service shall occur at the end of any twelve consecutive month period ending on the anniversary of the date the employee first completes one hour of service (the employee's employment com- mencement date) and during which such em- ployee does not complete more than 500 hours of service; and for purposes of determining a participant's vesting per- centage, a one-year break in service shall occur at the end of any plan year during which a terminated participant or employee does not complete more than 500 hours of service. In the case of a maternity or paternity absence, an employee shall be credited, for the first plan year in which such employee otherwise would have incurred a one-year break in service (and solely for purposes of determining whether such a break in service has occurred), with the hours of service which normally would have been credited to him but for such absence (or, if the administrator is unable to determine the hours which would have been so credited, eight hours for each work day of such absence), but in no event more than 501 hours for any one absence. (b) If the employer has specified the elapsed time method of calculating years of service in the adoption agreement pursuant to sub- section 2.28, each twelve consecutive month period commencing on the participant's em- ployment termination date and each anni- versary thereof, during which a participant is not employed by the employer. An em- ployee's employment termination date shall be the date the employee retires, quits or is discharged, or if earlier, the twelve- month anniversary of the date on which the employee was otherwise first absent from service. If an employee is absent from work by reason of a maternity or paternity -9- 18 absence, the twelve consecutive month period beginning on the first anniversary of the first date of such absence shall not constitute a break in service. 2.19. "PARTICIPANT" shall mean an employee covered under the plan in accordance with subsection 3.1. 2.20. "PLAN" shall mean State Street Solutions Prototype Defined Contribution Plan and the adoption agreement forming a part thereof as adopted by the employer. A copy of the plan (and the trust forming a part of the plan), as amended from time to time, will be on file at the office of the employ- er and may be examined by any participant. 2.21. "PLAN YEAR" shall mean a calendar year, the fiscal year of the employer or some other fiscal year, as spec- ified by the employer in the adoption agreement. 2.22. "PREDECESSOR EMPLOYER" shall mean any corpora- tion or other entity, the stock, assets or business of which was acquired by the employer, whether by merger, consolidation, purchase of assets or otherwise, and any predecessor thereto. If the employer has so designated in the adoption agreement, or if the employer maintains a plan of a predecessor employer, employment with the predecessor employer will be considered employment with the employer for all purposes of the plan. 2.23. "RELATED EMPLOYER" shall mean (i) a member of a controlled group of corporations within the meaning of Sec- tion 414(b) of the Code of which an employer is also a member, (ii) an incorporated or unincorporated trade or business under common control with an employer within the meaning of Section 414(c) of the Code, or (iii) a member of an affiliated service group within the meaning of Section 414(m) of the Code of which an employer is also a member, and any other entity required to be aggregated with the employer pursuant to regulations under Section 414(o) of the Code. 2.24. "SELF-EMPLOYED INDIVIDUAL" shall mean an indi- vidual who has earned income for the taxable year from the trade or business for which the plan is established, as well as an individual who would have had earned income but for the fact that the trade or business had no net profits for the taxable year. -10- 19 2.25. "TRUST" shall mean the trust agreement which forms a part of the plan pursuant to which funds contributed under the plan are held, invested, managed, controlled and distributed in accordance with the terms of such trust. 2.26. "TRUST FUND" shall mean the total assets held in trust as of any date under the trust forming a part of this plan, including any participating interests in any common, col- lective or commingled trust fund to which the trustee has made a deposit. 2.27. "TRUSTEE" shall mean State Street Bank and Trust Company. 2.28. "YEAR OF SERVICE" shall mean the twelve con- secutive month periods for eligibility and for vesting, as specified by the employer in its adoption agreement: (a) For purposes of eligibility, the twelve consecutive month period beginning on the date the employee first completes an hour of service for the employer (such employ- ee's "employment commencement date") and each anniversary of such employment com- mencement date, during which the employee completes at least 1,000 hours of service. For purposes of vesting, a year of service shall mean each plan year during which the employee completes 1,000 hours of service. (b) In lieu of the hours of service method described in (a) above, for purposes of eligibility or vesting, each twelve consec- utive month period of employment with the employer ending on an anniversary of the employee's employment commencement date, with any portion of a month being consid- ered a whole month for this purpose, in- cluding any period of employment termina- tion that does not exceed twelve months. -11- 20 SECTION 3 --------- Eligibility and Participation ----------------------------- 3.1. ELIGIBILITY. Each employee of an employer who is a participant in a predecessor plan (as defined in Section 18) immediately preceding the effective date will continue as a participant in the plan on and after that date, subject to the conditions and limitations of the plan. Each other employee of an employer will become eligible to participate in the plan on the effective date (if he then satisfies the requirements be- low) or on the first entry date coincident with or next follow- ing the date such employee meets the applicable requirements set forth below: (a) The employee has attained the minimum age, if any, specified by the employer for this purpose in its adoption agreement; (b) The employee has completed the number of years of service specified by the employer for this purpose in its adoption agreement; and (c) The employee is a member of a group or class of employees to whom the plan has been extended by the employer as specified for this purpose in its adoption agreement. For purposes of subparagraph (a) above, the minimum age that the employer may specify in its adoption agreement shall not exceed age 21 years. For purposes of subparagraph (b) above, the number of years of service that the employer may specify in its adoption agreement shall not exceed one year; except that, if employer contributions under the plan are fully vested at all times and the employer adopts this plan as a money purchase pension plan or specifies in the adoption agreement that par- ticipants cannot make compensation deferral contributions under subsection 4.1 of the plan, the number of years of service that may be specified in the adoption agreement shall not exceed two years. An employee who would be eligible to participate on an entry date except for subparagraph 3.1(c) above shall become a participant on the date such employee satisfies the condition for participation under subparagraph 3.1(c). 3.2. NOTICE OF PARTICIPATION. The employer will notify its employees of the date on which they become eligible to participate in the plan. Each such employee must complete and file with the administrator one or more of the following forms: -12- 21 (a) An election, if any, to have his compen- sation reduced and compensation deferral contributions made to the plan on his behalf by his employer. (b) An election, if any, to make voluntary contributions under the plan. (c) Such other forms as the administrator may determine. 3.3. LEAVE OF ABSENCE. Except as provided below, a leave of absence will not interrupt years of service or partic- ipation in the plan. If an employee or participant does not return to work with his employer on or before termination of a leave of absence, he will be considered to have terminated em- ployment on the date his leave of absence expires, unless he actually terminated employment before the expiration of his leave of absence. 3.4. EMPLOYER RECORDS. The records of an employer as to an employee's or a participant's employment, years of service, one-year breaks in service, termination of employment, reemployment, hours of service, compensation and leaves of absence will be conclusive on all persons unless demonstrated to the administrator's satisfaction to be incorrect. -13- 22 SECTION 4 --------- Compensation Deferral Contributions ----------------------------------- 4.1. COMPENSATION DEFERRAL CONTRIBUTIONS. No con- tributions are required of participants. However, if the em- ployer has so provided in its adoption agreement and subject to the limitations of this Section, a participant may elect to make compensation deferral contributions under the plan as of the beginning of the first pay period coincident with or next following the date he becomes eligible to participate under subsection 3.1, in an amount equal to a percentage of his com- pensation for the plan year which is within the range specified by the employer in its adoption agreement for this purpose. Each election by a participant under this subsection 4.1 shall be made by filing the election form furnished by the adminis- trator at least 30 days (or such shorter time period as may be established by the administrator) prior to the beginning of the pay period or date as of which such election is to be effec- tive. A participant's compensation deferral contributions shall be fully vested and nonforfeitable at all times. No benefit under the plan except employer matching contributions under subsection 6.3 shall be contingent upon the participant's election to make (or not to make) compensation deferral contri- butions. 4.2. DEDUCTION OF COMPENSATION DEFERRAL CONTRIBU- TIONS. Pursuant to the participant's compensation deferral election, compensation deferral contributions shall be made by a reduction of the participant's compensation for each pay period by the elected percentage, and a contribution by the employer to the trust fund pursuant to subsection 6.2, in the amount of such reduction. The administrator may limit the compensation deferral percentage elected by a participant who is a highly compensated employee in order to satisfy the limi- tations of this Section 4, and may limit the type of compensa- tion from which compensation deferral contributons may be made. 4.3. VARIATION, DISCONTINUANCE AND RESUMPTION OF COMPENSATION DEFERRAL CONTRIBUTIONS. Except as provided below, as of the dates specified for this purpose by the employer in the adoption agreement, a participant may elect to change the rate of his compensation deferral contributions (but not retro- actively) within the limits specified by the employer in its adoption agreement. A participant may elect to discontinue his compensation deferral contributions (but not retroactively) as of any pay period and resume making such contributions as of -14- 23 any such date. Each election under this subsection 4.3 shall be made by filing the election form furnished by the adminis- trator at least 30 days (or such shorter time period as may be established by the administrator) prior to the beginning of the period or date as of which such election is to be effective. Unless the plan specifies otherwise, compensation deferral con- tributions elected under this Section 4 shall be treated as em- ployer contributions under the plan. 4.4. CALENDAR YEAR DOLLAR LIMITATION ON COMPENSATION DEFERRAL CONTRIBUTIONS. In no event may a participant make a compensation deferral contribution election which would result in his elective deferrals (as defined below) for any calendar year exceeding $7,000 (or such greater amount as may be pre- scribed by the Secretary of Treasury to take into account cost- of-living increases pursuant to Code Section 402(g)(5)). For purposes of this subsection 4.4, the term "elective deferral" means, with respect to any calendar year, the sum of any con- tribution made by the participant: (a) pursuant to an election to defer under a cash or deferred arrangement (as defined in Code Section 401(k)), to the extent not includible in the participant's gross in- come for that calendar year pursuant to Code Section 402(e)(3) (determined without regard to Code Section 402(g)); (b) to an individual retirement plan pursuant to a simplified employee pension, to the extent not includible in the participant's gross income for that calendar year under Code Section 402(h)(1)(B) (determined with- out regard to Code Section 402(g)); and (c) applied toward the purchase of an annuity contract under Code Section 403(b) pursuant to a salary reduction agreement (within the meaning of Code Section 3121(a)(5)(D)). If a participant's elective deferrals with respect to any cal- endar year exceed the annual dollar limit prescribed above, the participant may notify the administrator in writing on or be- fore the March 1 next following the close of such calendar year of his election to have all or a portion of such excess elec- tive deferrals (and the income allocated to such deferrals) assigned to this plan and distributed in accordance with the following provisions. This assignment must be accompanied by the participant's written statement that if such amounts are not distributed, the participant's elective deferrals will exceed the limit imposed by Code Section 402(g) for the taxable year in which the deferral occurred. In such an event, the -15- 24 administrator, in its sole discretion and without regard to any other provision of the plan, may direct the trustee to distrib- ute to the participant on or before the April 15 following immediately thereafter the participant's excess deferrals (and the income allocated to such deferrals) so allocated under this plan. Excess elective deferrals shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to excess elective deferrals is the sum of: (1) income or loss allocable to the participant's compensation deferral account for the taxable year multiplied by a fraction, the numerator of which is such participant's excess elective deferral for the year, and the denominator of which is the participant's account balance attributable to elective defer- rals without regard to any income or loss occurring during such taxable year; and (2) ten percent of the amount determined under (1) multiplied by the number of whole calendar months between the end of the participant's taxable year and the date of distribution, counting the month of distribution if distri- bution occurs after the 15th of such month. The amount of such excess elective deferrals distributed to a highly compensated employee in accordance with the preceding sentence shall con- tinue to be treated as compensation deferral contributions for purposes of the actual deferral percentage test described in subsection 4.5 below. 4.5. LIMITATION ON COMPENSATION DEFERRAL CONTRIBU- TIONS. In no event shall the actual deferral percentage (as defined below) of the highly compensated employees for any plan year exceed the greater of: (a) The actual deferral percentage of all other eligible employees for such plan year mul- tiplied by 1.25; or (b) The actual deferral percentage of all other eligible employees for such plan year mul- tiplied by 2.0; provided that the actual deferral percentage of the highly compen- sated employees does not exceed that of all other eligible employees by more than two percentage points. The "actual deferral percentage" of a group of participants for a plan year means the average of the ratios (determined sepa- rately for each participant in such group) of A to B, where A equals the sum of: (c) The compensation deferral contributions credited to each such participant's ac- counts for such plan year, -16- 25 (d) The qualified nonelective contributions, if any, credited to each such participant's accounts for such plan year, and (e) The qualified matching contributions, if any, credited to each such participant's accounts for such plan year, and B equals the participant's compensation (as defined in subsection 2.3) for such plan year (whether or not the employee was a participant for the entire plan year). If the employer so elects, the administrator may limit the period of time for which compensation is taken into account to that portion of the plan year in which the employee was an eligible employee under the plan; provided that, this limit shall be applied uniformly to all eligible employees under the plan for the plan year. From time to time, the administrator shall determine from the compensation deferral elections then on file whether the fore- going limitation will be satisfied and, to the extent necessary to ensure compliance with such limitation, may reduce the ap- plicable percentages of compensation withheld, or to be with- held, for the class of highly compensated employees who have elected to defer the greatest percentage of compensation; pro- vided that such reduction shall apply to the entire class of highly compensated employees at each percentage level. The employer may elect in the adoption agreement to have all or a part of employer contributions treated as qualified nonelec- tive contributions. "Qualified nonelective contributions" means employer contributions that are fully vested at all times and subject to the restrictions on distribution applicable to compensation deferral contributions under Code Section 401(k) and subsection 4.9 of the plan (without regard to subparagraph (e) thereof). Each participant with respect to whom a reduction in amounts previously withheld from his compensation must occur shall have the excess deferral amounts (and income allocable thereto) dis- tributed to him in cash. The excess amounts previously with- held (and any income allocable thereto) shall be distributed within 2-1/2 months after the close of the plan year for which they are in excess, but in no event later than the close of the next following plan year. In the event that excess deferral amounts (and the income allocable thereto) are not distributed to participants within 2-1/2 months after the close of the plan year for which such deferrals are in excess, an excise tax, payable by the employer, shall be imposed upon the plan in an amount equal to ten percent of the excess deferral amount, pur- suant to Section 4979 of the Code. Excess contributions shall be adjusted for any income or loss up to the date of distribu- tion. The income or loss allocable to excess deferral contri- butions is the sum of: (1) income or loss allocable to the par- ticipant's compensation deferral contribution account (and, if applicable, the qualified nonelective contribution subaccount, or the qualified matching contribution subaccount, as appli- cable, of the employer contribution account) for the plan year multiplied by a fraction, the numerator of which is such par- -17- 26 ticipant's excess contributions for the year, and the denomina- tor of which is the participant's account balance attributable to compensation deferral contributions (and employer contribu- tions, if any of such contributions are included in the actual deferral percentage test) without regard to any income or loss occurring during such plan year; and (2) ten percent of the amount determined under (1) multiplied by the number of whole calendar months between the end of the plan year and the date of distribution, counting the month of distribution if distri- bution occurs after the 15th of such month. Excess deferral contributions shall be treated as annual additions under the plan. Amounts distributed under this subsection shall first be treat- ed as distributions from the participant's compensation defer- ral contribution account and shall be treated as distributed from the participant's employer contribution account (if such contributions are treated as qualified nonelective contribu- tions or qualified matching contributions) only to the extent such excess contributions exceed the balance in the partici- pant's compensation deferral contribution account. 4.6. LIMITATION ON VOLUNTARY AND EMPLOYER MATCHING CONTRIBUTIONS. In no event shall the contribution percentage (as defined below) of the highly compensated employees for any plan year exceed the greater of: (a) The contribution percentage of all other eligible employees for such plan year mul- tiplied by 1.25; or (b) The contribution percentage of all other eligible employees for such plan year mul- tiplied by 2.0; provided that the contribu- tion percentage of the highly compensated employees does not exceed that of all other eligible employees by more than two per- centage points or such lesser amount as the Secretary of the Treasury shall prescribe to prevent the multiple use of this alternative limitation with respect to any highly compensated employee. The "contribution percentage" of a group of participants for a plan year means the average of the ratios (determined sepa- -18- 27 rately for each participant in such group) of A to B, where A equals the sum of: (c) The voluntary contributions, if any, cred- ited to each such participant's account (as described in subsections 8.3 and 8.5) for such plan year; and (d) The matching contributions, if any, credit- ed to each such participant's account (as described in subsections 8.3 and 8.6) for such plan year, and B equals the participant's compensation (as defined in sub- section 2.3) for such plan year. If the employer so elects, the administrator may limit the period of time for which com- pensation is taken into account to that portion of the plan year in which the employee was an eligible employee under the plan; provided that, this limit shall be applied uniformly to all eligible employees under the plan for the plan year. Qualified matching contributions and qualified nonelective contributions used to satisfy the ADP test may not also be used to satisfy this test. Qualified nonelective contributions may be used to satisfy this test only if the requirements of Sec- tion 1.401(m)-1(b)(5) of the Income Tax Regulations are met. Matching contributions that are forfeited to correct excess aggregate contributions shall be disregarded for purposes of the ACP test. From time to time, the administrator shall determine from the voluntary contribution elections then on file whether the fore- going limitation will be satisfied and, to the extent necessary to ensure compliance with such limitation, may restrict such contributions for the remainder of the year or reduce the applicable contribution percentages for the class of highly compensated employees who have elected to contribute the greatest percentages of compensation by returning amounts of their voluntary contributions; provided that such reduction shall apply to the entire class of highly compensated employees at each percentage level. The determination of excess contribution percentage under this subsection 4.6 shall be made after the determinations under subsections 4.4 and 4.5. Each participant with respect to whom a reduction is required under this subsection 4.6 shall have the amount of voluntary participant or matching contributions involved in such reduction (and any income or losses allocable thereto) distri- buted to him in cash within 2-1/2 months after the close of the plan year, but in no event later than the close of the next following plan year. "Excess aggregate contributions" shall mean, with respect to any plan year, the excess of the aggre- gate contribution percentage amounts taken into account in -19- 28 computing the numerator of the contribution percentage actually made on behalf of highly compensated employees for such plan year, over the maximum contribution percentage amounts per- mitted by this test (determined by reducing contributions made on behalf of highly compensated employees in order of their contribution percentages beginning with the highest of such percentages). Such determination shall be made after first determining excess deferrals and excess contributions. In the event that excess aggregate contributions (and the income allocable thereto) are not distributed to participants within 2-1/2 months after the close of the plan year for which such contributions are in excess, an excise tax, payable by the employer, shall be imposed upon the plan in an amount equal to ten percent of the excess aggregate contribution amount, pur- suant to Section 4979 of the Code. Excess aggregate contribu- tions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to excess aggre- gate contributions is the sum of: (1) income or loss allocable to the participant's voluntary or employer matching contribu- tion account (and, if applicable, the qualified nonelective contribution subaccount of the employer contribution account) for the plan year multiplied by a fraction, the numerator of which is such participant's excess aggregate contributions for the year and the denominator of which is the participant's account balance attributable to voluntary or employer matching contributions, whichever is applicable (and qualified nonelec- tive contributions, if any of such contributions are included in the actual contribution percentage test) without regard to any income or loss occurring during such plan year; and (2) ten percent of the amount determined under (1) multiplied by the number of whole calendar months between the end of the plan year and the date of distribution, counting the month of dis- tribution if distribution occurs after the 15th of such month. Excess voluntary contributions shall be returned to the partic- ipant. Excess matching contributions, if forfeitable, shall be applied to reduce future employer matching contributions. Non- forfeitable excess matching contributions shall be distributed to participants to whose accounts such contributions were allo- cated as provided in the first sentence of this paragraph. 4.7. PROHIBITION OF CONTRIBUTIONS BY HIGHLY COMPEN- SATED EMPLOYEES. Notwithstanding the provisions of Sections 4 and 5, the employer may designate in its adoption agreement that if a participant is deemed to be a highly compensated employee for the plan year, such participant shall not be per- mitted to make compensation deferral contributions or voluntary contributions for that plan year. 4.8. TWO OR MORE PLANS. If two or more plans of the employers to which employer matching contributions, voluntary -20- 29 contributions or compensation deferral contributions are made, are treated as one plan for purposes of Code Section 410(b), such plans shall be treated as one plan for purposes of this Section 4. If a highly compensated employee participates in two or more plans of the employers to which employer matching, voluntary or compensation deferral contributions are made, then such contributions made under the various plans shall be aggre- gated for purposes of this Section 4 to determine the actual deferral percentage ("ADP") and actual contribution percentage ("ACP") of such highly compensated employee under subsections 4.5 and 4.6, respectively. In the event that this plan satis- fies the requirements of Sections 401(k), 401(a)(4), or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with this plan, then this Section shall be applied by determining the ADP and ACP of employees as if all such plans were a single plan. Plans may be aggregated in order to satisfy Sections 401(k) and 401(m) of the Code only if they have the same plan year. If a highly compensated employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. 4.9. DISTRIBUTION RESTRICTIONS. Compensation defer- ral contributions, qualified nonelective contributions, and qualified matching contributions, and income allocable to each are not distributable to a participant or his beneficiary or beneficiaries earlier than upon separation from service, death, or disability. Such amounts may also be distributed upon: (a) Termination of the plan without the estab- lishment of another defined contribution plan. (b) The disposition by a corporation to an unrelated corporation of substantially all of the assets (within the meaning of Sec- tion 409(d)(2) of the Code) used in a trade or business of such corporation if such corporation continues to maintain this plan after the disposition, but only with respect to employees who continue employ- ment with the corporation acquiring such assets. (c) The disposition by a corporation to an unrelated entity of such corporation's interest in a subsidiary (within the mean- ing of Section 409(d)(3) of the Code), if -21- 30 such corporation continues to maintain this plan, but only with respect to employees who continue employment with such subsid- iary. (d) The attainment of age 59 1/2 in the case of a profit-sharing plan. (e) The hardship of the participant as describ- ed in subsection 12.5. 4.10. OTHER REQUIREMENTS. ------------------ (a) For purposes of determining the ADP and ACP of a participant who is a 5-percent owner or one of the ten most highly-paid highly compensated employees, the elective defer- rals, voluntary contributions, employer matching contributions (and employer con- tributions if treated as elective deferrals or employer matching contributions for pur- poses of the ADP or ACP test, respectively) and compensation of such participant shall include the elective deferrals, voluntary contributions, employer matching contribu- tions (and, if applicable, employer contri- butions) and compensation for the plan year of family members (as defined in Section 414(q)(6) of the Code). Family members with respect to such highly compensated employees shall be disregarded as separate employees in determining the ADP and ACP both for participants who are non-highly compensated employees and for participants who are highly compensated employees. Excess contributions or excess aggregate contributions, as the case may be, shall be allocated to participants who are subject to the family member aggregation rules of Section 414(q)(6) of the Code in proportion to the contributions of each family member that are combined in accordance with the foregoing rules. (b) For purposes of determining the ADP and ACP tests, elective deferrals, voluntary con- tributions, qualified nonelective contri- butions and qualified matching contribu- tions must be made before the last day of the twelve-month period immediately follow- ing the plan year to which contributions -22- 31 relate. (c) The employer shall maintain records suffi- cient to demonstrate satisfaction of the ADP and ACP tests and the amount of quali- fied nonelective contributions or qualified matching contributions, or both, used in such tests. (d) The determination and treatment of the ADP and ACP amounts of any participant shall satisfy such other requirements as may be prescribed by the Secretary of the Trea- sury. (e) Multiple use: If one or more highly com- pensated employees participate in both a Section 401(k) plan and a plan subject to the ACP test maintained by the employer and the sum of the ADP and ACP of those highly compensated employees subject to either or both tests exceeds the aggregate limit (as defined below), then the ACP of those high- ly compensated employees who also partici- pate in a Section 401(k) plan will be re- duced (beginning with such highly compen- sated employee whose ACP is the highest) so that the limit is not exceeded. The amount by which each highly compensated employee's contribution percentage is reduced shall be treated as an excess aggregate contribution (and distributed in accordance with the rules of subsection 4.6). The ADP and ACP of the highly compensated employees are determined after any corrections required to meet the ADP and ACP tests. Multiple use does not occur if both the ADP and ACP of the highly compensated employees does not exceed 1.25 multiplied by the ADP and ACP of the nonhighly compensated employees. "Aggregate limit" means the sum of (i) 125 percent of the greater of the ADP of the non-highly compensated employees for the plan year or the ACP of non-highly compen- sated employees under the plan subject to Code Section 401(m) for the plan year be- ginning with or within the plan year of the 401(k) plan and (ii) the lesser of 200% or two plus the lesser of such ADP or ACP. (f) Hardship withdrawal: If a participant re- ceives a hardship withdrawal from this plan -23- 32 in accordance with subsection 12.5, such participant's compensation deferral contri- butions and voluntary contributions will be suspended for the twelve-month period fol- lowing such withdrawal. -24- 33 SECTION 5 --------- Participant Contributions ------------------------- 5.1. VOLUNTARY PARTICIPANT CONTRIBUTIONS. If the employer has so specified in the adoption agreement, a partici- pant may elect to make voluntary contributions under the plan as of the beginning of the first pay period coincident with or next following the date he becomes eligible to participate under subsection 3.1, in an amount equal to a percentage of his compensation for the plan year which is within the range speci- fied by the employer in its adoption agreement for this pur- pose. Each election by a participant under this subsection 5.1 shall be made by filing the election form furnished by the administrator at least 30 days (or such shorter time period as may be established by the administrator) prior to the beginning of the pay period or date on which such election is to be effective. A participant's voluntary contributions shall be fully vested and nonforfeitable at all times. 5.2. DEDUCTION OR PAYMENT OF VOLUNTARY CONTRIBU- TIONS. A participant's voluntary contributions must be made by regular payroll deductions (in multiples of one percent) or in one or more lump sum cash payments. Voluntary participant con- tributions deducted by the employer will be paid to the trustee as soon as practicable after the date the contributions were made. The administrator may limit the voluntary contribution percentage elected by a participant who is a highly compensated employee in order to satisfy the limitations of Section 4, and may limit the type of compensation from which voluntary contri- butions may be made. 5.3. VARIATION, DISCONTINUANCE AND RESUMPTION OF VOLUNTARY CONTRIBUTIONS. Except as provided below, as of the dates specified for this purpose by the employer in the adop- tion agreement, a participant may elect to change his voluntary contribution rate (but not retroactively) within the limits specified by the employer in its adoption agreement. A partic- ipant may elect to discontinue making voluntary contributions (but not retroactively) as of any pay period and resume making such contributions as of any such date. Each election under this subsection 5.3 shall be made by filing the election form furnished by the administrator at least 30 days (or such shorter time period as may be established by the administrator) prior to the beginning of the period or date as of which such election is to be effective. 5.4. NO DEDUCTIBLE EMPLOYEE CONTRIBUTIONS. The -25- 34 administrator will not accept deductible employee contributions which are made for a taxable year beginning after December 31, 1986. Contributions made prior to that date will be maintained in a separate account which will be nonforfeitable at all times. The account will share in the gains and losses of the trust in the same manner as described in Section 8 of the plan. No part of the deductible employee contribution account will be used to purchase life insurance. Subject to the Section 11 joint and survivor annuity requirements (if applicable), the participant may withdraw any part of the deductible employee contribution account by making a written application to the administrator. -26- 35 SECTION 6 --------- Employer Contributions ---------------------- 6.1. EMPLOYER CONTRIBUTIONS. Subject to the limita- tions of this Section 6 and Section 17, for each plan year of an employer, beginning with the first plan year in which the plan is in effect as to the employer, the employer will con- tribute to the trustee an annual amount required by (a) or (b) below, as has been selected by the employer in the adoption agreement: (A) PENSION PLAN: an amount which is equal to the percentage of participants' compensa- tion for the plan year specified in the adoption agreement. (B) PROFIT SHARING PLAN: such amount as the employer, in its discretion, shall deter- mine. The employer shall designate the plan year on account of which the contribu- tion is made and shall specify the amount of the contribution or a definite basis or formula by which the contribution can be determined within a reasonable time after the end of that plan year. The employer may specify in the adoption agreement that all or part of employer contributions shall be treated as qualified nonelective contri- butions, pursuant to subsection 4.5 or 4.6, as the case may be. Employer contributions made under this subsection 6.1 shall be allocated in accordance with subsection 8.7. 6.2. COMPENSATION DEFERRAL CONTRIBUTIONS. Subject to the limitations of this Section 6, Section 4 and Section 17, the employer will contribute to the trustee on behalf of each participant the amount of such participant's compensation deferral contributions elected under subsection 4.1. Such com- pensation deferral contributions shall be paid by the employer to the trustee as soon as practicable after being withheld, but not later than 30 days (or such later date as is permitted by law or regulation) following the end of the month in which such amounts are withheld. 6.3. EMPLOYER MATCHING CONTRIBUTIONS. Subject to the limitations of this Section 6, Section 4 and Section 17, if the employer has so specified in its adoption agreement, in -27- 36 addition to the compensation deferral contributions made under subsection 6.2, the employer shall contribute the amount which is specified by the employer in the adoption agreement. Such "employer matching contributions" shall be paid to the trustee as of the last day of each plan year, unless the employer pays them to the trustee more frequently. If the employer so elects in the adoption agreement, all or part of employer matching contributions shall be qualified matching contributions. "Qualified matching contributions" means employer matching con- tributions which are nonforfeitable at all times and subject to the restrictions on distribution applicable to compensation deferral contributions under Code Section 401(k) and subsection 4.9 of the plan (without regard to subparagraph (e) thereof). 6.4. PAYMENT OF EMPLOYER CONTRIBUTIONS. An employ- er's total contribution under this Section 6 for a plan year shall be due on the last day of the plan year and, if not paid by the end of that year, shall be payable to the trustee as soon as practicable thereafter, without interest, but not later than the time prescribed by law for filing the employer's fed- eral income tax return for the taxable year with or within with such plan year ends, including extensions thereof. 6.5. VERIFICATION OF EMPLOYER CONTRIBUTIONS. If for any reason the employer decides to verify the correctness of any amount or calculation relating to an employer contribution for any plan year, the certificate of an independent accountant selected by the employer shall be conclusive as to all persons. 6.6. NO RESPONSIBILITY FOR COLLECTION OR VERIFICA- TION. The trustee shall have no responsibility or obligation to collect any contributions under the plan or to verify the correctness of the amount of any contributions under the plan. 6.7. LIMITATIONS ON EMPLOYER CONTRIBUTIONS. An em- ployer's total contribution for any plan year under this Sec- tion 6 is conditioned on its deductibility under Section 404 of the Code in that year, shall comply with the contribution limi- tations set forth in Section 17, and shall not exceed an amount equal to the maximum amount deductible on account thereof by the employer for that year for purposes of federal taxes on income. Employer contributions to the plan may be made without regard to profits. -28- 37 SECTION 7 --------- Period of Participation ----------------------- 7.1. SETTLEMENT DATES. A participant's "settlement date" will be the date on which his employment with the employ- er is terminated because of the first to occur of the following events: (A) NORMAL OR LATE RETIREMENT. The participant retires on and after attaining the normal retirement age specified by the employer in the adoption agreement. A participant's right to his account balances shall be non- forfeitable on and after his normal retire- ment age. (B) EARLY OR DISABILITY RETIREMENT. The par- ticipant retires at or after attaining the early retirement age and service, if any, specified by the employer in the adoption agreement, or at any age because of dis- ability. (c) DEATH. The participant's death. (d) RESIGNATION OR DISMISSAL. The participant resigns or is dismissed from the employ of the employer before his retirement under subparagraph (a) or (b) of this subsection. A participant who is transferred to employment with a related employer which has not adopted the plan will not be deemed to have terminated employment with the employer, but his partici- pation in the plan will be restricted in accordance with the provisions of subsection 7.2. 7.2. RESTRICTED PARTICIPATION. In the event payment of part or all of a participant's account balances cannot be made at his settlement date or in the event a participant is transferred to a related employer which is not an employer under the plan or no longer meets the requirements designated by the employer under subparagraph 3.1(c), the participant or his beneficiary will be considered as a participant for all purposes of the plan, except as follows: (a) No share of employer contributions or em- ployer matching contributions or forfei- tures will be credited to his account after his settlement date (except as otherwise -29- 38 provided in Section 8), the date he is transferred to employment with such related employer or the date he no longer meets the requirements of subparagraph 3.1(c). (b) He will not be permitted to make compensa- tion deferral contributions or voluntary contributions under the plan. (c) The beneficiary of a deceased participant cannot designate a beneficiary under sub- section 10.8. -30- 39 SECTION 8 --------- Accounting ---------- 8.1. SEPARATE ACCOUNTS. The administrator shall maintain the following separate accounts in the name of each participant: (a) A "compensation deferral contribution ac- count" to reflect the compensation deferral contributions made by the employer pursuant to the participant's election under subsec- tion 4.1, and the income, losses, apprecia- tion and depreciation attributable thereto. (b) An "employer matching contribution account" to reflect the participant's allocable share of employer matching contributions, if any, made pursuant to subsection 6.3, and the income, losses, appreciation and depreciation attributable thereto. (c) An "employer contribution account" to re- flect the participant's allocable share of the employer contributions, if any, made pursuant to subsection 6.1, and the income, losses, appreciation and depreciation attributable thereto. (d) A "voluntary contribution account" to re- flect the participant's voluntary contribu- tions, if any, made pursuant to subsection 5.1 of the plan, which shall consist of two subaccounts: one to reflect the partici- pant's voluntary contributions made prior to January 1, 1987 and the earnings and market value adjustments thereon; and the other to reflect his voluntary contribu- tions made on and after that date and the income, losses, appreciation and deprecia- tion attributable thereto. (e) A "participant rollover account" to reflect each transfer to the trust fund pursuant to subsection 8.10 of rollover amounts, roll- over contributions or benefits under any plan which meets the requirements of Sec- tion 401(a) of the Code that are attribut- able to the participant, and the income, losses, appreciation and depreciation at- tributable thereto. -31- 40 If the employer has authorized the establishment of investment options in its adoption agreement, each account maintained for a participant will consist of separate subaccounts which will reflect the portion of each participant's account invested in each of the investment options in accordance with subsection 9.2. The administrator or the trustee also may maintain such other accounts or subaccounts in the names of participants or otherwise as it considers necessary or advisable. Unless the context indicates otherwise, the term "account" shall include all accounts (and subaccounts) maintained for a participant. 8.2. ACCOUNTING DATES. A "regular accounting date" is the date specified for this purpose by the employer in the adoption agreement. A "special accounting date" will be any accounting date specified as such by the employer subject to the provisions of subsection 16.5. The term "accounting date" shall include both a regular accounting date and a special accounting date. If an accounting date is not a day on which the trustee is open for the transaction of business, the next preceding business day or other date designated by the trustee shall be the accounting date. 8.3. ADJUSTMENT OF ACCOUNTS. The income, losses, appreciation and depreciation of the trust fund and each in- vestment option will be allocated as they arise to the accounts of each participant with an interest therein, pro rata, accord- ing to the portion of the participant's account balance in- vested in the trust fund or that investment option. 8.4. VALUATION DATE. Adjustments under subsection 8.3 shall be made as of each valuation date, based on the fair market value of the assets of the trust fund and each invest- ment option as of that date. A "valuation date" means each business day of the sponsor. In determining the fair market value of securities held in the trust fund which are listed on a registered stock exchange, the trustee shall value the same at the prices they were last traded on such exchange preceding the close of business on the valuation date. If such securi- ties were not traded on the valuation date, or if the exchange on which they are traded was not open for business on the valu- ation date, then the securities shall be valued at the prices they were last traded prior to the valuation date. Any un- listed security held in the trust fund shall be valued at it's bid price as of or next preceding the close of business on the valuation date. In detrmining the fair market value of assets other than securities for which trading or bid prices can be obtained, the trustee may appraise such assets itself, or in -32- 41 its discretion, employ one or more appraisers for that purpose and rely on the values established by such appraiser or appraisers. 8.5. CREDITING OF COMPENSATION DEFERRAL CONTRIBU- TIONS AND VOLUNTARY CONTRIBUTIONS. COMPENSATION deferral con- tributions made on behalf of a participant shall be credited to his compensation deferral contribution account. Each partici- pant's voluntary contributions, if any, will be credited to his voluntary contribution account. 8.6. ALLOCATION AND CREDITING OF EMPLOYER MATCHING CONTRIBUTIONS. The employer's matching contributions under subsection 6.3 of the plan shall be allocated and credited to the employer matching contribution accounts of such partici- pants as the employer has specified in its adoption agreement in the manner specified by the employer in the adoption agree- ment. However, if the participant has elected any withdrawal from his compensation deferral contribution account during the applicable period, then, for purposes of determining the allo- cation of employer matching contributions for the period, such withdrawal shall be deemed to have occurred first from any com- pensation deferral contributions which the participant made during that period. In no event, however, shall employer matching contributions be credited to a participant's employer matching contribution account which would exceed the limita- tions specified in subsection 4.6 or Section 17 of the plan. 8.7. ALLOCATION AND CREDITING OF EMPLOYER CONTRIBU- TIONS. As of the accounting date coincident with the last day of the plan year, the employer's contribution for the plan year ending on that date shall be allocated and credited to the employer contribution accounts of such participants as the em- ployer has specified in its adoption agreement, based upon such participants' compensation (calculated as specified by the em- ployer in the adoption agreement), according to (a) or (b) below, as specified by the employer in the adoption agreement: (a) COMPENSATION ALLOCATION. To the employer contribution accounts of all participants, PRO RATA, according to the compensation paid to them by the employer during that plan year. (b) PERMITTED DISPARITY ALLOCATION. To the employer contribution accounts of all par- ticipants as follows: (i) FIRST, PRO RATA, according to the compensation paid to them -33- 42 by the employer during that plan year, but not in excess of three percent of compensation. (ii) SECOND, any employer contribu- tions remaining after the allo- cation in (i) above will be allocated to each participant's account, PRO RATA, according to the compensation paid to them by the employer during that plan year in excess of the integration level (as specified by the employer in the adoption agreement), but not in excess of three percent of such excess compensation. (iii) THIRD, any employer contribu- tions remaining after the allo- cations in (i) and (ii) above will be allocated to each par- ticipant's account, PRO RATA, according to the sum of the total compensation and the compensation in excess of the integration level paid to them by the employer while they were participants during that plan year, but not in excess of the maximum disparity rate (as de- fined below) multiplied by the sum of such compensation and excess compensation. (iv) FINALLY, any employer contribu- tions remaining after the allo- cations above will be allocated to each participant's account, PRO RATA, according to the com- pensation paid to them by the employer during that plan year. If the employer has adopted this plan as a paired defined con- tribution plan, only one of the plans may elect to allocate employer contributions in accordance with subparagraph (b) above. The maximum disparity rate shall be: (i) 2.7% if the integration level is either: (A) the taxable wage base under Section 3121(a) of the Code as in effect at the beginning of -34- 43 the plan year (the "TWB"); or (B) not more than the greater of $10,000 or 20% of the TWB; (ii) 2.4% if the integration level is more than 80% of the TWB but less than the TWB; and (iii) 1.3% if the integration level is: (A) more than the greater of $10,000 or 20% of the TWB; but (B) not more than 80% of the TWB. The integration level shall be equal to the taxable wage base or such lesser amount elected by the employer in the adoption agreement. The taxable wage base is the contribution and bene- fit base in effect under Section 230 of the Social Security Act at the beginning of the plan year. This plan may not provide for permitted disparity if the employer maintains any other plan that provides for permitted disparity and benefits any of the same participants. A participant is treated as benefitting under the plan for any plan year during which the participant received or is deemed to receive an allocation in accordance with Section 1.410(b)-3(a) of the Income Tax Regulations. 8.8. ALLOCATION AND CREDITING OF FORFEITURES. As of the accounting date coincident with the end of the plan year in which distribution of the participant's benefits occurs (or in which the participant incurs five consecutive one-year breaks in service, if earlier), the amount by which a participant's accounts are reduced under subsection 10.2 (or subsection 19.5, if applicable) on account of such participant's resignation or dismissal from employment with the employer prior to becoming fully vested in his accounts shall be a "forfeiture". Prior to that date, all of a participant's accounts shall be subject to adjustment under subsection 8.3. Forfeitures shall be applied in one of the following methods, as specified by the employer in the adoption agreement: (a) Forfeitures shall be allocated and credited to the employer contribution accounts of participants as though they were additional employer contributions (but not in excess of the limitations of Section 415 of the Code); or (b) Forfeitures shall be applied first, to reduce the amount of employer matching -35- 44 contributions, if any, which are made pur- suant to subsection 6.3 of the plan, and then to reduce the employer contributions, if any, which are made pursuant to subsec- tion 6.1 of the plan. In the event a participant is reemployed by an employer after distribution of his benefits but before incurring five consecu- tive one-year breaks in service, the provisions of subsection 14.3 shall apply. 8.9. CHARGING WITHDRAWALS AND DISTRIBUTIONS. All withdrawals, payments, loan disbursements and distributions made under the plan to or for the benefit of a participant or his beneficiary shall be charged to the proper accounts of such participant. 8.10. ROLLOVERS. At the direction of the adminis- trator, and in accordance with such rules as the administrator may establish from time to time, rollovers described in Section 402(c) of the Code, rollover contributions described in Section 408(d)(3) of the Code and benefits under another plan which meets the requirements of Section 401(a) of the Code that are attributable to an employee covered under subsection 3.1(c) of the plan may be transferred to the trust fund and received by the trustee. A rollover account will be established in the name of each such employee in accordance with subparagraph 8.1(e) for rollovers or transfers made with respect to that em- ployee. Except to the extent otherwise provided in the plan or determined by the administrator, such rollover accounts shall be subject to the same investment elections and the same ac- counting, withdrawal, distribution and other provisions of this plan as the other accounts of the employee, but no participant or employer contributions made under this plan nor forfeitures that arise under this plan shall be credited to such rollover accounts. Rollovers, rollover contributions and benefits under other qualified plans that are transferred to the trust fund pursuant to this subsection shall be credited to the appropri- ate participant rollover accounts. If the administrator deter- mines to accept a direct or indirect transfer on behalf of an employee from any defined benefit plan, any defined contribu- tion plan subject to the funding standards of Section 412 of the Code or any defined contribution plan that would require a joint and survivor annuity or pre-retirement annuity under Sec- tions 401(a)(11) and 417 of the Code with respect to that em- ployee, the provisions of Section 11 shall apply. 8.11. STATEMENTS. At least once each year, the administrator will furnish to each participant a statement -36- 45 reflecting the condition of the participant's accounts in the trust fund. -37- 46 SECTION 9 --------- Investments ----------- 9.1. INVESTMENT OPTION SELECTION. If the employer has specified in its adoption agreement that each participant may select the investment options offered under the plan in which his account balances and the contributions to be made by him or on his behalf under the plan will be invested, the pro- visions of this Section 9 shall be applicable. The employer shall designate in the adoption agreement whether each partici- pant in the plan may direct the investment option selection for all accounts maintained on his behalf (and the contributions made to such accounts) or only for those accounts specified by the employer in the adoption agreement. Each participant, by writing filed with the administrator at least 30 days (or such shorter time period as may be established by the administrator) prior to the first day as of which this Section is applicable, may specify the percentage (in whole multiples of such percent- ages as the employer specifies in its adoption agreement for this purpose and not exceeding 100 percent) of the future con- tributions to be made by him or on his behalf to be invested in each of the investment options established under the trust, as described in subsection 9.2. Each participant, by writing filed with the administrator also may specify the percentage (in whole multiples of such percentages as the employer speci- fies in its adoption agreement and not exceeding 100 percent) of his current account balances to be invested in each of the investment options. Unless the administrator (with the consent of the trustee) specifies otherwise, a participant may execute separate investment elections with respect to his current ac- count balances under the plan and the future contributions to be made to the plan by him or on his behalf. 9.2. INVESTMENT OPTION SUBACCOUNTS. The administra- tor will maintain subaccounts reflecting the portion of each participant's compensation deferral contribution account, vol- untary contribution account, participant rollover contribution account, employer matching contribution account and employer contribution account invested in one or more of the investment options established under the trust, as agreed to by the em- ployer and the trustee. If the employer so directs, an invest- ment fund may be invested entirely in "qualifying employer securities," as that term is defined in Section 407(d)(5) of ERISA. The trustee shall invest such contributions and each participant's account balances in an investment option or options in accordance with the directions given the trustee by the administrator, but shall have no obligation or duty to verify the correctness of any such directions. -38- 47 9.3. ELECTIONS TO CHANGE INVESTMENTS. As of each valuation date (or such other date or dates as may be estab- lished by the administrator with the consent of the trustee), a participant may elect by writing filed with the administrator at least 30 days (or such shorter time period as may be estab- lished by the administrator) prior to the date as of which such election is to be effective, and within the limits specified in subsection 9.1: (a) To select, based upon a percentage, total- ling 100%, the investment option or options in which the aggregate credit balance of his subaccounts are to be redistributed; and (b) Except as provided in the last sentence of subsection 9.1, to change his direction with respect to the investment of any con- tributions made by him or for his benefit after such date. Unless a participant elects to change his investment direction with respect to his account balances and contributions made to him or on his behalf, such contributions and account balances will be invested in accordance with the investment directions last filed with the administrator. During any period in which no direction as to the investment of contributions made by a participant or for his benefit, or the participant's account balances, is in effect with respect to the participant, such contributions and the participant's account balances will be invested in such manner as the administrator may determine. 9.4. ACCOUNTING FOR INVESTMENTS. In the event a participant directs the transfer of his account balances from one investment option to another investment option, the partic- ipant's subaccount invested in the investment option from which such transfer is made will be charged with the amount trans- ferred, and the subaccount invested in the investment option to which such transfer is made shall be credited with the amount so transferred as of the effective date of such transfer. Any forfeiture allocated to a participant's employer matching or contribution account in accordance with subsection 8.8 will be invested in the same manner as specified in the participant's current investment election as to future contributions. 9.5. PARTICIPANT DIRECTED BROKERAGE ACCOUNTS. If one of the investment options established under the plan is a participant directed brokerage account, the trustee shall make purchases or sales of property for a participant directed -39- 48 brokerage account as the participant directs in writing. How- ever, pending investment of his account, the trustee may invest any portion of the assets in a participant's account which is held in cash or cash equivalents in short term fixed income investments. A participant shall be entitled to give orders directly to a broker for the purchases and sale of securities. A participant may not require the trustee to: (a) enter into a general partnership or a joint venture; (b) engage in a transaction with respect to commodities; (c) acquire any property that will be subject to acquisition or other indebtedness; (d) acquire any securities other than those listed on a recognized national exchange or quoted by the National Association of Secu- rities Dealers automatic quotation system; (e) write or acquire any option with respect to property of any kind; (f) acquire any real property in violation of local laws on the holding of such property or acquire any non-commercial real property; (g) acquire any franchise or similar right or property; or (h) engage in any transaction that the trustee in good faith believes to be a transaction prohibited by ERISA. Each participant shall indemnify and hold the employer, the administrator and the trustee harmless from and against any and all claims, obligations, liabilities, costs and expenses (in- cluding reasonable attorneys' fees) arising from any investment direction given by the participant in accordance with this sub- section 9.5. Notwithstanding the provisions of the trust, all expenses incurred in connection with the sale, investment and reinvestment of assets in accordance with this subsection 9.5 (including, but not limited to custodial, maintenance, invest- ment management, brokerage, postage, express and insurance charges, and transfer taxes) shall be charged to the appropri- ate accounts of participants who elect to direct investment of their accounts. By writing filed with the trustee, a partici- pant may direct the trustee to liquidate all the assets held subject to his individual direction at fair market value (as -40- 49 determined by the trustee after consulting with the partici- pant). The amount realized by the trustee shall be credited to the participant's accounts under the plan and shall thereafter be invested and reinvested by the trustee in accordance with the applicable provisions of the trust agreement. 9.6. INVESTMENT RESTRICTIONS. No assets of the trust may be invested in "collectibles" as that term is defined in Section 408(m) of the Code. If the sponsor consents, life insurance contracts may be held for a participant, subject to the following provisions of this subsection 9.6. For purposes of this subsection, ordinary life insurance contracts are con- tracts with both nondecreasing death benefits and nonincreasing premiums. If such contracts are held, less than of the aggregate employer contributions allocated to any participant will be used to pay the premiums attributable to them. No more than of the aggregate employer contributions allocated to any participant will be used to pay the premiums on term life insurance contracts, universal life insurance contracts, and all other life insurance contracts which are not ordinary life. The sum of the ordinary life insurance premiums and all other life insurance premiums will not exceed of the aggre- gate employer contributions allocated to any participant. Sub- ject to the survivor annuity requirements of Section 11, the contracts on a participant's life will be converted to cash or an annuity or distributed to the participant upon commencement of benefits. The trustee shall apply for and will be the owner of any insurance contract held under the terms of this plan. The insurance contract(s) must provide that proceeds will be payable to the trustee; however, the trustee shall be required to pay over all proceeds of the contract(s) to the partici- pant's designated beneficiary in accordance with the distribu- tion provisions of this plan. A participant's spouse will be the designated beneficiary of the proceeds in all circumstances unless a qualified election has been made in accordance with Section 11, if applicable. Under no circumstances shall the trust retain any part of the proceeds. In the event of any conflict between the terms of this plan and the terms of any insurance contract purchased hereunder, the plan provisions shall control. Any dividends or credits earned on insurance contracts will be allocated to the participant's account derived from employer contributions for whose benefit the contract is held. -41- 50 SECTION 10 ---------- Payment of Account Balances --------------------------- 10.1. RETIREMENT OR DEATH. If a participant's set- tlement date occurs under subparagraph 7.1(a), (b) or (c) on account of his retirement, disability or death, his entire ac- count balance will be fully vested and nonforfeitable and will be payable under subsection 10.3 or 10.4. 10.2. RESIGNATION OR DISMISSAL. If a participant's settlement date occurs under subparagraph 7.1(d) on account of his resignation or dismissal, his account balances, reduced in certain cases as required below, will be payable under subsec- tion 10.3 (or 10.4 if the participant dies before the commence- ment of his benefits). If at the date the participant's em- ployment terminates the participant has not been a participant in the plan for his applicable "vesting period" (as defined below), the participant's employer matching contribution ac- count balance and employer contribution account balance as of his settlement date (after any adjustments then required) will be reduced to an amount equal to the "vested percentage" (as defined below) of such balances, except as otherwise provided in the next sentence. A participant's applicable "vesting period" is the applicable vesting period as specified by the employer in the adoption agreement, based on his years of ser- vice with his employer. Except as may be required under sub- section 19.5, of the plan, the "vested percentage" of a partic- ipant in his employer contribution and employer matching con- tribution account balances will be the percentage specified by the employer in the adoption agreement for this purpose. A participant's interests in his compensation deferral contribu- tion account, voluntary contribution account and participant rollover account (and employer contribution account, to the extent employer contributions are utilized to satisfy the ADP test under subsection 4.5 or the ACP test under subsection 4.6) shall be fully vested and nonforfeitable at all times. If the employer has specified under subsection 3.1 that two years of service are required for eligibility purposes, the vested per- centage of all participant accounts shall be one hundred per- cent. 10.3. MANNER OF DISTRIBUTION. Subject to the provi- sions of this Section 10 and Section 11, after each partici- pant's settlement date, distribution of the net credit balances in the participant's accounts, after all required adjustments have been completed, will be made to the participant by payment in a lump sum, unless the employer has specified in the adop- tion agreement that a participant may elect to receive payment -42- 51 in a series of substantially equal annual, semi-annual, quar- terly or monthly installments, or unless the joint and survivor provisions of Section 11 apply because the employer has adopted this plan as a money purchase pension plan or because the em- ployer has adopted this plan as a profit sharing plan and has elected in the adoption agreement to provide a joint and sur- vivor annuity form of payment. If the participant may elect the form of payment, then his account balances will be paid to him (or, in the event of his death, to his spouse or designated beneficiary) in accordance with such election. If the partici- pant has not filed the appropriate election with the adminis- trator (or if such election is not permitted), his account bal- ance will be paid in a lump sum, subject to the provisions of Section 11, if applicable. If the participant's interest is to be distributed in other than single sum, the following minimum distribution rules shall apply on or after the required begin- ning date to determine the amount to be distributed each year: (a) If a participant's benefit is to be dis- tributed over (i) a period not extending beyond the life expectancy of the partici- pant or the joint life and last survivor expectancy of the participant and the par- ticipant's designated beneficiary or (ii) a period not extending beyond the life expectancy of the designated beneficiary, the amount required to be distributed for each calendar year, beginning with distri- butions for the first distribution calendar year, must at least equal the quotient obtained by dividing the participant's benefit by the applicable life expectancy. (b) The amount to be distributed each year, beginning with distributions for the first distribution calendar year shall not be less than the quotient obtained by dividing the participant's benefit by the lesser of (i) the applicable life expectancy, or (ii) if the participant's spouse is not the designated beneficiary, the applicable divisor determined from the table set forth in Q&A-4 of Section 1.401(a)(9)-2 of the Income Tax Regulations. Distributions after the death of the participant shall be distributed using the applicable life ex- pectancy in (a) above as the relevant divi- sor without regard to Regulations Section 1.401(a)(9)-2. (c) The minimum distribution required for the participant's first distribution calendar -43- 52 year must be made on or before the partici- pant's required beginning date. The mini- mum distribution for other calendar years, including the minimum distribution for the distribution calendar year in which the participant's required beginning date occurs, must be made on or before December 31 of that distribution calendar year. 10.4. DEATH DISTRIBUTION PROVISIONS. If the partic- ipant dies after distribution of the participant's interest has begun, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of dis- tribution being used prior to the participant's death. If a participant dies prior to the commencement of his benefit pay- ments under the plan, his account balances will be distributed in a lump sum, unless the employer has specified in the adop- tion agreement that distributions may be made by installment payments and the participant has elected payment in that form to his spouse or other beneficiary, as provided in subsection 10.8, or unless the provisions of Section 11 apply. If the participant dies before distribution of his or her interest begins, distribution of the participant's entire interest must be completed by December 31 of the calendar year containing the fifth anniversary of the participant's death, except that, if installment payments may be elected, as specified by the em- ployer in the adoption agreement, an election may be made to receive distributions in accordance with (a) or (b) below: (a) if any portion of the participant's inter- est is payable to a designated beneficiary, distributions may be made over the life of, or over a period certain not greater than the life expectancy of, the designated ben- eficiary, commencing on or before December 31 of the calendar year immediately following the calendar year in which the participant died; (b) if the designated beneficiary is the par- ticipant's surviving spouse, the date dis- tributions are required to begin in accor- dance with (a) above shall not be earlier than the later of (1) December 31 of the calendar year immediately following the calendar year in which the participant died and (2) December 31 of the calendar year in which the participant would have attained age 70-1/2. If elections are permitted, but the participant has not made an -44- 53 election pursuant to this subsection by the time of his death, the participant's designated beneficiary must elect the method of distribution no later than the earlier of (1) December 31 of the calendar year in which distributions would be required to begin under this subsection, or (2) December 31 of the calendar year which contains the fifth anniversary of the date of death of the participant. If the participant has no designated bene- ficiary, or if the designated beneficiary does not elect a method of distribution (or the adoption agreement does not per- mit elections), distribution of the participant's entire inter- est must be completed by December 31 of the calendar year con- taining the fifth anniversary of the participant's death. If the surviving spouse dies after the participant, but before payments to such spouse begin, the provisions of (a) above shall be applied as if the surviving spouse were the partici- pant. For purposes of this subsection, any amount paid to a child of the participant will be treated as if it had been paid to the surviving spouse if the amount becomes payable to the surviving spouse when the child reaches the age of majority. For purposes of this subsection, distribution of a partici- pant's interest is considered to begin on the participant's required beginning date (or the date distribution is required to begin to the surviving spouse pursuant to (b) above). 10.5. COMMENCEMENT OF DISTRIBUTIONS. Except as provided below in this subsection, payment of a participant's benefits will be made (or installment payments will commence) within a reasonable time after his settlement date, but not later than 60 days after the latest of (a) the end of the plan year in which a participant attains normal retirement age, (b) the end of the plan year in which the participant terminates his employment with the employer, or (c) such later date on which the amount of the payment can be ascertained by the administrator. Distribution of a participant's benefits shall be made (or installment payments shall commence) no later than the participant's required beginning date as defined in sub- paragraph 10.11(d). Notwithstanding the foregoing, if a par- ticipant has elected, by filing a written designation with the administrator prior to January 1, 1984, to have distribution of his benefits commence in accordance with the terms of a pre- decessor plan as in effect immediately preceding January 1, 1984, then distribution of such participant's benefits will be made in accordance with that designation, unless revoked by the participant, except that, for calendar years beginning after December 31, 1988, such distributions must meet the minimum distribution incidental benefit requirements in Section 1.401(a)(9)-2 of the Income Tax Regulations. 10.6. DISTRIBUTION REQUIREMENTS. All distributions required under this Section shall be determined and made in -45- 54 accordance with the Income Tax Regulations under Section 401(a)(9), including the minimum distribution incidental bene- fit requirement of Section 1.401(a)(9)-2 of the regulations. The entire interest of a participant must be distributed or begin to be distributed no later than the participant's requir- ed beginning date. As of the first distribution calendar year, distributions, if not made in a single-sum, may only be made over one of the following periods (or a combination thereof): (a) the life of the participant, (b) the life of the participant and a desig- nated beneficiary, (c) a period certain not extending beyond the life expectancy of the participant, or (d) a period certain not extending beyond the joint and last survivor expectancy of the participant and a designated beneficiary. 10.7. CONSENT TO DISTRIBUTION. If a participant's settlement date occurs and the value of the participant's vest- ed account balance derived from employer and employee contribu- tions is not greater than $3,500, the participant will receive a distribution of the value of the entire vested portion of such account balance and the nonvested portion will be treated as a forfeiture. For purposes of this subsection, if the value of a participant's vested account balance is zero, the partici- pant shall be deemed to have received a distribution of such vested account balance. If a participant's settlement date occurs and the participant elects, in accordance with the re- quirements below, to receive the value of his vested account balance, the nonvested portion will be treated as a forfeiture. If a participant receives or is deemed to receive a distribu- tion pursuant to this subsection and the participant resumes employment covered under this plan, the participant's employer- derived account balance may be restored pursuant to subsection 14.3. If the value of participant's vested account balance derived from employer and employee contributions exceeds (or at the time of any prior distribution exceeded) $3,500, and the ac- count balance is immediately distributable, the participant must consent to any distribution of such account balance. The consent of the participant shall be obtained in writing within the 90-day period ending on the date proposed for distribution. An account balance is immediately distributable if any part of the account balance could be distributed to the participant before the participant attains age 65. The administrator shall -46- 55 notify the participant of the right to defer any distribution until the participant's account balance is no longer immedi- ately distributable. Such notification shall include a general description of the material features, and an explanation of the relative values of, the optional forms of benefit available under the plan in a manner that would satisfy the notice re- quirements of Code Section 417(a)(3), and shall be provided no less than 30 days and no more than 90 days prior to the date proposed for distribution. The consent of the participant shall not be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code. In addition, upon termi- nation of this plan, the participant's account balance may, without the participant's consent, be distributed to the par- ticipant or transferred to another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code) within the same controlled group. Notwithstanding the foregoing, the failure of a partic- ipant to consent to a distribution while a benefit is immedi- ately distributable, within the meaning of this subsection, shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy this subsection. If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (a) The administrator clearly informs the par- ticipant that the participant has a right to a period of at least 30 days after re- ceiving the notice to consider whether or not to elect a distribution (and, if appli- cable, a particular distribution option), and (b) the participant, after receiving the no- tice, affirmatively elects a distribution. 10.8. BENEFICIARY DESIGNATION. Each participant from time to time, by signing a form furnished by the adminis- trator, may designate any person or persons (who may be desig- nated contingently or successively) to whom his account balanc- es under the plan are to be paid if he dies before he receives all of such account balances. Each beneficiary designation form signed by a participant will be effective only when filed with the administrator and when so filed will cancel all such beneficiary designation forms signed earlier. Notwithstanding the foregoing, if a deceased participant is survived by his -47- 56 spouse, such spouse automatically shall be his sole primary beneficiary unless the participant has designated another per- son or persons as his primary, sole or co-beneficiary and the surviving spouse has consented thereto. Such consent by a sur- viving spouse shall be in writing filed with the administrator, shall acknowledge the effect of such designation and shall be witnessed by the administrator or a notary public. If a par- ticipant dies without leaving a surviving spouse or having failed to designate a beneficiary as provided above or if his spouse or designated beneficiary dies before him or before com- plete distribution of his account balances, the administrator in its discretion may direct the trustee to pay the partici- pant's account balances to either: (a) one or more of the participant's relatives by blood or marriage and in such propor- tions as the administrator determines; or (b) the legal representative or representatives of the estate of the last to die of the participant and his designated beneficiary. The phrase "designated beneficiary" means the person or persons designated by a participant as his beneficiary in the last effective beneficiary designation form filed with the adminis- trator under this subsection and to whom a deceased partici- pant's account balances are payable under the plan. The term "beneficiary" means the natural or legal person or persons to whom a deceased participant's account balances are payable under this subsection. No beneficiary may designate another beneficiary. 10.9. MISSING PARTICIPANTS OR BENEFICIARIES. Each participant must file with the administrator from time to time in writing his and his designated beneficiary's post office address and each change of any such address. If a participant dies before he receives all of his benefits under the plan, his beneficiary must file any change in his post office address with the administrator. A communication, statement or notice addressed to a participant or beneficiary at his last post office address filed with the administrator or shown on his employer's records, will be binding on the participant and his beneficiary for all purposes of the plan. If the administrator notifies the participant or his beneficiary that he is entitled to a payment and also notifies him of this subsection, and the participant or beneficiary fails to claim his benefits or make his whereabouts known to the administrator within three years after the notification, the account of the participant or bene- ficiary will be disposed of as follows: (a) If the whereabouts of the participant's -48- 57 designated beneficiary then is known to the administrator, payment or distribution will be made to the designated beneficiary; (b) If the whereabouts of his designated bene- ficiary then is unknown to the administra- tor but the whereabouts of one or more relatives by blood, marriage or adoption of the participant is known to the adminis- trator, payment or distribution will be made to one or more of such relatives and in such proportions as the administrator decides; or (c) If the whereabouts of all of such relatives and the participant's designated beneficia- ry then is unknown to the administrator, the accounts of the participant or benefi- ciary will become a forfeiture and will be allocated and credited in accordance with subsection 8.8; provided that, if the whereabouts of the participant or desig- nated beneficiary later becomes known to the administrator, the amount of the ac- counts shall be restored to such partici- pant or beneficiary. The amount to be restored shall come first from forfeitures, then from a special employer contribution and finally from income and gains of the trust fund in the manner described in sub- section 14.3 of the plan. 10.10. FACILITY OF PAYMENT. When, in the opinion of the administrator, a participant or beneficiary is under a legal disability or is incapacitated in any way so as to be unable to manage his financial affairs, the administrator may direct the trustee to make payments to the participant or his beneficiary or his legal representative. 10.11. DEFINITIONS. For purposes of this Section 10, the following terms shall have the following meanings: (a) Applicable life expectancy. The life ex- pectancy (or joint and last survivor expec- tancy) calculated using the attained age of the participant (or designated beneficiary) as of the participant's (or designated ben- eficiary's) birthday in the applicable cal- endar year reduced by one for each calendar year which has elapsed since the date life -49- 58 expectancy was first calculated. The applicable calendar year shall be the first distribution calendar year. If payments commence before the required beginning date, the applicable calendar year is the year such payments commence. (b) Life expectancy. Life expectancy and joint and last survivor expectancy are computed by use of the expected return multiples in Tables V and VI of Section 1.72-9 of the Income Tax Regulations. Unless otherwise elected by the participant (or spouse, in the case of distributions described in sub- section 10.4 above) by the time distribu- tions are required to begin, life expec- tancies shall not be recalculated annually. Such election shall be irrevocable and shall apply to all subsequent years. The life expectancy of a nonspouse beneficiary may not be recalculated. (c) Distribution calendar year. A calendar year for which a minimum distribution is required. For distributions beginning before the participant's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the participant's re- quired beginning date. For distributions beginning after the participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin pursuant to subsec- tion 10.5. (d) Required beginning date. The required beginning date of a participant is the first day of April of the calendar year following the calendar year in which the participant attains age 70-1/2. The re- quired beginning date of a participant who attains age 70-1/2 before January 1988, shall be determined in accordance with (1) or (2) below: (i) Non-5-percent-owners. The required beginning date of a participant who is not a 5-per- cent owner is the first day of April of the calendar year fol- lowing the calendar year in -50- 59 which the later of retirement or attainment of age 70-1/2 occurs. (ii) 5-percent owners. The required beginning date of a participant who is a 5-percent owner during any year beginning after Decem- ber 31, 1979 is the first day of April following the later of: (A) the calendar year in which the participant attains age 70-1/2, or (B) the earlier of the calendar year with or within which ends the plan year in which the participant be- comes a 5-percent owner, or the calendar year in which the par- ticipant retires. The required beginning date of a partici- pant who is not a 5-percent owner who attains age 70-1/2 during 1988 and who has not retired as of January 1, 1989 is April 1, 1990. A participant is treated as a 5-percent owner for purposes of this sub- section if such participant is a 5-percent owner as defined in Section 416(i) of the Code (determined in accordance with Section 416 but without regard to whether the plan is top-heavy) at any time during the plan year ending with or within the calendar year in which such owner attains age 66-1/2 or any subsequent plan year. Once distri- butions have begun to a 5-percent owner under this subsection, they must continue to be distributed, even if the participant ceases to be a 5-percent owner in a subse- quent year. (e) Participant's benefit. The account balance as of the last valuation date in the calen- dar year immediately preceding the distri- bution calendar year (valuation calendar year) increased by the amount of any con- tributions or forfeitures allocated to the account balance as of dates in the valua- tion calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. However, if any portion of the mini- -51- 60 mum distribution for the first distribution calendar year is made in the second distri- bution calendar year on or before the re- quired beginning date, the amount of the minimum distribution made in the second distribution calendar year shall be treated as if it had been made in the immediately preceding distribution calendar year. 10.12. DISTRIBUTION TO ALTERNATE PAYEES. The admin- istrator may direct the trustee to distribute benefits to an alternate payee on the earliest date specified in a qualified domestic relations order, without regard to whether such dis- tribution is made or commences prior to the participant's ear- liest retirement age (as defined in Section 414(p)(4)(B) of the Code) or the earliest date that the participant could commence receiving benefits under the plan. -52- 61 SECTION 11 ---------- Joint and Survivor Annuity Requirements --------------------------------------- 11.1. QUALIFIED JOINT AND SURVIVOR ANNUITY. The provisions of this Section shall apply to any participant who is credited with at least one hour of service with the employer on or after August 23, 1984, and such other participants as provided in subsection 11.6. Unless the participant selects an optional form of benefit pursuant to a qualified election within the 90-day period ending on the annuity starting date, a married participant's vested account balance will be paid in the form of a qualified joint and survivor annuity and an unmarried participant's vested account balance will be paid in the form of a life annuity. The participant may elect to have such annuity distributed upon attainment of the earliest re- tirement age under the plan. A "qualified joint and survivor annuity" is an immediate annuity for the life of the partici- pant with a survivor annuity for the life of the spouse which is not less than 50 percent and not more than 100 percent of the amount of the annuity which is payable during the joint lives of the participant and the spouse and which is the amount of benefit which can be purchased with the participant's vested account balance. The percentage of the survivor annuity under the plan shall be 50%. A "life annuity" is an immediate annu- ity payable in equal installments for the life of the partici- pant that terminates upon the participant's death. Any annuity contract distributed from the plan must be nontransferable. The terms of any annuity contract purchased and distributed by the plan to a participant or spouse shall comply with the requirements of the plan. 11.2. QUALIFIED PRERETIREMENT SURVIVOR ANNUITY. Unless the participant selects an optional form of benefit within the election period pursuant to a qualified election, if a participant dies before the annuity starting date, the par- ticipant's vested account balance shall be applied toward the purchase of an annuity for the life of the surviving spouse. The surviving spouse may elect to have such annuity distributed within a reasonable period after the participant's death. -53- 62 11.3. DEFINITIONS. ----------- (a) Election period: The period which begins on the first day of the plan year in which the participant attains age 35 and ends on the date of the participant's death. If a participant separates from service prior to the first day of the plan year in which age 35 is attained, with respect to the account balance as of the date of separation, the election period shall begin on the date of separation. (b) Pre-age 35 waiver: A participant who will not yet attain age 35 as of the end of any current plan year may make a special quali- fied election to waive the qualified prere- tirement survivor annuity for the period beginning on the date of such election and ending on the first day of the plan year in which the participant will attain age 35. Such election shall not be valid unless the participant receives a written explanation of the qualified preretirement survivor annuity in such terms as are comparable to the explanation required under subsection 11.4. Qualified preretirement survivor annuity coverage will be automatically reinstated as of the first day of the plan year in which the participant attains age 35. Any new waiver on or after such date shall be subject to the full requirements of this Section. (c) Qualified election: A waiver of a quali- fied joint and survivor annuity or a quali- fied preretirement survivor annuity. Any waiver of a qualified joint and survivor annuity or a qualified preretirement survi- vor annuity shall not be effective unless: (i) the participant's spouse consents in writing to the election; (ii) the election designates a specific beneficiary, includ- ing any class of beneficiaries or any con- tingent beneficiaries, which may not be changed without spousal consent (or the spouse expressly permits designations by the participant without any further spousal consent); (iii) the spouse's consent acknowledges the effect of the election; and (iv) the spouse's consent is witnessed -54- 63 by a plan representative or notary public. Additionally, a participant's waiver of the qualified joint and survivor annuity shall not be effective unless the election desig- nates a form of benefit payment which may not be changed without spousal consent (or the spouse expressly permits designations by the participant without any further spousal consent). If it is established to the satisfaction of a plan representative that there is no spouse or that the spouse cannot be located, a waiver will be deemed a qualified election. Any consent by a spouse obtained under this provision (or establishment that the con- sent of a spouse may not be obtained) shall be effective only with respect to such spouse. A consent that permits designa- tions by the participant without any re- quirement of further consent by such spouse must acknowledge that the spouse has the right to limit consent to a specific bene- ficiary, and a specific form of benefit where applicable, and that the spouse vol- untarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a participant without the consent of the spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the partic- ipant has received notice as provided in subsection 11.4 below. (d) Spouse (surviving spouse): The spouse or surviving spouse of the participant, pro- vided that a former spouse will be treated as the spouse or surviving spouse and a current spouse will not be treated as the spouse or surviving spouse to the extent provided under a qualified domestic rela- tions order as described in Section 414(p) of the Code. (e) Annuity starting date: The first day of the first period for which an amount is paid as an annuity or in any other form. (f) Vested account balance: The aggregate value of the participant's vested account -55- 64 balances derived from employer and employee contributions (including rollovers), wheth- er vested before or upon death, including the proceeds of insurance contracts, if any, on the participant's life. The provi- sions of this Section shall apply to a par- ticipant who is vested in amounts attrib- utable to employer contributions, employee contributions (or both) at the time of death or distribution. 11.4. NOTICE REQUIREMENTS. In the case of a quali- fied joint and survivor annuity, the administrator shall pro- vide each participant, no less than 30 days and no more than 90 days prior to the annuity starting date, a written explanation of: (i) the terms and conditions of a qualified joint and sur- vivor annuity; (ii) the participant's right to make and the effect of an election to waive the qualified joint and survivor annuity form of benefit; (iii) the rights of a participant's spouse; and (iv) the right to make, and the effect of, a revo- cation of a previous election to waive the qualified joint and survivor annuity. In the case of a qualified preretirement survivor annuity as described in subsection 11.2, the administrator shall provide each participant, within the applicable period for such partic- ipant, a written explanation of the qualified preretirement survivor annuity in such terms and in such manner as would be comparable to the explanation provided for meeting the require- ments of the preceding paragraph applicable to a qualified joint and survivor annuity. The applicable period for a par- ticipant is whichever of the following periods ends last: (i) the period beginning with the first day of the plan year in which the participant attains age 32 and ending with the close of the plan year preceding the plan year in which the partici- pant attains age 35; (ii) a reasonable period ending after the individual becomes a participant; (iii) a reasonable period ending after subsection 11.5 ceases to apply to the partici- pant; or (iv) a reasonable period ending after this subsection first applies to the participant. Notwithstanding the forego- ing, notice must be provided within a reasonable period ending after separation from service in the case of a participant who separates from service before attaining age 35. For purposes of applying the preceding paragraph, a reasonable period ending after the enumerated events described in (ii), (iii) and (iv) is the end of the two-year period beginning one year prior to the date the applicable event occurs, and ending one year after that date. In the case of a participant who separates from service before the plan year in which he attains -56- 65 age 35, notice shall be provided within the two-year period beginning one year prior to separation and ending one year after separation. If such a participant thereafter returns to employment with the employer, the applicable period for such participant shall be redetermined. 11.5. EXCEPTIONS TO NOTICE REQUIREMENTS. Notwith- standing the provisions of subsection 11.4, the respective notices prescribed by that subsection need not be given to a participant if the plan (1) "fully subsidizes" the costs of a qualified joint and survivor annuity or qualified preretirement survivor annuity, (2) does not allow the participant to waive the qualified joint and survivor annuity or qualified prere- tirement survivor annuity, and (3) does not allow a married participant to designate a nonspouse beneficiary. For purposes of this subsection 11.5, a plan fully subsidizes the costs of a benefit if no increase in cost, or decrease in benefits to the participant may result from the participant's failure to elect another benefit. 11.6. SAFE HARBOR RULES. This subsection 11.6, which provides an exception to the joint and survivor annuity requirement for certain profit sharing plans, shall apply to a participant in a profit sharing plan, and to any distribution, made on or after the first day of the first plan year beginning after December 31, 1988, from or under a separate account at- tributable solely to accumulated deductible employee contribu- tions, as defined in Section 72(o)(5)(B) of the Code, and main- tained on behalf of a participant in a money purchase pension plan, (including a target benefit plan) if the following condi- tions are satisfied: (i) the participant does not or cannot elect payments in the form of a life annuity; and (ii) on the death of a participant, the participant's vested account bal- ance will be paid to the participant's surviving spouse, but if there is no surviving spouse, or if the surviving spouse has consented in a manner conforming to a qualified election, then to the participant's designated beneficiary. The surviving spouse may elect to have distribution of the vested account balance commence within the 90-day period following the date of the participant's death. The account balance shall be adjusted for gains or losses occurring after the participant's death in accordance with the provisions of Section 8 of the plan. This subsection 11.6 shall not be operative with respect to a par- ticipant in a profit sharing plan if the plan is a direct or indirect transferee of a defined benefit plan, money purchase plan, a target benefit plan, stock bonus, or profit sharing plan which is subject to the survivor annuity requirements of Section 401(a)(11) and Section 417 of the Code, or if the em- ployer has specified in the adoption agreement that the joint and survivor annuity shall be the normal form of payment under -57- 66 the plan. If this subsection 11.6 is operative, then the pro- visions of this Section 11, other than this subsection 11.6, shall be inoperative. Notwithstanding the foregoing: (a) The participant may waive the spousal death benefit described in this subsection at any time provided that no such waiver shall be effective unless it satisfies the condi- tions of subsection 11.3 (other than the notification requirement referred to there- in) that would apply to the participant's waiver of the qualified preretirement sur- vivor annuity. (b) For purposes of this subsection 11.6, vest- ed account balances shall mean, in the case of a money purchase pension plan or a tar- get benefit plan, the participant's sepa- rate account balance attributable solely to accumulated deductible employee contribu- tions within the meaning of Section 72(o)(5)(B) of the Code. In the case of a profit sharing plan, vested account balance shall have the same meaning as provided in subsection 11.3. -58- 67 SECTION 12 ---------- Withdrawals and Distributions During Employment ----------------------------------------------- 12.1. WITHDRAWAL OF VOLUNTARY PARTICIPANT CONTRIBU- TIONS. A participant may elect to withdraw all or any portion of the net credit balance in his voluntary contribution ac- count. Each election by a participant under this subsection 12.1 shall be made by filing the election form furnished by the administrator at least 30 days (or such shorter time period as may be established by the administrator) prior to the date as of which such withdrawal is to be effective. If the provisions of Section 11 are applicable to a participant, then such par- ticipant's election to withdraw his voluntary contributions shall not be effective unless the participant's spouse consents to the withdrawal in writing in the manner described in subsec- tion 11.3. Such consent shall acknowledge the form of payment, the effect of the withdrawal and be witnessed by a plan repre- sentative or a notary public. 12.2. PRE-TERMINATION DISTRIBUTIONS. If the employ- er has adopted this plan as a profit sharing plan and specified in its adoption agreement that pre-termination distributions may be made from the plan, this subsection shall be applicable. Subject to the provisions of Section 11, as of any accounting date, a participant who has attained age 59-1/2 (or has met such other requirements as are specified by the employer in the adoption agreement) and is fully vested in all of his account balances may irrevocably elect to withdraw all or any portion of such account balances (after any adjustments required under the plan have been made), except that, a participant who has not attained age 59 1/2 may not withdraw amounts from his compen- sation deferral contribution accounts nor any employer contri- butions (and earnings thereon) that are treated as qualified matching contributions or qualified nonelective contributions under the plan. Each election under this subsection 12.2 shall be made by filing the election form furnished by the adminis- trator at least 30 days (or such shorter time period as may be established by the administrator) before the date as of which such withdrawal is to be effective. All pre-termination dis- tributions under this subsection shall be distributed in a single payment (including amounts, if any, which are withdrawn from an investment fund investing in employer securities), and if the participant's accounts are invested in various invest- ment options pursuant to Section 9, withdrawal shall be made pro rata, from all investment option subaccounts. 12.3. CHARGING AND PAYMENT OF WITHDRAWALS. All withdrawals by a participant under this Section 12 shall be charged to the appropriate account of the participant, and to -59- 68 his interest in the investment options designated by the par- ticipant if the participant is allowed to select investment options, in accordance with such rules as the administrator may establish. In the absence of investment option designations by a participant, withdrawals shall be charged in accordance with such rules as shall be established by the administrator. In determining the amount any participant may withdraw under this Section 12, any unpaid loan or loans theretofore made to the participant under subsection 12.4 shall be taken into account. Withdrawals under this Section 12 shall be paid to the partici- pant as soon as practicable after all plan accounting required on or before such withdrawal is completed. Withdrawals from a participant's accounts must occur in the following order: (a) FIRST, the participant's voluntary contri- butions made prior to January 1, 1987 from the subaccount under the participant's voluntary contribution account which is attributable to such contributions; (b) NEXT, the participant's voluntary contribu- tions made on and after January 1, 1987 and the interest, earnings and appreciation thereon, from the subaccount under the par- ticipant's voluntary contribution account which is attributable to such contribu- tions; (c) NEXT, the interest, earnings and apprecia- tion on the participant's voluntary contri- butions made prior to January 1, 1987 from the remainder of the subaccount attribut- able to such contributions; and (d) FINALLY, the participant's remaining ac- counts under the plan, subject to the limi- tations of subsections 12.2 and 12.5. No forfeitures will occur solely as a result of a participant's withdrawal of compensation deferral or voluntary contributions. 12.4. LOANS TO PARTICIPANTS. While it is the pri- mary purpose of the plan to accumulate funds for participants when they retire, it is recognized that under some circum- stances it is in the best interests of participants to permit loans to be made to them while they continue in the active ser- vice of the employer. Accordingly, if the employer has so specified in its adoption agreement, the administrator, pursu- ant to such rules and procedures as it may from time to time establish, and upon written application by a participant sup- ported by such evidence as the administrator requests, may -60- 69 direct the trustee to make a loan to a participant from his accounts in the trust fund. Loans shall be made available to all participants on a reasonably equivalent basis and shall be subject to the following rules: (a) Subject to the limitations below, the prin- cipal amount of any loan made to a partici- pant, when added to the outstanding balance of all other loans made to the participant from all qualified plans maintained by the employer or a related employer, shall not exceed the lesser of: (i) $50,000, reduced by the excess (if any) of the highest out- standing balance during the one-year period ending immediately preceding the date of the loan, over the outstand- ing balance on the date of the loan, of all such loans from all such plans; or (ii) 50 percent of the participant's vested account balances under the plan. (b) Each loan must be evidenced by a written note in a form approved by the administra- tor, and shall bear interest at a reason- able rate. If the administrator does not specify a procedure for determining a rea- sonable rate of interest, the applicable rate will be the reference rate in effect at the sponsor on the date the loan is made. (c) Each loan shall specify a repayment period determined by the administrator in a uni- form and nondiscriminatory manner, but not in excess of five years. However, the five year limit shall not apply to any loan used to acquire any dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as the prin- cipal residence of the participant. (d) In the event of default, foreclosure on the note and attachment of security will not occur until a distributable event occurs under the plan. -61- 70 (e) No loans will be made to a shareholder- employee, or to an owner-employee (as defined in subsection 2.7). For purposes of this requirement, a "shareholder- employee" means an employee or officer of an electing small business (Subchapter S) corporation who owns (or is considered as owning within the meaning of Section 318(a)(1)) of the Code), on any day during the taxable year of such corporation, more than five percent of the outstanding stock of the corporation. (f) Principal and interest on each loan shall be repaid on a substantially level basis (no less frequently than quarterly) by payroll withholding or in a single lump sum prepayment, and shall be credited to the accounts and investment option subaccounts of the participant in accordance with his current investment election as to future contributions. Except as provided in the preceding sentence, partial repayments will not be permitted. (g) Loans shall not be made available to highly compensated employees (as defined in sub- section 2.12) in an amount greater than the amount made available to other employees. Loans will be approved or denied based on the credit worthiness of the participant/applicant and the liquidity of the trust fund. (h) The employer or administrator shall adopt and publish a procedure governing the application for and processing of partic- ipant loans. (i) If the provisions of Section 11 are appli- cable to any participant in this plan, then the consent of such participant's spouse must be obtained as to any loan, in the manner described in subsection 11.3. Spousal consent shall be obtained no ear- lier than the beginning of the 90-day period ending on the date of the loan, must be in writing, must acknowledge the effect of the loan, and must be witnessed by a plan representative or notary public. Such consent shall thereafter be binding with respect to the consenting spouse or any -62- 71 subsequent spouse with respect to that loan; but a new consent shall be required if the account balances are used for rene- gotiation, extension, renewal or other revisions of the loan. The employer or administrator shall specify the accounts from which a loan to a participant can be made; and also shall spec- ify whether any such loan shall be drawn, PRO RATA, from the vested portion of each of the participant's specified accounts (and subaccounts, if any) or the hierarchy of accounts from which such loans will be drawn. No loan shall exceed the pres- ent value of a participant's nonforfeitable account balances. Any loan made under the plan or a predecessor plan on or before December 31, 1986 shall be governed by the terms of the plan or the predecessor plan in effect on or before that date. Any loan made under the plan or a predecessor plan after December 31, 1986 (including any renegotiation, extension, revision or renewal after that date of a loan made on or before that date) shall be subject to the foregoing limitations of this subsec- tion 12.4. If on a participant's settlement date (including for this purpose the date a distribution is to be made to a participant under subsection 12.2), any loan or portion of a loan made to him under the plan, together with the accrued interest thereon, remains unpaid, an amount equal to such loan or any part thereof, together with the accrued interest there- on, shall be charged to the participant's accounts after all other adjustments required under the plan, but before any dis- tribution pursuant to subsections 10.3, 10.4, and 12.2 and such amount shall be deemed distributed to the participant at that time, subject to applicable law. In the event of a default by the participant prior to the participant's settlement date (e.g., a failure to make timely repayments), the amount of the loan, together with any accrued interest thereon, may be deemed distributed. In no event shall a loan to a participant be secured by an interest in the participant's residence. 12.5. HARDSHIP WITHDRAWALS. If the employer has so provided in the adoption agreement, a participant, in accor- dance with such rules and procedures as the administrator may from time to time establish, may elect to withdraw all or any portion of the sum of (a) the lesser of the compensation defer- ral contributions in his compensation deferral contribution account (including investment earnings credited to such account before 1989), or his total compensation deferral contribution account balance (determined as of the preceding accounting date), plus (b) the compensation deferral contributions with- held by the employer but not yet credited to the participant's compensation deferral contribution account. A participant may not withdraw any portion of the investment earnings on his com- pensation deferral contribution account that are credited to -63- 72 such account after 1988. Such a withdrawal must be necessary because of a hardship causing immediate and heavy financial needs on the participant, and the participant previously must have withdrawn the entire net credit balance, if any, in his voluntary contribution account. Such a withdrawal shall not exceed the amount required to meet such immediate financial need and not reasonably available from other resources of the participant, and shall not exceed the balance of such account as of the valuation date coincident with or next preceding the date of withdrawal (reduced by the remaining principal and interest of any outstanding loan made to the participant under subsection 12.4 above). Each election under this subsection 12.5 shall be made by filing the election form furnished by the administrator at such time and in such manner as the adminis- trator shall determine, and shall be effective in accordance with such rules as may be required by Internal Revenue Service regulations and as the administrator may establish from time to time. The following are the only financial needs considered immediate and heavy: expenses incurred or necessary for medi- cal care (within the meaning of Section 213(d) of the Code) of the participant, the participant's spouse, or dependents; the purchase (excluding mortgage payments) of a principal residence for the participant; payment of tuition and related educational fees for the next twelve months of post-secondary education for the participant, the participant's spouse, children, or depen- dents; or the need to prevent the eviction of the participant from, or a foreclosure on the mortgage of, the participant's principal residence; and amounts reasonably determined by the administrator to be necessary to pay any federal, state, or local income taxes or penalties resulting from any such hard- ship withdrawal. A distribution will be considered as neces- sary to satisfy an immediate and heavy financial need of the participant only if: (a) the participant has obtained all dis- tributions, other than hardship distributions, and all nontax- able loans under all plans maintained by the employer; (b) all plans maintained by the employer provide that the participant's elective deferrals (and participant contributions) will be sus- pended for twelve months after the receipt of the hardship dis- tribution; (c) the distribution is not in excess of the amount of an immediate and heavy financial need; and (d) all plans maintained by the employer provide that the participant may not make elective deferrals for the participant's taxable year immediately following the taxable year of the hardship distri- bution in excess of the applicable limit under Section 402(g) of the Code for such taxable year less the amount of such par- ticipant's elective deferrals for the taxable year of the hardship distribution. If the provisions of Section 11 are applicable to any partici- pant in this plan, then the consent of such participant's spouse must be obtained as to any hardship withdrawal, in the manner described in subsection 11.3. Spousal consent shall be -64- 73 obtained no earlier than the beginning of the 90-day period ending on the date of the hardship withdrawal, must be in writ- ing, must acknowledge the effect of the hardship withdrawal, and must be witnessed by a plan representative or notary public. -65- 74 SECTION 13 ---------- No Reversion in Employer ------------------------ The employer shall have no right, title or interest in the trust fund, and no part of the trust fund shall revert or be repaid to the employer, directly or indirectly, unless: (a) the Internal Revenue Service initially determines that the plan does not meet the requirements of Section 401(a) of the Code, in which event the contributions made to the plan by the employer shall be returned to it within one year after such adverse determination; (b) a contribution is made by the employer by mistake of fact and such contribution is returned to the employer within one year after payment to the trustee; or (c) a contribution conditioned on the deduct- ibility thereof is disallowed as an expense for federal income tax purposes and such contribution (to the extent disallowed) is returned to the employer within one year after the disallowance of the deduction. Contributions may be returned to the employer pursuant to sub- paragraph (a) above only if they are conditioned upon initial qualification of the plan, and an application for determination was made by the time prescribed by law for filing the employ- er's Federal income tax return for the taxable year in which the plan was adopted (or such later date as the Secretary of the Treasury may prescribe). The amount of any contribution that may be returned to the employer pursuant to subparagraph (b) or (c) above must be reduced by any portion thereof previ- ously distributed from the trust fund and by any losses of the trust fund allocable thereto, and in no event may the return of such contribution cause any participant's account balances to be less than the amount of such balances had the contribution not been made under the plan. -66- 75 SECTION 14 ---------- Reemployment and Employment With Related Employers -------------------------------------------------- 14.1. REEMPLOYMENT BEFORE BREAK IN SERVICE. If an employee's employment with his employer terminates and he is reemployed before he incurs a one-year break in service, his years of service will not be deemed to have been interrupted during such year and, if he was a participant in the plan, he will continue as such upon his reemployment if he then meets the requirements of subparagraph 3.1(c); provided that, such participant must refile the forms required under subsection 3.2 with the administrator and he may resume making compensation deferral contributions and voluntary contributions as of the beginning of the first pay period coincident with or next fol- lowing the date of his reemployment. 14.2. REEMPLOYMENT AFTER BREAK IN SERVICE. If a former participant who incurs a one-year break in service is reemployed, he will again become a participant in the plan as of his date of reemployment if he then meets the requirements of subparagraph 3.1(c). If an employee who is not partici- pating in the plan should terminate employment and then subse- quently be reemployed by an employer, his eligibility for par- ticipation shall be determined in accordance with subsection 3.1, and he shall become a participant on the date of his reem- ployment if he then meets the requirements of subparagraph 3.1(c) and he had met the requirements of subparagraphs 3.1(a) and (b) prior to his termination. The years of service accrued prior to termination by a non-vested participant or by an em- ployee who was not a participant shall be disregarded for pur- poses of subsection 10.2 only if his number of consecutive one- year breaks in service occurring after his termination equal or exceed the greater of (i) five, or (ii) his years of service prior to his termination. Each such reemployed employee or participant must file (or refile) the forms required by subsec- tion 3.2 with the administrator, and compensation deferral contributions and voluntary contributions by a reemployed par- ticipant will not resume under the plan until the beginning of the first pay period coincident with or next following the date of his reemployment. A "non-vested participant" is a partici- pant who, at his prior termination of employment, had no non- forfeitable right under subsection 10.2 to any part of his em- ployer matching or employer contribution accounts. In the case of a participant who has 5 consecutive 1-year breaks in ser- vice, all years of service after such breaks in service will be disregarded for the purpose of vesting the employer-derived account balance that accrued before such breaks, but both pre- break and post-break service will count for the purposes of vesting the employer-derived account balance that accrues after -67- 76 such breaks. Both accounts will share in the earnings and losses of the fund. In the case of a participant who does not have 5 consecutive 1-year breaks in service, both the pre-break and post-break service will count in vesting both the pre-break and post-break employer-derived account balance. 14.3. RESTORATION OF FORFEITURES. If a participant whose employment with the employer terminated because of resig- nation or dismissal before he was 100 percent vested in his em- ployer matching or contribution accounts is reemployed by the employer or a related employer after distribution of his em- ployer contribution or employer matching contribution accounts has commenced (or was deemed to commence under subsection 10.7) but before he incurs five consecutive one-year breaks in ser- vice, he may repay to the trustee the total amount distributed to him from such accounts as a result of his earlier termina- tion of employment. Such repayment must be made before the earlier of five years after the first date on which the partic- ipant is subsequently reemployed by an employer, or the date the participant incurs five consecutive one-year breaks in ser- vice commencing after the distribution. If a participant makes such a repayment to the trustee, both the amount of the repay- ment and the forfeiture which resulted from his earlier termi- nation of employment (without interest) shall be credited to his employer matching and contribution accounts, as appropri- ate, as of the regular accounting date coincident with or next following the date of repayment (after all other adjustments required under the plan as of that date have been made), but the amount of the repayment shall be separately accounted for by the administrator or trustee, inasmuch as such amount was previously the subject of a taxable distribution. Forfeitures which are restored to participants' accounts as of a regular accounting date under this subsection 14.3 shall reduce: first, forfeitures to be allocated as of that date under sub- section 8.8; and then, to the extent that the forfeitures to be allocated as of that date are insufficient to fully restore a reemployed participant's accounts, the employer will make a special contribution in the amount necessary to restore such forfeitures. 14.4. EMPLOYMENT WITH RELATED EMPLOYERS. Employment of an employee or a participant with a related employer will be considered as employment with the employer for purposes of determining the employee's or participant's years of service, hours of service, leaves of absence, breaks in service and dis- tribution date. Termination of an employee's or participant's employment with his employer will not be considered a termina- tion of employment for purposes of the plan if, concurrently with or immediately following such termination of employment, such employee or participant is employed by a related employer. -68- 77 No contribution to be made by an employer under the plan on behalf of a participant, however, will be based on any earnings paid to such employee or participant by such related employer, and no employee of a related employer may become a participant in the plan solely as a result of such employment. -69- 78 SECTION 15 ---------- General Provisions ------------------ 15.1. INFORMATION FURNISHED BY PARTICIPANTS. Par- ticipants and their beneficiaries must furnish to the adminis- trator and the trustee such evidence, data or information as the administrator and the trustee consider desirable to carry out the plan. No participant, except one authorized by the administrator, shall have the right to inspect plan records. 15.2. INFORMATION FURNISHED TO TRUSTEE. Each em- ployer and the administrator shall furnish the trustee such data and information as it may require to perform its functions under the plan and trust. 15.3. INALIENABILITY OF BENEFITS. The interests of participants and their beneficiaries under the plan are not subject to the claims of their creditors and, except as may be required by a domestic relations order which the administrator determines to be a qualified domestic relations order under Section 414(p) of the Code, may not be voluntarily or involun- tarily assigned or alienated. 15.4. ABSENCE OF GUARANTY. Neither the administra- tor, the trustee nor the employers in any way guarantee the trust fund from loss or depreciation. The liability of the trustee and the administrator to make any payment under the plan will be limited to the assets held by the trustee which are available for that purpose. 15.5. EMPLOYMENT RIGHTS. The plan does not consti- tute a contract of employment. The plan shall not be construed as giving a participant a right to be retained in the employ of the employers or a right or claim to any benefit under the plan unless the right or claim has specifically accrued under the plan. 15.6. GENDER AND NUMBER. Words in the masculine include the feminine and neuter genders, words in the neuter include the masculine and feminine genders, the singular in- cludes the plural and the plural includes the singular, unless qualified by the context. 15.7. ADMINISTRATIVE DECISIONS FINAL. Any interpre- -70- 79 tation of the plan and any decision on a matter within the administrator's discretion made in good faith shall be binding on all persons, and shall not be overturned unless held to be arbitrary and capricious. A misstatement or other mistake of fact shall be corrected when it becomes known, and the adminis- trator shall make such adjustment on account thereof as it considers equitable and practicable. 15.8. EVIDENCE. Evidence required of anyone under the plan may be by certificate, affidavit, document, or other information which the person acting on it considers pertinent and reliable and signed, made or presented by the proper party or parties. 15.9. ACTION BY EMPLOYER. Any action required or permitted to be taken by an employer under the plan shall be by resolution of its Board of Directors, by resolution of a duly authorized committee of its Board of Directors, or by a person or persons authorized by resolution of its Board of Directors or such committee, if the employer is a corporation; by written instrument signed by its managing partner or partners, or by a person or persons authorized by such managing partner or part- ners, if the employer is a partnership; and by written instru- ment signed by the employer, if the employer is a sole propri- etor. 15.10. UNIFORM RULES. In managing the plan, the administrator will apply uniform rules to all participants similarly situated. 15.11. CONTROLLING LAW. Except to the extent super- seded by the laws of the United States, the laws of the state of the employer's principal place of business shall govern, control and determine all questions arising with respect to the plan and the trust agreement and the validity of their provi- sions. 15.12. WAIVER OF NOTICE. Any notice required under the plan or the trust agreement may be waived by the person entitled thereto. 15.13. SUCCESSOR TO AN EMPLOYER. The term "employ- er" also includes any entity that is a successor to an employer or a purchaser of all or substantially all of the assets of an employer and which agrees to continue the plan as provided in subparagraph 16.3(d). -71- 80 15.14. CLAIMS PROCEDURE. A participant or bene- ficiary who believes that he is entitled to a benefit under the plan may file a written claim for such benefit with the admin- istrator. The administrator shall notify in writing any par- ticipant or beneficiary whose claim for benefits under the plan has been denied in whole or part within 90 days after receipt of the claim for benefits by the administrator, or within 180 days of receipt of such claim if the participant is notified in writing by the administrator that an extension of time is re- quired for processing the claim. If a claim is neither granted nor denied within 90 days or 180 days, as the case may be, the claim will be considered denied and the claimant may pursue the review procedure set forth below. Each notice of denial of a claim shall be in writing and shall contain the following information: (a) The specific reason or reasons for the denial; (b) Specific reference to pertinent plan provi- sions upon which the denial is based; (c) A description of any additional material or information necessary for the applicant to perfect the claim and an explanation of why such material or information is necessary; and (d) An explanation of the plan's review proce- dure (as described below). In the event a claim for benefits is denied in whole or in part, the claimant or the claimant's duly authorized represen- tative may request a review of such denial by the administra- tor. Each such request for review must be in writing signed by the claimant or the claimant's duly authorized representative, must specify that it is a request for review of a denied claim and must be filed with the administrator no later than 60 days after receipt by the claimant of the denial of the claim. The decision of the administrator upon a claimant's request for review shall be made within 60 days after the request for re- view is received by the administrator unless special circum- stances require an extension of time for processing such re- view, in which event the claimant shall be notified in writing prior to the expiration of such 60 days, and the decision of the administrator shall be rendered within 120 days of the receipt of the request for review. In connection with a request for review, the claimant or the claimant's duly autho- rized representative may submit issues and comments in writing -72- 81 to the administrator. All communications between the adminis- trator and the claimant or the claimant's duly authorized rep- resentative shall be in writing unless the claimant or the claimant's duly authorized representative requests otherwise and the administrator consents thereto. Each decision of the administrator on a request for review shall be in writing, shall include the specific reason or reasons for the decision and shall contain specific reference to the plan provisions upon which the decision is based. 15.15. LITIGATION BY PARTICIPANTS. If a legal action begun against the trustee, the employer or the administrator by or on behalf of any person results adversely to that person, or if a legal action arises because of conflicting claims to a participant's or beneficiary's benefits, the cost to the trust- ee, the employer or the administrator of defending the action will be charged to the extent legally permitted under ERISA against the sums, if any, involved in the action or payable to the participant or beneficiary concerned. 15.16. AMENDMENTS OF VESTING SCHEDULE. If the em- ployer amends the vesting schedule contained in the adoption agreement: for every employee who is a participant on the later of the amendment adoption date or the amendment effective date, the vested percentage of such participant shall not be less than the vested percentage of such participant without regard to the amendment; and each participant with three or more years of service may elect, within a reasonable period of time after the adoption of such amendment, to have his vested percentage determined under the plan without regard to such amendment. For participants who do not have at least one hour of service in any plan year beginning after December 31, 1988, the preceding sentence shall be applied by substituting "five" for "three" years of service where such language appears. The period during which such election may be made will end on the latest of (i) 60 days after the amendment is adopted; (ii) 60 days after the effective date of the amendment, and (iii) 60 days after the participant is issued written notice of the amendment by the administrator. For purposes of this subsec- tion, an amendment of the vesting schedule is any plan amend- ment which directly or indirectly affects the computation of the vested percentage of participants' rights to their employer matching and contribution account balances. 15.17. QUALIFICATION OF PLAN. Adoption of the plan and trust by the employer is conditioned, unless the plan is adopted as a standardized plan, upon the employer's securing a determination letter from the Internal Revenue Service to the effect that the plan, as adopted by the employer, meets the -73- 82 applicable requirements of Section 401(a) of the Code. In the event the employer fails to secure such determination letter or, after having secured such determination letter, is notified that the plan no longer meets the applicable requirements of Section 401(a), any assets of the plan held in the trust will be considered as held by a nonqualified plan and treated ac- cordingly. If the employer's plan fails to attain or retain qualification, such plan will no longer participate in this prototype plan and will be considered an individually designed plan. As a condition to adopting this plan, the employer agrees to notify the trustee and provide the trustee with a copy of the determination letter issued by the Internal Revenue Service in connection with the plan within a reasonable period of time after such letter is received. 15.18. COMPLIANCE WITH ERISA AND SEVERABILITY. The plan is intended to comply with the applicable requirements of ERISA. The provisions of the plan shall be interpreted to con- form to ERISA and any regulations and rules promulgated or issued under ERISA. If any provision of the plan is found to be illegal or invalid, such illegality or invalidity shall not affect the remaining provisions of the plan and the plan shall be construed and enforced as if such illegal or invalid provi- sion had never been incorporated herein. 15.19. CONTROL OF TRADES OR BUSINESSES BY OWNER- EMPLOYEE. If this plan provides contributions or benefits for one or more owner-employees who control both the business for which this plan is established and one or more other trades or businesses, this plan and the plan established for such other trades or businesses must, when looked at as a single plan, satisfy Code Sections 401(a) and (d) for the employees of this and all other trades or businesses. If the plan provides contributions or benefits for one or more owner-employees who control one or more other trades or busi- nesses, the employees of the other trades or businesses must be included in a plan which satisfies Sections 401(a) and (d) and which provides contributions and benefits not less favorable than provided for owner-employees under this plan. If an individual is covered as an owner-employee under the plans of two or more trades or businesses which are not con- trolled and the individual controls a trade or business, then the contributions or benefits of the employees under the plan of the trades or businesses which are controlled must be as favorable as those provided for him under the most favorable plan of the trade or business which is not controlled. For purposes of the preceding paragraphs, an owner-employee, or -74- 83 two or more owner-employees, will be considered to control a trade or business if the owner-employee, or two or more owner- employees together: (a) own the entire interest in an unincorpo- rated trade or business, or (b) in the case of a partnership, own more than 50 percent of either the capital interest or the profits interest in the partnership. For purposes of the preceding sentence, an owner-employee, or two or more owner-employees, shall be treated as owning any interest in a partnership which is owned, directly or indi- rectly, by a partnership which such owner-employee, or such two or more owner-employees, are considered to control within the meaning of the preceding sentence. 15.20. PORTABILITY. Except as provided below, an employer may direct the trustee, with the consent of the trust- ee, to receive and hold for the benefit of a participant under this plan any assets (i) held for the benefit of such partici- pant under any other plan or trust qualified under Section 401(a) of the Code or (ii) held in a trust or custodial account qualified under Section 408 of the Code and attributable to such participant's prior participation in a plan or trust qual- ified under Section 401(a) of the Code. Any such assets trans- ferred to this plan shall be held in a separate, nonforfeitable account established for the benefit of such participant, which shall be adjusted as any other participant account under the plan until distributed in accordance with Section 10. -75- 84 SECTION 16 ---------- Amendment and Termination ------------------------- 16.1. AMENDMENT BY THE EMPLOYER. While the employer expects and intends to continue the plan, the employer reserves the right, subject to Section 13, to amend the plan (in accor- dance with the procedures set forth in subsection 15.9) from time to time, subject to the following: (a) No amendment to the plan shall be effective to the extent that it has the effect of decreasing a participant's accrued benefit. Notwithstanding the preceding sentence, a participant's accrued benefit may be reduced to the extent permitted under Section 412(c)(8) of the Code. For pur- poses of this subparagraph, a plan amend- ment which has the effect of decreasing a participant's account balance or elimi- nating an optional form of benefit, with respect to benefits attributable to service before the amendment shall be treated as reducing an accrued benefit. Furthermore, no amendment to the plan shall have the effect of decreasing a participant's vested interest determined without regard to such amendment as of the later of the date such amendment is adopted or the date it becomes effective. (b) The employer, by filing an amended adoption agreement with the sponsor, may amend the plan to specify which of the plan's vari- able features will be included in the plan after the effective date of the amended adoption agreement and to specify, to the extent permitted under the plan, how these variable features will be applied. (c) The employer, by continuing the plan in the form of a newly-established and individ- ually designed plan and trust, may amend the plan in any manner it considers desir- able, provided that the accounts of par- ticipants will not be transferred to such newly-established trust until it has been determined that the plan, as amended and continued in the form of such newly-estab- lished plan and trust, continues to meet the requirements of a qualified plan under -76- 85 the Code. If the employer amends the plan in this fashion (not including an amendment under (b) above) it shall no longer be con- sidered to have adopted this plan, and the plan, as adopted by the employer, will no longer be considered to be a prototype plan. Participants' accounts will be transferred to such newly-established trust as soon as practicable after the accounting date coincident with or next following the date of a favorable Internal Revenue Ser- vice determination as to the plan's quali- fication. If the employer amends the plan because of a waiver of the minimum funding requirements of Code Section 412, the plan will be considered an individually designed plan and no longer part of the prototype plan. (d) The employer may amend the plan by adding overriding plan language to the adoption agreement where such language is necessary to satisfy Sections 415 and 416 of the Code because of the required aggregation of multiple plans under Sections 415 and 416. (e) The employer may add certain model amend- ments published by the Internal Revenue Service which specifically provide that their adoption will not cause the plan to be treated as individually designed. 16.2. AMENDMENT BY SPONSOR. Each employer, by fil- ing its adoption agreement with the sponsor and thus adopting the plan, authorizes and empowers the sponsor to amend the plan from time to time subject to Section 13 and the following: (a) Except as provided in subparagraphs (b) and (c) next below, no such amendment shall become effective until at least 30 days' prior written notice thereof has been given to the employer, nor shall any such amend- ment reduce participants' benefits to less than the benefits to which they would have been entitled to receive if they had re- signed from the employ of their respective employers on the day of the amendment or eliminate any optional form of distribution under the plan. -77- 86 (b) An amendment of the plan made under this subsection which the sponsor deems neces- sary or appropriate to enable the plan to meet the requirements of Section 401(a) of the Code, or any future legislation amend- ing, supplementing or superseding said section, may be made effective as of the date the plan was established by the spon- sor or as of any subsequent date. (c) An amendment of the plan made under this subsection to conform the plan to any change in the law of the United States, the state of the employer's principal place of business or any political subdivision thereof, or to any rule or regulation thereunder, may take effect as of the date such amendment is required to be effective under such law, rule or regulation. 16.3. TERMINATION. The plan will terminate as to an individual employer on the first to occur of the following: (a) The date the plan is terminated by the em- ployer (in accordance with the procedures set forth in subsection 15.9) if thirty days' advance written notice of the termi- nation is given to the administrator, the trustee and other employers, if any. (b) The date the employer is judicially dis- charged in bankruptcy or is insolvent. (c) The date the employer permanently discon- tinues making contributions under the plan. (d) The dissolution, merger, consolidation or reorganization of the employer, or the sale by the employer of all or substantially all of its assets except that: (i) in such event arrangements may be made with the consent of the employer whereby the plan will be continued by a successor to, or purchaser of all or substantially all of the employer's assets, in which case the successor or purchaser will be substituted for the employer under the plan; and (ii) if an employer is merged, dissolved or in any way reorganized into, or consolidated with, any other employer, the plan, as -78- 87 applied to the former employer automat- ically will continue in effect without a termination thereof. If the employer is a partnership, the withdrawal of partners and the admission of new partners will not in itself be considered as affecting the identity of the employer. 16.4. NOTICE OF AMENDMENT OR TERMINATION. The administrator shall notify participants of an amendment or ter- mination of the plan within a reasonable time. 16.5. VESTING AND DISTRIBUTION ON TERMINATION. On termination or partial termination of the plan [including com- plete discontinuance of contributions under subparagraph 16.3(c)], the date of termination shall be a special accounting date and after all adjustments then required have been made, the account balances of each participant will be fully vested and nonforfeitable and will be distributable in accordance with subsections 10.3 or 10.4. Until the entire trust fund has been distributed, all appropriate accounting provisions of the plan shall continue to apply, the trust shall continue in effect, and the trustee shall have all the powers, rights, discretions, duties and liabilities provided for in the trust and the plan. 16.6. MERGER OR CONSOLIDATION. In the event of a merger or consolidation of this plan with, or transfer of assets or liabilities of the plan to, any other plan, each par- ticipant's or beneficiary's benefits under such other plan immediately after such merger, consolidation or transfer (if the plan terminated immediately after such merger, consolida- tion or transfer) at least shall equal the benefit he would have received under this plan immediately before the merger, consolidation or transfer (if this plan had terminated). -79- 88 SECTION 17 ---------- Benefit Limitations ------------------- 17.1. SINGLE PLAN. If the participant does not par- ticipate in, and has never participated in, another qualified plan, a welfare benefit fund (as defined in Section 419(e) of the Code), an individual medical account (as defined in Section 415(l)(2) of the Code), or a simplified employee pension (as defined in Section 408(k) of the Code), maintained by the employer, which provides an annual addition as defined in sub- section 17.12, the amount of annual addition which may be allo- cated under this plan to the participant's accounts for any limitation year shall not exceed the lesser of the maximum per- missible amount or any other limitation contained in this plan. If the employer contribution that would otherwise be contri- buted or allocated to the participant's employer contribution account would cause the annual additions for that limitation year to exceed the maximum permissible amount, the amount con- tributed or allocated will be reduced so that the annual addi- tions for the limitation year will equal the maximum permis- sible amount. 17.2. ESTIMATED COMPENSATION. Prior to the deter- mination of the participant's actual compensation for a limi- tation year, the maximum permissible amount may be determined on the basis of the participant's estimated annual compensation for such limitation year. Such estimated annual compensation shall be determined on a reasonable basis and shall be uni- formly determined for all participants similarly situated. 17.3. ACTUAL COMPENSATION. As soon as is adminis- tratively feasible after the end of the limitation year, the maximum permissible amount for such limitation year shall be determined on the basis of the actual compensation for such participant for such limitation year. 17.4. EXCESS AMOUNT IN SINGLE PLAN. If, pursuant to subsection 17.3 or as a result of the allocation of forfei- tures, there is an excess amount with respect to a participant for a limitation year, such excess amount shall be disposed of as follows: (a) Any voluntary contributions, to the extent they would reduce the excess amount, will be returned to the participant. (b) If after the application of subparagraph -80- 89 (a) an excess amount still exists, and the participant is covered by the plan at the end of the limitation year, then such excess amount shall not be distributed to the participant, but shall be reapplied to reduce future employer contributions or matching contributions under the plan for the next limitation year (and for each suc- ceeding limitation year, if necessary) for such participant, so that in each such year, the sum of actual employer contri- butions and matching employer contributions plus the reapplied amount shall equal the amount of employer matching or contribu- tions which would otherwise be allocated to such participant's employer contribution and employer matching contribution ac- counts. (c) If after the application of subparagraph (a) an excess amount still exists, and the participant is not covered by the plan at the end of the limitation year, or in the event that the participant is not entitled to have an employer contribution allocated to his account for the next limitation year, then such excess amount shall not be distributed to the participant, but shall be held unallocated in a suspense account. The suspense account will be applied to reduce future employer contributions or employer matching contributions for all remaining participants in the next limita- tion year, and each succeeding limitation year if necessary. (d) If a suspense account is in existence at any time during the limitation year pursu- ant to this subsection, it will not partic- ipate in the allocation of the trust's investment gains and losses. If a suspense account is in existence at any time during a particular limitation year, all amounts in the suspense account must be allocated and reallocated to participants' accounts before any employer or employee contribu- tions may be made to the plan for that limitation year. Excess amounts may not be distributed to participants or former par- ticipants. 17.5. TWO OR MORE QUALIFIED PLANS (MASTER OR PROTO- -81- 90 TYPE PLANS). If, in addition to this plan, the participant is covered under another qualified master or prototype defined contribution plan maintained by the employer, a welfare benefit fund maintained by the employer, an individual medical account maintained by the employer, or a simplified employee pension maintained by the employer, which provides an annual addition as defined in subsection 17.12 during any limitation year, the amount of annual additions which may be allocated under this plan on a participant's behalf for a limitation year shall not exceed the maximum permissible amount reduced by the annual additions credited to a participant's account under the other plans and welfare benefit funds for the same limitation year. If the annual additions with respect to the participant under other defined contribution plans and welfare benefit funds maintained by the employer are less than the maximum permissi- ble amount and the employer contribution that otherwise would be contributed or allocated to the participant's account under this plan would cause the annual additions for the limitation year to exceed this limitation, the amount contributed or allo- cated will be reduced so that the annual additions under all such plans and funds for the limitation year will equal the maximum permissible amount. If a participant's annual addi- tions under such other plans result in an excess amount for a limitation year, no participant or employer contributions will be contributed or allocated to the participant's accounts under this plan for the limitation year. 17.6. ESTIMATED COMPENSATION (TWO OR MORE PLANS). Prior to the determination of the participant's actual compen- sation for a limitation year, the amounts referred to in sub- section 17.5 above may be determined on the basis of the par- ticipant's estimated annual compensation for such limitation year. Such estimated annual compensation shall be determined on a reasonable basis and shall be uniformly determined for all participants similarly situated. 17.7. ACTUAL COMPENSATION (TWO OR MORE PLANS). As soon as is administratively feasible after the end of the limi- tation year, the amounts referred to in subsection 17.6 shall be determined on the basis of the actual compensation paid to such participant for such limitation year. 17.8. TREATMENT OF EXCESSES (TWO OR MORE PLANS). IF pursuant to subsection 17.7 or as a result of the allocation of forfeitures, a participant's annual additions under this plan and all such other plans result in an excess amount for a limi- tation year, such excess amount shall be deemed to consist of the amounts last allocated under the plans, except that annual additions attributable to a simplified employee pension will be -82- 91 deemed to have been allocated first, followed by annual addi- tions to a welfare benefit fund or individual medical account, regardless of the actual allocation date. Any excess amounts attributable to this plan shall be disposed of as provided in subsection 17.4. 17.9. COINCIDENT ALLOCATIONS (TWO OR MORE PLANS). If an excess amount was allocated to a participant's accounts on an allocation date of this plan which coincides with an allocation date of another plan, the excess amount attributable to this plan will be the product of: (a) the total excess amount allocated as of such date, and (b) the ratio of (i) the annual additions allo- cated to the participant for the limitation year as of such date under this plan, to (ii) the total annual additions allocated to the participant for the limitation year as of such date under all qualified master or prototype defined contribution plans. 17.10. TWO OR MORE QUALIFIED PLANS (OTHER THAN MAS- TER OR PROTOTYPE PLANS). If the employer also maintains anoth- er plan which is a qualified defined contribution plan other than a master or prototype plan and a participant is covered under such other plan, annual additions allocated to accounts under this plan on behalf of any participant shall be limited in accordance with the provisions of subsections 17.5 through 17.10, as though the other plan were a master or prototype plan, unless the employer provides other limitations in the adoption agreement. 17.11. COMBINED PLAN LIMITATION. If the employer maintains or at any time maintained a qualified defined benefit plan covering any of its employees who are participants in this plan, the sum of the participant's defined benefit plan frac- tion and defined contribution plan fraction will not exceed 1.0 in any limitation year. The benefits provided for the partici- pant under the defined benefit plan will be adjusted to the extent necessary so that the sum of such fractions determined with respect to the participant does not exceed 1.0, unless the employer has specified otherwise in the adoption agreement. 17.12. DEFINITIONS RELATIVE TO BENEFIT LIMITATIONS. For purposes of this Section 17, the following terms shall have the following meanings: -83- 92 (a) "Annual addition" means the sum of the following amounts allocated or credited to a participant's account for a limitation year: (i) all employer contributions made on his behalf; (ii) all forfeitures; and (iii) all of the participant's volun- tary contributions. In addition, amounts allocated, after March 31, 1984, to an individual medical account, as defined in Section 415(l)(2) of the Code, which is part of a pension or annuity plan maintained by the employer are treated as annual additions to a defined contribution plan. Also, amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a key employee, as defined in Section 419A(d)(3) of the Code under a welfare benefit fund, as de- fined in Section 419(e) of the Code, main- tained by the employer, are treated as annual additions to a defined contribution plan. (b) "Maximum permissible amount" means, with respect to any participant for a limitation year, the lesser of (i) $30,000 (or if greater, 1/4 of the dollar amount in effect under Section 415(b)(1) of the Code for that limitation year), or (ii) 25 percent of the participant's actual compensation for the limitation year. The limitation in (ii) above shall not apply to any contribu- tion for medical benefits (within the mean- ing of Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise treated as an annual addition, or any amount otherwise treated as an annual addition under Section 415(l)(1) or 419A(d)(2) of the Code. If a short limitation year is created because of an amendment changing the plan year to a different 12-consecutive month period, the maximum permissible amount will not exceed -84- 93 the defined contribution dollar limitation in (i) above multiplied by the following fraction: Number of Months in the short limitation year --------------------------------------------- 12 (c) "Excess amount" means the excess of a par- ticipant's annual addition for a limitation year over the participant's maximum permis- sible amount. (d) "Defined benefit fraction" means a frac- tion, the numerator of which is the sum of the participant's projected annual benefits under all the defined benefit plans (wheth- er or not terminated) maintained by the employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the limitation year under Sections 415(b) and (d) of the Code or 140 percent of the highest average compensation, including any adjustments under Section 415(b) of the Code. Notwith- standing the above, if the participant was a participant as of the first day of the first limitation year beginning after December 31, 1986, in one or more defined benefit plans maintained by the employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the participant had accrued as of the end of the last limitation year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Section 415 for all limitation years beginning before January 1, 1987. (e) "Defined contribution fraction" means a fraction, the numerator of which is the sum of the annual additions to the partici- pant's accounts under all the defined con- tribution plans (whether or not terminated) maintained by the employer for the current and all the prior limitation years (includ- ing the annual additions attributable to -85- 94 the participant's voluntary contributions to all defined benefit plans, whether or not terminated, maintained by the employer, and the annual additions attributable to all welfare benefit funds, individual medi- cal accounts, and simplified employee pen- sions, maintained by the employer) and the denominator of which is the sum of the maximum aggregate amount for the current and all prior limitation years of service with the employer (regardless of whether a defined contribution plan was maintained by the employer). The "maximum aggregate amount" in any limitation year is the lesser of 125 percent of the dollar limita- tion in effect under Section 415(c)(1)(A) of the Code or 35 percent of the partici- pant's compensation for such year. If the employee was a participant as of the end of the first day of the first limitation year beginning after December 31, 1986, in one or more defined contribution plans main- tained by the employer which were in exis- tence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit frac- tion would otherwise exceed 1.0 under the terms of this plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last limitation year beginning before January 1, 1987 and disregarding any changes in the terms and conditions of the plan made after May 5, 1986, but using the Section 415 limitation applicable to the first limita- tion year beginning on or after January 1, 1987. The annual addition for any limita- tion year beginning before January 1, 1987 shall not be recomputed to treat all em- ployee contributions as annual additions. (f) "Projected annual benefit" means the annual benefit (adjusted to an actuarially equiva- lent straight life annuity if such benefit is expressed in a form other than a straight life annuity or qualified joint and survivor annuity) to which the partici- -86- 95 pant would be entitled under the terms of the plan assuming: (i) the participant will continue employment until normal retire- ment age under the plan (or current age, if later), and (ii) the participant's compensation for the current limitation year and all other relevant factors used to determine benefits under the plan will remain con- stant for all future limitation years. (g) "Compensation". For purposes of this Sec- tion 17 only, the term "compensation" means a participant's earned income, wages, sala- ries, fees for professional service and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the employer maintaining the plan to the extent that the amounts are includible in the participant's gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premi- ums, tips and bonuses) and excluding the following: (i) employer contributions to a plan of deferred compensation which are not includible in the employee's gross income for the taxable year in which contrib- uted, or employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the employee, or any distribu- tions from a plan of deferred compensation; (ii) amounts realized from the exer- cise of a non-qualified stock option, or when restricted stock (or property) held by the employee either becomes freely transferable or is no longer -87- 96 subject to a substantial risk of forfeiture; (iii) amounts realized from the sale, exchange or other disposition of stock acquired under a qual- ified stock option; and (iv) other amounts which received special tax benefits, or con- tributions made by the employer (whether or not under a salary reduction agreement) towards the purchase of an annuity described in Section 403(b) of the Code (whether or not the amounts are actually excludable from the gross income of the employee). Notwithstanding the foregoing, compensation for a participant in a defined contribution plan who is permanently and totally dis- abled (as defined in Section 22(e)(3) of the Code) is the compensation such partici- pant would have received for the limitation year if the participant was paid at the rate of compensation paid immediately be- fore becoming permanently and totally dis- abled; such imputed compensation for the disabled participant may be taken into account only if the participant is not a highly compensated employee (as defined in Section 414(q) of the Code), and contribu- tions made on behalf of such participant are nonforfeitable when made. (h) "Master or Prototype Plan" means a plan the form of which is the subject of a favorable opinion letter from the Internal Revenue Service. (i) "Highest Average Compensation" means the average compensation for the three consecu- tive years of service with the employer that produces the highest average. A year of service with the employer is the 12-con- secutive month period defined in subsection 2.28 and the adoption agreement. -88- 97 SECTION 18 ---------- Predecessor Plan ---------------- If the employer so indicates in the adoption agree- ment, this plan (and the trust which forms a part of the plan) shall constitute an amendment, continuation and entire restate- ment of a plan (the "predecessor plan") previously adopted and maintained by the employer which also was a plan intended to meet the requirements of Section 401(a) of the Code. If this plan constitutes a continuation of a predecessor plan, each employee of the employers who was a participant in the prede- cessor plan immediately prior to the applicable effective date of this plan will continue as a participant in this plan, sub- ject to its terms and conditions. Furthermore, in the case of a participant in the predecessor plan immediately prior to the effective date of this plan, the vested or nonforfeitable per- centage of such participant's benefits under this plan in no event shall be less than the vested or nonforfeitable percent- age which he was entitled to receive under such predecessor plan. -89- 98 SECTION 19 ---------- Special Rules Applicable When Plan is Top-Heavy ----------------------------------------------- 19.1. PURPOSE AND EFFECT. The purpose of this Sec- tion 19 is to comply with the requirements of Section 416 of the Code. The provisions of this Section 19 shall be effective for each plan year in which the plan is a "top-heavy plan" within the meaning of Section 416(g) of the Code and shall supersede any conflicting provisions in the plan or the adop- tion agreement. The administrator shall have sole responsibil- ity for determining whether the plan is a top-heavy plan. 19.2. TOP-HEAVY PLAN. In general, the plan will be a top-heavy plan for any plan year if, (i) as of the last day of the preceding plan year and (ii) in the case of the first plan year of a new plan, the last day of such plan year (the "determination date"), the top-heavy ratio for this plan (and any other plan which is aggregated in accordance with subsec- tion 19.4 below including any Simplified Employee Pension Plan) exceeds 60 percent. The "top-heavy ratio" for this plan (and such other plans) is equal to the ratio of the sum of the amounts in (a), (b) and (c) below for key employees (as defined below and in Section 416(i)(1) of the Code) to the sum of such amounts for all employees who are covered by a defined contri- bution plan or defined benefit plan which is aggregated in accordance with subsection 19.4 below: (a) The aggregate account balances of partici- pants under this plan. (b) The aggregate account balances of partici- pants under any other defined contribution plan included in subsection 19.4 below. (c) The present value (based on the assumptions specified in the adoption agreement) of the cumulative accrued benefits of participants calculated under any defined benefit plan included in subsection 19.4 below. The accounting date coincident with the last day of the plan year shall be the "valuation date" for purposes of determining the value of account balances and the present value of accrued benefits. In making the foregoing determination: (A) a par- ticipant's account balances or cumulative accrued benefits shall be increased by the aggregate distributions, if any, made with respect to the participant during the 5-year period ending on the determination date, including distributions under a ter- minated plan which, if it had not been terminated, would have -90- 99 been required to be included in the aggregation group, (B) the account balances or cumulative accrued benefits of a partici- pant who was previously a key employee, but who is no longer a key employee, shall be disregarded, (C) the account balances or cumulative accrued benefits of a beneficiary of a participant shall be considered accounts of the participant, (D) the ac- count balances or cumulative accrued benefits of a participant who has not been credited with at least one hour of service with an employer or related employer at any time during the five-year period ending on the determination date shall be disregarded, (E) any rollover contribution (or similar trans- fer) from a plan maintained by an unrelated employer to this plan initiated by a participant shall not be taken into account as part of the participant's aggregate account balances under this plan and (F) any contribution not actually made as of a determination date, but which is required to be taken into account under Section 416 and the regulations thereunder, shall be taken into account. The accrued benefit of a participant other than a key employee shall be determined under: (i) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the employer; or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section 411(b)(1)(C) of the Code. 19.3. KEY EMPLOYEE. In general, a "key employee" is an employee or former employee (and the beneficiaries of such employee) who, at any time during the 5-year period ending on the determination date, is: (a) an officer of an employer or related em- ployer receiving annual earnings from the employer and related employers in excess of 50% of the limitation in effect under Sec- tion 415(b)(1)(A) of the Code for that year); provided that, for purposes of this subparagraph (a), no more than 50 employees of the employer and related employers (or, if lesser, the greater of 3 employees or 10 percent of the employees) shall be treated as officers; (b) one of the ten employees receiving annual earnings from an employer and related em- ployers in excess of the dollar limitation in effect under Section 415(c)(1)(A) of the Code for that year and owning (or consid- ered as owning under Section 318 of the Code) both the largest interests in the employer or in a related employer and more than a one-half percent interest; or -91- 100 (c) a 5-percent owner of an employer or a re- lated employer; or (d) a 1-percent owner of an employer or related employer receiving annual earnings from the employer and related employers of more than $150,000. The determination of who is a key employee will be made in accordance with Section 416(i)(l) of the Code and the regula- tions thereunder. A "non-key employee" is each employee who is not a key employee, as defined above. Annual earnings means compensation as defined in Section 415(c)(3) of the Code, but including amounts contributed by the employer pursuant to a salary reduction agreement which are excludable from the em- ployee's gross income under Section 125, Section 402(c)(3), Section 402(h) or Section 403(b) of the Code. 19.4. AGGREGATION OF PLANS. Each other defined con- tribution plan and defined benefit plan maintained by the em- ployer or related employers which covers a "key employee" as a participant at any time during the determination period (re- gardless of whether the plan has terminated), or which is main- tained by the employer or related employers in order for a plan covering a key employee to qualify under Section 401(a)(4) and 410 of the Code, shall be aggregated with this plan in deter- mining whether this plan is top-heavy ("required aggregation"). In addition, any other defined contribution or defined benefit plan of the employer or related employers may be included if all such plans which are included when aggregated will continue to qualify under Section 401(a)(4) and 410 of the Code ("per- missive aggregation"). 19.5. MINIMUM VESTING. Once the plan has become a top-heavy plan for any plan year, a participant's vested per- centage in his employer matching and contribution accounts for that year and all subsequent years shall not be less than the vesting percentage specified by the employer in the adoption agreement or the percentage determined under the following table (whichever results in a more rapid vesting schedule):
Years of Service Vested Percentage ---------------- ----------------- Less than 2 0% 2 years 20% 3 years 40% 4 years 60% 5 years 80% 6 or more years 100%
-92- 101 19.6. MINIMUM EMPLOYER CONTRIBUTION. Subject to the following sentence and subsection 19.8 below, for any plan year in which the plan is a top-heavy plan, employer contributions and forfeitures, if any, credited to each participant who is not a key employee (including participants who were employed on the last day of the plan year but did not complete 1,000 hours of service) shall not be less than 3 percent of such partici- pant's compensation for that year. In no event, however, shall the employer contributions and forfeitures, if any, credited in any year to any such participant (expressed as a percentage of such participant's compensation) exceed the maximum employer contributions and forfeitures, if any, credited in that year to a key employee (expressed as a percentage of such key employ- ee's compensation). The preceding sentence shall not apply if this plan is required to be included in an aggregation group for a defined benefit plan in order for such group to meet the requirements of 401(a)(4) or 410 of the Code. The employer may specify in the adoption agreement that the minimum employer contribution provided above will be 4 percent of each partici- pant's compensation for that year if it desires to preserve the defined contribution and benefit fractions provided under sub- paragraph 17.12(d) and (e) and the plan is not super top-heavy (as defined below). If the employer has adopted this plan as a paired defined contribution plan, for each plan year in which the paired plans are top-heavy, the employer will provide a minimum contribution equal to 3 percent of compensation for each non-key employee who is entitled to a minimum contribution under both paired defined contribution plan number 003 and paired defined contribution plan number 001. Compensation for purposes of this Section 19 means a participant's earnings paid to him by the employers for the plan year as reported on the participant's Federal Income Tax Withholding Statement (Form W-2). 19.7. COORDINATION OF BENEFITS. If a participant is covered by another plan maintained by the employer or a related employer, the minimum contribution otherwise required under subsection 19.6 above may be reduced to prevent inappropriate duplication of required minimum contributions or benefits. Accordingly, the provisions of subsection 19.6 shall not apply to any participant to the extent the participant is covered by another plan or plans of the employer and the employer has provided in the adoption agreement that the minimum contribu- tion or benefit requirements will be met in the other plan or plans. 19.8. ADJUSTMENT OF COMBINED BENEFIT LIMITATIONS. For any plan year in which the plan is a top-heavy plan, the -93- 102 determination of the defined contribution plan fraction and defined benefit plan fraction under subparagraphs 17.12(d) and (e) of the plan shall be adjusted in accordance with the provi- sions of Section 416(h) of the Code (by substituting "1.0" for "1.25" in the determination of such fractions), unless the min- imum employer contribution specified in subsection 19.6 above is not less than four rather than three percent and the plan is not a "super top-heavy plan" (as described below and in Section 416(h) of the Code) for that year. The plan will be a super top-heavy plan for any plan year if the plan would still be a top-heavy plan under subsection 19.2 above if the figure "90 percent" was substituted for the figure "60 percent" in that subsection. 19.9. BENEFIT ACCRUAL. Solely for the purpose of determining if the plan, or any other plan included in a re- quired aggregation group of which this plan is a part, is top- heavy (within the meaning of Section 416(g) of the Code), the accrued benefit of an employee other than a key employee (with- in the meaning of Section 416(i)(1) of the Code) shall be de- termined under (a) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the employ- ers, or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permit- ted under the fractional accrual rule of Section 411(b)(1)(C) of the Code. -94- 103 SECTION 20 ---------- Direct Transfer of Eligible Rollover Distributions -------------------------------------------------- 20.1. PURPOSE. This Section 20 applies to distribu- tions 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 Section 20, a dis- tributee may elect, at the time and in the manner prescribed by the administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan spec- ified by the distributee in a direct rollover. 20.2. DEFINITION OF 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 dis- tribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). 20.3. DEFINITION OF ELIGIBLE RETIREMENT PLAN. An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retire- ment annuity described in Section 408(b) of the Code, an annu- ity plan described in Section 403(a) of the Code, or a quali- fied trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. How- ever, 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. 20.4. DEFINITION OF DISTRIBUTEE. A distributee in- cludes an employee or former employee. In addition, the em- ployee's or former employee's surviving spouse and the employ- ee's or former employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. -95- 104 20.5. DEFINITION OF DIRECT ROLLOVER. A direct roll- over is a payment by the plan to the eligible retirement plan specified by the distributee. -96- 105 STATE STREET SOLUTIONS ------------------------ PROTOTYPE DEFINED CONTRIBUTION TRUST ------------------------------------ 106 TABLE OF CONTENTS -----------------
PAGE ---- ARTICLE I 1 - --------- Introduction 1 ------------ Name 1 ---- Purpose 1 ------- Controlling Law 1 --------------- Use of Terms 1 ------------ ARTICLE II 2 - ---------- Fiduciary Responsibility 2 ------------------------ ARTICLE III 2 - ----------- The Trust Fund and Its Administration 2 ------------------------------------- The Trust Fund 2 -------------- Plan Administration 2 ------------------- General Powers 2 -------------- Investment Manager Accounts 8 --------------------------- Investment Options 9 ------------------ Participant Directed Brokerage Accounts 9 --------------------------------------- Employer Stock Accounts 10 ----------------------- Employer Managed Investment Accounts 10 ------------------------------------ Trustee Managed Investment Accounts 10 ----------------------------------- Compensation and Expenses 10 ------------------------- Limit of Trustee's Responsibility 11 --------------------------------- ARTICLE IV 11 - ---------- General Provisions 11 - -------------------- Action by Employer 11 ------------------ Warranty 11 -------- Disagreement as to Acts 11 ----------------------- Courts 11 ------ Evidence 11 -------- Third Parties 12 ------------- No Reversion in Employer 12 ------------------------ Interests Not Transferable 12 -------------------------- Indemnification 13 --------------- Litigation by Participants 13 -------------------------- Liabilities Mutually Exclusive 13 ------------------------------ Waiver of Notice 13 ---------------- Counterparts 13 ------------ Gender and Number 13 ----------------- Successors 13 ---------- Severability 14 ------------ Statutory References 14 -------------------- Discretion of the Trustee Binding 14 ---------------------------------
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PAGE ---- Duration of Trust 14 ----------------- No Liability for Acts of Predecessor and Successor Trustees 14 ----------------------------------------------------------- ARTICLE V 14 - --------- Amendment, Termination and Change of Trustee 14 -------------------------------------------- Amendment By Sponsor 14 -------------------- Amendment By Employer 15 --------------------- Termination 15 ----------- Resignation and Removal of Trustee 15 ---------------------------------- ARTICLE VI 16 - ---------- Incorporation of Collective Investment Trusts 16 ---------------------------------------------
-ii- 108 STATE STREET SOLUTIONS ---------------------- PROTOTYPE DEFINED CONTRIBUTION TRUST ------------------------------------ ARTICLE I --------- Introduction ------------ I-1. NAME. The trust set forth herein (the "trust") may be referred to as "State Street Solutions Prototype Defined Contribution Trust". I-2. PURPOSE. This trust agreement is intended to implement and form a part of State Street Solutions Prototype Defined Contribution Plan (the "plan") as adopted by the employer thereunder and sponsored by State Street Bank and Trust Company (the "sponsor"). By signing the adoption agreement, the employer has executed and become a party to this trust agreement, and the provisions of and benefits under the plan, as so adopted by the employer, are subject to the terms and conditions of this trust agreement. State Street Bank and Trust Company shall serve as "trustee" pursuant to this trust agreement. The trust is established, operated and maintained in the United States of America exclusively for the investment and reinvestment of funds contributed under the plan. I-3. CONTROLLING LAW. Except to the extent superseded by laws of the United States, the laws of the Commonwealth of Massachusetts shall be controlling in all matters relating to this agreement. I-4. USE OF TERMS. The terms "employer," "adoption agreement," and "administrator," and words and phrases used and defined for purposes of the plan are similarly used and defined for purposes of this trust. The terms "trust," "agreement," "herein," "hereunder," and similar terms mean this agreement and do not include the plan; but, unless qualified by the context or otherwise defined in this agreement, a word, term or phrase defined in this agreement is similarly defined for purposes of the plan. 109 ARTICLE II ---------- Fiduciary Responsibility ------------------------- The employer, the administrator, the trustee, any investment manager appointed pursuant to paragraph III-4, and any other fiduciaries with respect to the plan or trust shall discharge their duties thereunder solely in the interest of participants and beneficiaries, for the exclusive purpose of providing their benefits and defraying reasonable expenses of plan and trust administration, with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. ARTICLE III ----------- The Trust Fund and Its Administration ------------------------------------- III-1. THE TRUST FUND. The "trust fund" as at any date means all property then held by the trustee under this agreement. III-2. PLAN ADMINISTRATION. The plan is administered by the "administrator", as designated by the employer in its adoption agreement for the plan. The employer has also engaged the sponsor and its affiliates and agents (the "recordkeeper") to provide certain administrative services with re- spect to the plan, including but not limited to maintaining participant accounts for all contributions, loans and loan repayments, rollovers, and other deposits made for the purpose of determining how such deposits are to be allocated to the investment funds of the plan, for determining requirements for transfers among investment funds in accordance with the terms of the plan, for maintaining participant records for the purpose of voting or tendering shares in an investment fund, for distributing information about the investment funds provided for under the plan, and for distributing participant statements at periodic intervals. The trustee may rely upon a certification of the administrator or the recordkeeper with respect to any instruction, direction or approval of the administrator or the recordkeeper. The trustee shall be fully protected in acting upon any instrument, certificate, or paper of the employer, the administrator or the recordkeeper, believed by it to be genuine and to be signed or presented by any authorized person, and the trustee shall be under no duty to make any investigation or inquiry as to any statement contained in any such writing but may accept the same as fully authorized by the employer, the administrator or the recordkeeper, as the case may be. References in this agreement to actions by the administrator shall include similar actions by the recordkeeper. III-3. GENERAL POWERS. With respect to the management and control of the assets of the trust fund, the trustee shall have and exercise investment power and authority (i) -2- 110 over Trustee Managed Investment Accounts as provided in paragraph III-9, (ii) upon the direction of the administrator or named fiduciary with respect to an Employer Managed Investment Account under paragraph III-8, (iii) upon the direction of a participant with respect to a Participant Directed Brokerage Account under paragraph III-6, and (iv) upon the direction of an investment manager with respect to an Investment Manager Account under paragraph III-4. Subject to the preceding sentence, the trustee shall have the following powers, rights and duties in addition to those provided elsewhere in this agreement, the plan or by law: (a) To acquire and become the policyholder under group annuity contracts issued by a legal reserve life insurance company; and to manage, sell, contract to sell, grant options to purchase, convey, exchange, transfer, abandon, improve, repair, insure, lease for any term (although commencing in the future or extending beyond the term of this trust) and otherwise deal with all property, real or personal, in such way, for such considerations, and on such terms and conditions as the trustee decides. (b) To retain in cash such amounts as the trustee considers advisable and as are permitted by applicable law; to invest and reinvest part or all of the balance of the trust fund in stocks, bonds, notes, mortgages, mutual fund shares or other property of any kind, real or personal, including one or more group annuity, deposit administration or separate account contracts issued by a legal reserve life insurance company; and to diversify such investments so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so. (c) To deposit cash in any depositary (including the banking department of the trustee) without liability for interest and, without limiting the generality of the foregoing, to invest cash in savings accounts or time certificates of deposit bearing a reasonable rate of interest in the banking department of the trustee. (d) To trade in financial options and futures, including index options and options on futures and to execute in connection therewith such account agreements and other agreements including contracts for the exchange of interest rates, or investment performance, currencies or other notional principal contracts in such form and upon such terms as an investment manager or the administrator shall direct. (e) To make any payment or distribution from the trust fund as directed by the administrator without inquiring as to whether a payee or distributee is entitled thereto or as to whether it is proper, and the trustee shall not be liable for a payment or dis- -3- 111 tribution made as directed by the administrator without notice or knowledge that the payment or distribution is not proper under the terms of the plan or this agreement; and to notify the administrator if a payment or distribution is returned to the trustee, and the trustee shall have no obligation to search for or ascertain the whereabouts of a payee or distributee. (f) To the extent permitted by law, to borrow from anyone, with the employer's approval, such sum or sums from time to time as the trustee considers desirable to carry out this trust, and to mortgage or pledge all or part of the trust fund as security, provided that the trustee shall not borrow to acquire employer securities (as described in paragraph III-7), or pledge employer securities held under the trust as security for any loan. (g) To retain any funds or property subject to any dispute without liability for interest and to decline to make payment or delivery thereof until final adjudication by a court of competent jurisdiction or until an appropriate release is obtained. (h) To begin, maintain or defend any litigation necessary in connection with the administration of the plan or this trust, except that, unless otherwise required by law, the trustee shall not be obliged or required to do so unless indemnified to the trustee's satisfaction. (i) To compromise, contest, arbitrate or abandon claims or demands. (j) Except to the extent otherwise required by the Code or ERISA or agreed to between the trustee and the employer, or as provided in paragraph III-7 with respect to employer securities, to give proxies to vote stocks and other voting securities, to join in or oppose (alone or jointly with others) voting trusts, mergers, consolidations, foreclosures, reorganizations, liquidations, or other changes in the financial structure of any corporation, and to exercise or sell stock subscription or conversion rights, only as directed by the person or entity with investment authority over such stock or security. (k) To hold securities or other property in the name of a nominee, in a depositary, or in any other way, with or without disclosing the trust relationship; provided, however, that except as authorized by regulations issued by the Secretary of Labor, the indicia of ownership of the assets of the trust fund shall not be maintained -4- 112 outside the jurisdiction of the district courts of the United States. (l) To report to the employer and the administrator on each accounting date under the plan, or as soon thereafter as practicable, or at such other times as may be agreed to by the employer or administrator and the trustee, the then net worth of the trust fund (that is, the fair market value of all assets com- prising the trust fund, less liabilities, if any, other than liabilities to persons entitled to benefits under the plan) determined on the basis of such evidence, data or information as the trustee considers pertinent and reliable. (m) To furnish to the employer and the administrator an annual account or an account for such other period as may be agreed to by the employer or the administrator and the trustee, or as may be required under this agreement or the plan, showing all investments, receipts, disbursements, and other transactions involving the trust during the accounting period, and also showing the assets of the trust fund held at the end of the period, which, to the extent permitted by law, shall be conclusive on all persons, including the employer, except as to any act or transaction as to which the employer or the administrator files with the trustee written exceptions or objections within sixty days after receipt of the account. (n) To pay out of the trust fund all real and personal property taxes, income taxes and other taxes of any and all kinds levied or assessed under existing or future laws against the trust fund. (o) To maintain records and accounts reflecting all receipts and disbursements under this agreement and such other records and accounts as may be agreed to by the employer or the administrator and the trustee, all of which shall be open to the inspection of the employer or the administrator at all reasonable times, and may be audited from time to time by anyone named by the employer or the administrator. (p) To employ agents, attorneys, accountants or other persons (who also may be employed by the employer) and to delegate to them such powers as the trustee considers desirable (except that the trustee may not delegate its responsibilities as to the management or control of the assets of the trust fund), provided that such delegation, and the acceptance thereof, by such agents, attorneys, accountants or other persons, shall be in writing; and, -5- 113 to the extent permitted by law, the trustee shall be protected in acting or refraining from acting on the advice of persons so employed without court action. (q) To appoint a bank, trust company, or broker or dealer registered under the Securities Exchange Act of 1934 to act as custodian with respect to any portion of the trust fund; and a custodian so appointed shall have custody of such assets as are deposited with it and as custodian such rights, powers and duties with respect thereto as shall be agreed upon from time to time by the trustee and such custodian. (r) To furnish the employer with such information in the trustee's possession as the employer may need for tax or other purposes. (s) At the direction of the employer or the administrator, to receive, hold and invest any funds or other property transferred to the trustee from: (i) any other trust forming a part of a plan intended to meet the requirements of Section 401(a) of the Code; (ii) an employee of the employer if such funds or property qualify as a rollover described in Section 402(c) of the Code; or (iii) an individual retirement account or individual retirement annuity maintained by an employee of the employer, if such funds or property qualify as a rollover contribution described in Section 408(d)(3) of the Code; and to allocate, credit and distribute any such funds and other property so transferred in accordance with the terms of the plan. (t) To transfer all or any portion of the trust fund to another trust or trusts forming a part of a plan or plans that are intended to meet the requirements of Section 401(a) of the Code, as directed by the administrator. (u) To transfer an eligible rollover distribution described in Section 402(c)(4) of the Code directly to an eligible retirement plan described in Section 402(c)(8)(B) of the Code, as directed by the -6- 114 administrator. (v) To perform any and all other acts which in the trustee's judgment are necessary or appropriate for carrying out its duties under this agreement. The trustee shall transmit promptly to the administrator or the investment manager, as the case may be, all notices of conversion, redemption, tender, exchange, subscription, class action, claim in insolvency proceedings or other rights or powers relating to any of the securities in the trust fund, which notices are received by the trustee from its agents or custodians, from issuers of the securities in question and from the party (or its agents) extending such rights. The trustee shall have no obligation to determine the existence of any conversion, redemption, tender, exchange, subscription, class action, claim in insolvency proceedings or other right or power relating to any of the securities in the trust fund of which notice was given prior to the purchase of such securities by the trust fund, and shall have no obligation to exercise any such right or power unless the trustee is informed of the existence of the right or power. The trustee shall not be liable for any untimely exercise or assertion of such rights or powers described in the paragraph immediately above in connection with securities or other property of the trust fund at any time held by it unless (i) it or its agents or custodians are in actual possession of such securities or property and (ii) it receives directions to exercise any such rights or powers from the administrator or an investment manager, as the case may be, and both (i) and (ii) occur at least three business days prior to the date on which such rights or powers are to be exercised. If the trustee is directed by the administrator or an investment manager to purchase securities issued by any foreign government or agency thereof, or by any corporation or other entity domiciled outside of the United States, it shall be the responsibility of the administrator or investment manager, as the case may be, to advise the trustee in writing with respect to any laws or regulations of any foreign countries or any United States territory or possession which shall apply in any manner whatsoever to such securities, including, without limitation, receipt by the trustee of dividends, interest or other distributions on such securities. All Investment Company shares shall be registered in the name of the trustee or its nominee. Subject to any requirement of applicable law, the trustee will transmit to the administrator copies of any notices of shareholders' meetings, proxies and proxy-soliciting materials, prospectuses and the annual or other reports to shareholders, with respect to Investment Company shares held in the trust. The trustee shall act in accordance with appropriate directions received from the administrator with respect to matters to be voted upon by the shareholders of the Investment Company. Such directions must be in writing on a form approved by the trustee, signed by the addressee and delivered to the trustee within the time prescribed by it. The trustee will not vote Investment Company shares as to which it receives no written directions. For the purposes of this paragraph, Investment Company means a registered -7- 115 investment company provided that its prospectus offers its shares under the plan. III-4. INVESTMENT MANAGER ACCOUNTS. The employer may appoint one or more investment managers to manage the investment of any part or all of the assets of the trust fund. Except as otherwise provided by law, the trustee shall have no obligation for investment of any assets of the trust fund which are subject to management by an investment manager. Appointment of an investment manager shall be made by written notice to the investment manager and the trustee, which notice shall specify those powers, rights and duties of the trustee under this agreement that are allocated to the investment manager and that portion of the assets of the trust fund subject to investment management. An investment manager so appointed pursuant to this paragraph shall be either a registered investment adviser under the Investment Advisers Act of 1940, a bank, as defined in said Act, or an insurance company qualified to manage, acquire and dispose of the assets of the plan under the laws of more than one state of the United States. Any such investment manager shall acknowledge to the employer in writing that it accepts such appointment and that it is a fiduciary with respect to the plan and trust. An investment manager may resign at any time upon written notice to the trustee and the employer. The employer may remove an investment manager at any time by written notice to the investment manager and the trustee. The trustee shall have no liability (i) for the acts or omissions of any investment manager (except to the extent the trustee itself is serving as investment manager); (ii) for following directions, including investment directions of an investment manager (other than the trustee) or the employer or named fiduciary, which are given in accordance with this trust agreement; (iii) for failing to act in the absence of investment manager direction; or (iv) for any loss of any kind which may result by reason of the manner of division of the trust fund or investment fund into investment accounts. An investment manager shall certify, at the request of the trustee, the value of any securities or other property held in any investment account managed by such investment manager, and such certification shall be regarded as a direction with regard to such valuation. The trustee shall be entitled to conclusively rely upon such valuation for all purposes under this trust agreement. Except as otherwise provided in this trust agreement, the investment manager of an investment account shall have the power and authority, to be exercised in its sole discretion at any time and from time to time, to issue orders for the purchase or sale of securities directly to a broker. Written notification of the issuance of each such order shall be given promptly to the trustee by the investment manager and the confirmation of each such order shall be confirmed to the trustee by the broker. Unless otherwise directed by the investment manager, such notification shall be authority for the trustee to pay for securities purchased or to deliver securities sold as the case may be. Upon the direction of the investment manager, the trustee will execute and deliver appropriate trading authorizations, but no such authorization shall be deemed to increase the liability or responsibility of the trustee under this trust agreement. -8- 116 III-5. INVESTMENT OPTIONS. The employer from time to time and in accordance with provisions of the plan, may direct the trustee, with the trustee's consent, to establish one or more separate investment options within the trust fund, each separate option being hereinafter referred to as an "investment fund", which may be invested in (i) shares of investment companies registered under the Investment Company Act of 1940, (ii) collective funds maintained by a bank or trust company, (iii) various classes of securities of the employer, (iv) participant directed brokerage accounts, (v) pools of insurance contracts, (vi) funds managed by a registered investment manager, bank or insurance company, (vii) accounts managed by named fiduciaries for the plan; and (viii) other investment options available from time to time under the plan. The trustee shall have no liability for any loss of any kind which may result by reason of the manner of division of the trust fund into investment funds, or for the investment management of these accounts, except as provided in paragraph III-9 respecting a trustee managed investment account, if any. The trustee shall transfer to each such investment fund such portion of the assets of the trust fund as the employer or the administrator directs. The trustee shall not incur any liability on account of following any direction of the employer or the administrator, and the trustee shall be under no duty to review the investment guidelines, objectives and restrictions so established. To the extent that directions from the employer or the administrator to the trustee represent investment instructions of the plan's participants, the trustee shall have no responsibility for such investment elections and shall incur no liability on account of the direct and necessary results of investing the assets of the trust fund in accordance with such participant investment instructions. All interest, dividends and other income received with respect to, and any proceeds received from the sale or other disposition of, securities or other property held in an investment fund shall be credited to and reinvested in such investment fund. All expenses of the trust fund which are allocable to a particular investment fund shall be so allocated and charged. Subject to the provisions of the plan, the employer may direct the trustee to eliminate an investment fund or funds, and the trustee shall thereupon dispose of the assets of such investment fund and reinvest the proceeds thereof in accordance with the directions of the administrator. III-6. PARTICIPANT DIRECTED BROKERAGE ACCOUNTS. The trustee shall, if so directed by the employer, segregate all or a portion of the trust fund held by it into one or more separate investment accounts to be known as "Participant Directed Brokerage Accounts". Whenever a participant is directing the investment and reinvestment of a Participant Directed Brokerage Account, the participant shall have the powers and duties which an investment manager would have under this trust agreement if an investment manager were then serving, and the trustee shall be protected to the same extent as it would be protected under this trust agreement as to directions or the absence of directions of an investment manager. A participant shall be entitled to give orders directly to a broker for the purchases and sale of securities. The broker shall provide confirmation of each order to both the participant and to the administrator, which shall maintain records in such form as to satisfy reporting requirements of the plan. -9- 117 III-7. EMPLOYER STOCK ACCOUNTS. The employer may direct the trustee, with the trustee's consent, to establish one or more investment funds substantially all of the assets of which shall be invested in securities which constitute "qualifying employer securities" within the meaning of Section 407 of ERISA (an "Employer Stock Account"). It shall be the duty of the employer to determine that such investment is not prohibited by Sections 406 or 407 of ERISA. In addition, during any time when there is no investment manager with respect to an Employer Stock Account (such as before an investment management agreement takes effect or after it terminates), the administrator shall direct the investment and reinvestment of such Employer Stock Account. Except to the extent otherwise required by the Code or ERISA or agreed to between the trustee and the employer, the trustee shall exercise all voting or tender or exchange offer rights with respect to all qualifying employer securities held by it in an Employer Stock Account only as directed by the administrator. III-8. EMPLOYER MANAGED INVESTMENT ACCOUNTS. The trustee shall, if so directed in writing by the employer, segregate all or a portion of the trust fund held by it into one or more separate investment accounts to be known as "Employer Managed Investment Accounts". The employer, by written notice to the trustee, may at any time relinquish its powers under this paragraph III-8 and direct that an Employer Managed Investment Account shall no longer be maintained. Whenever the administrator or named fiduciary is directing the investment and reinvestment of an investment account or an Employer Managed Investment Account, the administrator or named fiduciary shall have the powers and duties which an investment manager would have under this trust agreement if an investment manager were then serving, and the trustee shall be protected to the same extent as it would be protected under this trust agreement as to directions or the absence of directions of an investment manager. III-9. TRUSTEE MANAGED INVESTMENT ACCOUNTS. The trustee shall have no duty or responsibility to direct the investment and reinvestment of the trust fund, any investment fund or any investment account unless expressly agreed to in writing between the trustee and the Employer. In the event that the trustee enters into such an agreement, it shall have the powers and duties of an investment manager under this trust agreement with regard to such investment account. III-10. COMPENSATION AND EXPENSES. Except as otherwise provided below in this agreement, all reasonable costs, charges, and expenses incurred in the administration of this trust and the plan, including compensation to the trustee (as agreed upon between the employer and the trustee), compensation to an investment manager (as agreed upon between the employer and the investment manager), and any compensation to agents, attorneys, accountants and other persons employed by the trustee, will be paid from the trust fund to the -10- 118 extent not paid by the employer. Expenses incurred in connection with the sale, investment and reinvestment of the trust fund (such as brokerage, postage, express and insurance charges and transfer taxes) shall be paid from the trust fund. III-11. LIMIT OF TRUSTEE'S RESPONSIBILITY. No power, duty or responsibility is imposed upon the trustee under the plan, except as set forth in this agreement. Until they determine or are advised to the contrary, the trustee and any investment manager (appointed as provided in paragraph III-4) may assume that this trust is qualified under Section 401(a), and is entitled to tax exemption under Section 501(a), of the Code. ARTICLE IV ---------- General Provisions ------------------ IV-1. ACTION BY EMPLOYER. Any action required or permitted to be taken by the employer under the trust shall be by resolution of its Board of Directors, by resolution of a duly authorized committee of its Board of Directors, or by a person or persons authorized by resolution of its Board of Directors or such committee, if the employer is a corporation; by written instrument signed by its managing partner or partners, or by a person or persons authorized by such managing partner or partners, if the employer is a partnership; and by written instrument signed by the employer, if the employer is a sole proprietor. IV-2. WARRANTY. The employer warrants that all directions or authorizations by it or by the administrator, whether for the payment of money or otherwise, will comply with the plan and this trust. IV-3. DISAGREEMENT AS TO ACTS. If there is a disagreement between the trustee and anyone as to any act or transaction reported in any accounting, the trustee shall have the right to a settlement of its account by any proper court. IV-4. COURTS. Except as otherwise provided by law, in case of any court proceedings involving the employer, the trustee or the trust fund, only the employer and the trustee shall be necessary parties to the proceedings, and no other person shall be entitled to notice of process. A final judgment entered in any such proceedings shall be conclusive. IV-5. EVIDENCE. Evidence required of anyone under this agreement may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. -11- 119 IV-6. THIRD PARTIES. Except as otherwise provided by law, the trustee's exercise or non-exercise of its powers and discretions in good faith shall be conclusive on all persons. No one shall be obliged to see to the application of any money paid or property delivered to the trustee, except to the extent such person is acting as an investment manager as respects such money or property. The certificate of the trustee that it is acting according to this agreement will fully protect all persons dealing with the trustee. An insurance company may assume that this agreement and the plan have not been amended or changed unless notice of such amendment or change is received by the insurance company at its home office. IV-7. NO REVERSION IN EMPLOYER. The employer shall have no right, title or interest in the trust fund, nor shall any part of the trust fund revert or be repaid to the employer, directly or indirectly, unless: (a) the Internal Revenue Service initially determines that the plan does not meet the requirements of Section 401(a) of the Code, in which event the contributions made to the plan by the employer shall be returned to it within one year after the adverse determination; (b) a contribution is made by the employer by mistake of fact and such contribution is returned to the employer within one year after payment to the trustee; or (c) a contribution conditioned on the deductibility thereof is disallowed as an expense for federal income tax purposes and such contribution (to the extent disallowed) is returned to the employer within one year after the disallowance of the deduction. Contributions may be returned to the employer pursuant to subparagraph (a) above only if they are conditioned upon initial qualification of the plan, and an application for determination was made by the time prescribed by law for filing the employer's Federal income tax return for the taxable year in which the plan was adopted (or such later date as the Secretary of the Treasury may prescribe). The amount of any contribution that may be returned to the employer pursuant to subparagraph (b) or (c) above must be reduced by any portion thereof previously distributed from the trust fund and by any losses of the trust fund allocable thereto, and in no event may the return of such contribution cause any participant's account balances to be less than the amount of such balances had the contribution not been made under the plan. The employer shall have sole responsibility for determining whether any of the conditions for repayment of contributions under subparagraphs (a) through (c) above have been met. IV-8. INTERESTS NOT TRANSFERABLE. The interests of persons entitled to benefits under the plan are not subject to their debts or other obligations and, except as may be required by a qualified domestic relations order as defined in Section 414(p) of the Code, may -12- 120 not be voluntarily or involuntarily sold, transferred, alienated, assigned or encumbered. IV-9. INDEMNIFICATION. To the extent permitted by applicable law, the employer shall indemnify and save harmless the trustee for and from any loss or expense (including reasonable attorneys' fees) arising (a) out of an authorized action hereunder taken in good faith by the trustee or any matter as to which this agreement provides that the trustee is directed, protected, not liable, or not responsible, or (b) by reason of any breach of any statutory or other duty owed to the plan by the employer, the administrator, or any investment manager or any delegate of any of them (and for the purposes of this sentence the trustee shall not be considered to be such a delegate), whether or not the trustee may also be considered liable for that other person's breach under the provisions of Section 405(a) of ERISA. IV-10. LITIGATION BY PARTICIPANTS. If a legal action begun against the trustee or the employer by or on behalf of any person results adversely to that person, or if a legal action arises because of conflicting claims to a participant's or other person's benefits, the cost to the trustee or the employer of defending the action will be charged to the extent permitted by law to the sums, if any, which were involved in the action or were payable to the person concerned. IV-11. LIABILITIES MUTUALLY EXCLUSIVE. To the extent permitted by law, the trustee, an investment manager and the employer shall be responsible only for its own acts or omissions and the trustee shall not be required to collect any contribution from the employer or any other person or to verify that it is in the proper amount. No insurance company shall be a party to this agreement for any purpose or be responsible for the validity of this agreement, it being intended that an insurance company shall be liable only for the obligations set forth in the contracts issued by it. IV-12. WAIVER OF NOTICE. Any notice required under this agreement may be waived by the person entitled to such notice. IV-13. COUNTERPARTS. This agreement may be executed in two or more counterparts, any one of which will be an original without reference to the others. IV-14. GENDER AND NUMBER. Where the context admits, words in the masculine gender shall include the feminine and neuter genders, the singular shall include the plural, and the plural shall include the singular. IV-15. SUCCESSORS. This agreement shall be binding on all persons entitled to benefits under the plan and their respective heirs and legal representatives, on the employer and its successors and assigns and on the trustee and its successors. The term "employer" as used in the plan and this agreement includes any entity that continues the plan and this trust in effect, as provided in the plan. -13- 121 IV-16. SEVERABILITY. If any provision of the plan or this agreement is held to be illegal or invalid, such illegality or invalidity shall not affect the remaining provisions of the plan and this agreement, and they shall be construed and enforced as if such illegal or invalid provision had never been inserted therein. IV-17. STATUTORY REFERENCES. Any references in the plan or this agreement to a Section of the Internal Revenue Code (the "Code"), the Employee Retirement Income Security Act of 1974 ("ERISA") or the Tax Reform of 1986 shall include any comparable section or sections of any future legislation which amends, supplements or supersedes said Section. IV-18. DISCRETION OF THE TRUSTEE BINDING. Wherever in this trust it is provided that a power may be exercised or an action taken by the trustee requiring the exercise of discretion, the exercise of discretion by the trustee in conformance with Article II of the trust shall be absolute and bind- ing on the employer and participants under the plan. IV-19. DURATION OF TRUST. Unless sooner terminated, the trust created under this trust agreement shall continue for the maximum period of time which the laws of the Commonwealth of Massachusetts shall permit. IV-20. NO LIABILITY FOR ACTS OF PREDECESSOR AND SUCCESSOR TRUSTEES. The trustee shall have no liability for the acts or omissions of any predecessors or successors in office. ARTICLE V --------- Amendment, Termination and Change of Trustee -------------------------------------------- V-1. AMENDMENT BY SPONSOR. The employer, by signing the adoption agreement, authorizes and empowers the sponsor to amend the trust from time to time, subject to the following: (a) Except as provided in subparagraphs (b) and (c) next below, no such amendment shall become effective until at least 30 days' prior written notice thereof has been given to the employer. (b) An amendment of the trust made under this paragraph, which the sponsor deems necessary or appropriate to enable the trust to -14- 122 meet the requirements of Section 401(a) of the Code, or any future legislation amending, supplementing or superseding said Section, may be made effective as of any date the sponsor deems appropriate. (c) An amendment of the trust made under this paragraph to conform the trust to any change in any law of the United States, any state or political subdivision thereof, or to any rule or regulation thereunder, may take effect as of the date such amendment is required to be effective under such law, rule or regulation. (d) Except as provided in paragraph IV-7, under no condition shall an amendment result in the return or repayment to the employer of any part of the trust fund or the income from it or result in the distribution of the trust fund for the benefit of anyone other than persons entitled to benefits under the plan. V-2. AMENDMENT BY EMPLOYER. This trust may not be amended by the employer, except with the advance written consent of the trustee. Except as provided in paragraph IV-7, under no condition shall an amendment result in the return or repayment to the employer of any part of the trust fund or the income from it or result in the distribution of the trust fund for the benefit of anyone other than persons entitled to benefits under the plan. V-3. TERMINATION. If the plan is terminated, this trust, including all rights, titles, powers, duties, discretions and immunities imposed on or reserved to the trustee, the administrator and the employer nevertheless shall continue in effect until all assets have been distributed by the trustee as directed by the administrator under the plan. Notwithstanding the foregoing, the trustee shall not be required to pay out any assets of the trust fund upon termination of the trust until the trustee has received written certification from the administrator that all provisions of law with respect to such termination have been complied with. The trustee shall rely conclusively on such written certification, and shall be under no obligation to investigate or otherwise determine its propriety. V-4. RESIGNATION AND REMOVAL OF TRUSTEE. The trustee acting hereunder may resign at any time by giving thirty days' prior written notice to the employer, which notice may be waived by the employer. The employer may remove the trustee at any time upon thirty days' prior written notice to the trustee, which notice may be waived by the trustee. In case of the resignation or removal of the trustee, the employer shall promptly appoint a successor trustee, and if no successor trustee has been appointed by the effective date of the trustee's resignation, the trustee may petition a court of competent jurisdiction to appoint a successor trustee at the expense of the trust fund. Any successor trustee shall have the same powers and duties as those conferred by this agreement as if originally named trustee. The removal of a trustee and the appointment of a new trustee shall be by a written instrument delivered to the -15- 123 trustee. Upon the appointment of a successor trustee, the resigning or removed trustee shall transfer or deliver the trust fund to such successor trustee. ARTICLE VI ---------- Incorporation of Collective Investment Trusts --------------------------------------------- Notwithstanding any other provisions of this agreement, the trustee or any investment manager may cause any part or all of the trust assets for which it has investment responsibility to be invested in any common, collective or commingled trust fund or pooled investment fund qualified under Section 401(a) and entitled to tax exemption under Section 501(a) of the Code. To the extent trust assets are invested in any such common, collective or commingled trust fund or pooled investment fund, the provisions of the documents under which such fund is maintained, as amended from time to time, shall govern any investment therein, and such provisions are hereby incorporated herein and made a part of this agreement. -16- EX-10.8 3 TIMBERLAND CO. PROFIT SHARING PLAN & TRUST AGREEMT 1 EXHIBIT 10.8 ADOPTION AGREEMENT FOR ---------------------- STATE STREET SOLUTIONS ---------------------- PROTOTYPE DEFINED CONTRIBUTION PLAN ----------------------------------- (Profit Sharing - Nonstandardized) (001) 2 ADOPTION AGREEMENT FOR ---------------------- STATE STREET SOLUTIONS ---------------------- PROTOTYPE DEFINED CONTRIBUTION PLAN ----------------------------------- (Profit Sharing - Nonstandardized) ADOPTION OF PLAN - ---------------- [ ] ADOPTION - With the consent of State Street Bank and Trust Company (the "sponsor"), the undersigned (the "employer") hereby adopts as a profit sharing plan for its employees the form of plan known as State Street Solutions Prototype Defined Contribution Plan, and hereby agrees to become a party to the Trust Agreement under State Street Solutions Prototype Defined Contribution Trust (the "trust"), which forms a part of the plan. [ ] AMENDMENT OF STATE STREET SOLUTIONS PROTOTYPE DEFINED CONTRIBUTION PLAN (the "employer") previously has adopted a profit sharing plan in the form of State Street Solutions Prototype Defined Contribution Plan and the execution of this adoption agreement constitutes an amendment of that plan. [X] RESTATEMENT OF OTHER PROFIT SHARING PLAN - With the consent of State Street Bank and Trust Company (the "sponsor"), the undersigned THE TIMBERLAND COMPANY (the "employer") hereby adopts as a profit sharing plan for its employees the form of plan known as State Street Solutions Prototype Defined Contribution Plan, and hereby agrees to become a party to the Trust Agreement under State Street Solutions Prototype Defined Contribution Trust (the "trust"), which forms a part of the plan. NAME OF PLAN. The name of this plan as adopted by the employer is the TIMBERLAND RETIREMENT EARNINGS 401(K) (the "plan"). With respect to the variable features contained in the plan, the employer hereby makes the following selections granted under the provisions of the plan: GENERAL INFORMATION (Sections 1 and 2 of the plan) - ------------------- 1. ADOPTING ENTITY. The employer adopts the plan as: (subsection 1.2) ---------------- [ ] (a) a single employer plan. [X] (b) a plan of a controlled group of corporations or trades or businesses under common control. [ ] (c) a plan of an affiliated service group. -1- 3 Item (a) should be selected if the plan is being adopted by the employer only. If the plan is adopted by one or more related employers in addition to the employer, item (b) or (c) should be selected and the related employers adopting the plan should be specified below: ----------------------------------- ----------------------------------- ----------------------------------- The adopting employers and the employer are referred to herein collectively as the "employer." 2. EMPLOYER'S ADDRESS. The employer's principal business address is: ------------------ THE TIMBERLAND COMPANY ---------------------- 200 DOMAIN DRIVE ---------------------- STRATHAM, NH. 03885 ---------------------- (subsection 1.4) 3. EMPLOYER'S NAME AND ID NUMBER. The employer's name and employer identification number that will be used for filing annual return/reports is: THE TIMBERLAND COMPANY / 02-0132554 ------------------------------------------------------------------------- 4. EFFECTIVE DATE. The "effective date" of the initial adoption of this plan or this plan amendment is OCTOBER 1, 1995 (subsection 2.6). If this is an amendment and restatement of a prior profit sharing plan, the initial effective date of the prior plan was FEBRUARY 1, 1991. 5. EMPLOYER'S FISCAL YEAR. The last month and day of the employer's fiscal year is DECEMBER 31 (subsection 2.11). 6. PLAN YEAR. The "plan year" of the plan shall be (subsection 2.21): [X] (a) A calendar year. -2- 4 [ ] (b) The fiscal year of the employer. [ ] (c) The fiscal year ending [specify month and day]. [ ] (d) A short plan year beginning , 19 and ending , 19 ; and thereafter the plan year shall be as indicated in (a), (b) or (c) above. 7. PLAN ADMINISTRATOR. The plan administrator(subsection 1.3) of the plan is THE TIMBERLAND COMPANY (fill in the name(s) of the individuals or entity that is responsible for administration of the plan) and such other persons or entity as the employer shall appoint from time to time. The employer will notify the trustee of any change in the administrator. COMPENSATION - ------------ 8. EXCLUSIONS FROM COMPENSATION. For purposes of subsection 2.3 of the plan, the definition of compensation: (a) [X] shall include [ ] shall not include --- all employer contributions made pursuant to a compensation deferral (or reduction) election which are not includible in the gross income of the employee under Sections 125, 402(e)(3), 402(h), 457(b), 403(b) or 414(h)(2) of the Code; and (b) [X] shall [ ] shall not exclude the following items from the compensation of an employee: BONUSES, OVERTIME PAY, INCENTIVE COMPENSATION, OR ANY OTHER EXTRA RENUMERATION NOT CONSTITUTING DIRECT COMPENSATION FOR SERVICES. [If you exclude items from compensation under (b) above, the plan will be required to demonstrate that the resulting definition of compensation is non-discriminatory.] -3- 5 ELIGIBILITY TO PARTICIPATE -------------------------- 9. ENTRY DATE. The entry date (subsection 2.9) is: [Select one] [ ] (a) The first day of each month. [X] (b) The first day of each plan year quarter. [ ] (c) The first day of each plan year and the first day of the seventh month of each plan year. [ ] (d) The last day of the sixth month of each plan year and the last day of each plan year. [ ] (e) The first day of each plan year. [If you select this option, the age requirement in item 10(a) may not exceed 20-1/2 years and the service requirement in item 10(b) may not exceed 1/2 year.] [ ] (f) The date that the employee satisfies the plan's eligibility requirements. 10. ELIGIBILITY REQUIREMENTS. Subject to the provisions of subsection 3.1 of the plan, each employee of the employer will be eligible to participate in the plan if the employee satisfies all of the following eligibility requirements: (a) MINIMUM AGE. The employee has attained at least age 18 years (specify 21 or less - or specify that "no" age requirement shall apply). (subparagraph 3.1(a)) (b) MINIMUM SERVICE. The employee has completed at least .5 year(s) of service (specify 2 or less). If you permit compensation deferral contributions, the employee will be eligible to participate in the compensation deferral (and matching contribution, if any) arrangement under this plan if the employee completes at least .5 year of service (specify 1 or less). (subparagraph 3.1(b)) (c) ELIGIBLE CLASSES. The employee belongs to at least one of the groups or classes of employees specified below (subparagraph 3.1(c)): -4- 6 [ ] All employees. [ ] All employees who are not included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargain- ing agreement between employee representatives and one or more employers, if there is evidence that retirement benefits were the subject of good faith bargaining between the employer and such employee representatives, and participation in the plan has not been extended to such unit of employees. [X] Salary based employees who regularly work in the United States. [X] Hourly employees of The Timberland Company. [ ] Commissioned salesmen [ ] Other (specify) . [If you select any of the last four choices in item (c) above, the plan must satisfy on a continuing basis the non-discrimination test of Section 401(a)(4), the participation test of Section 401(a)(26) and the coverage test of Section 410(b) of the Internal Revenue Code. These participation and coverage tests will automatically be satisfied if you select only the first or second choice in (c) above.] YEAR OF SERVICE - --------------- 11. ELIGIBILITY SERVICE. A "year of service" (subsection 2.28) for purposes of determining eligibility to participate in the plan shall be computed in accordance with: [Select one] [ ] (a) Hours of service completed in a year, in accordance with subparagraph 2.28(a) of the plan. [X] (b) Elapsed time, in accordance with subparagraph 2.28(b) of the plan. 12. VESTING SERVICE. A "year of service" (subsection 2.28) for purposes of determining vesting under the plan shall be computed in accordance with: [Select one] [ ] (a) Hours of service completed in a plan year, in accordance with subparagraph 2.28(a) -5- 7 of the plan. [X] (b) Elapsed time, in accordance with subparagraph 2.28(b) of the plan. This item must be completed even though the number "0" has been specified in item 10(b). 13. HOURS OF SERVICE. [Do not complete item 13 if you selected both 11(b) and 12(b) above]. If item 11(a) or 12(a) has been specified, an employee shall be credited with hours of service (subsection 2.13), as follows: [Select one] [ ] (a) Actual hours of service for which an employee is paid or entitled to payment. [ ] (b) 10 hours of service for each day or portion of a day. [ ] (c) 45 hours of service for each week or portion of a week. [ ] (d) 190 hours of service for each month or portion of a month. COMPENSATION DEFERRAL CONTRIBUTIONS ----------------------------------- 14. COMPENSATION DEFERRAL CONTRIBUTIONS PERMITTED. Compensation deferral contributions by participants under subsection 4.1 of the plan are permitted. [X] (a) Yes. A participant's compensation deferral contribution election: [Select one] [ ] (i) shall [X] (ii) shall not apply to cash bonuses. [ ] (b) No. 15. COMPENSATION DEFERRAL CONTRIBUTION LIMITS. Between 2% and 16% of a participant's compensation (specify minimum and maximum whole percentages) may be deferred by a participant and contributed to the plan as compensation deferral contributions in accordance with subsections 4.1 and 6.2 of the plan. Compensation deferral contributions withheld from participants' compensation are deemed to be made by the employer. Compensation deferral contributions may not exceed the dollar limit in effect under Section 402(g) of the Internal Revenue Code for any taxable year, and excess deferrals -6- 8 under Section 402(g) must be remedied as a matter of plan qualification. The plan contains limitations on the percentage of compensation that "highly compensated employees" may elect to defer as compared to all other participants (subsection 4.5). The plan also contains a limitation ($9,240 for 1995, and indexed to the cost-of-living) on the compensation deferral contributions made by any participant for any calendar year (subsection 4.4). You may wish to take these limitations into consideration when selecting the maximum and minimum percentages above. Under no circumstances may a salary reduction agreement or other deferral mechanism be adopted retroactively. 16. COMPENSATION DEFERRAL CONTRIBUTION CHANGES. A participant may elect to change the rate of his compensation deferral contributions under subsection 4.3 of the plan as of the first payroll period beginning on or after: [Select one] [ ] (a) The first day of any plan year. [ ] (b) The first day of any plan year and the first day of the seventh month of any plan year. [X] (c) The first day of any plan year quarter. [ ] (d) The first day of any month. VOLUNTARY PARTICIPANT CONTRIBUTIONS - ----------------------------------- 17. VOLUNTARY CONTRIBUTIONS PERMITTED. If the employer has specified that participants may make compensation deferral contributions under the plan, participants also may elect to make voluntary contributions under subsection 5.1 of the plan. Note: If you maintain another qualified retirement plan that permits voluntary participant contributions, you must check "No". [ ] (a) Yes. A participant's voluntary contribution election: [Select one] [ ] (i) shall [ ] (ii) shall not apply to cash bonuses. [X] (b) No. 18. VOLUNTARY CONTRIBUTION LIMITS. If the employer has specified in item 17 above that participants may elect to make voluntary contributions, such contributions may be between one and percent of their compensation (specify a whole number, up to 10 percent). The plan contains limitations on the percentage of compensation that "highly compensated employees" may elect to contribute (when added together with any employer matching contributions allocated to such participants), as compared to all participants (subsection 4.6). You may wish to take these limitations into account when setting the maximum percentage in this item 18, unless you have prohibited highly compensated employees from -7- 9 making contributions by item 29 below. 19. VOLUNTARY CONTRIBUTION CHANGES. If the employer has specified in item 17 above that participants may elect to make voluntary contributions, a participant may elect to change the rate of his voluntary contributions under subsection 5.3 of the plan as of the first payroll period beginning on or after: [select one] [ ] (a) The first day of any plan year. [ ] (b) The first day of any plan year and the first day of the seventh month of any plan year. [ ] (c) The first day of any plan year quarter. [ ] (d) The first day of any month. MATCHING CONTRIBUTIONS - ---------------------- 20. EMPLOYER MATCHING CONTRIBUTIONS PERMITTED. In addition to the compensation deferral contributions under subsection 6.2 of the plan, the employer will make a matching contribution on behalf of each participant under subsection 6.3 of the plan. [X] Yes. [ ] No. 21. AMOUNT OF MATCHING CONTRIBUTION. If the employer has specified that it will make employer matching contributions on behalf of participants, such matching contributions will be in an amount determined as follows: [Select one] [X] (a) 50% of the compensation deferral contributions made by each participant. [ ] (b) At a percentage of the compensation deferral contributions to be determined solely in the discretion of the employer in a nondiscriminatory manner. [If (a) or (b) above is selected, the employer will not match compensation deferral contributions in excess of $___________ or 4% of each participant's compensation -- -8- 10 specify either a dollar amount or a whole percentage which is between 1% and the highest percentage specified in item 15.] [ ] (c) $________ for each participant who made compensation deferral contributions of at least ____% of compensation. [ ] (d) ____% of the compensation of each participant who made compensation deferral contributions of at least ____% of compensation. [ ] (e) In an amount to be determined solely in the discretion of the employer in a nondiscriminatory manner, to be allocated to those participants who made compensation deferral contributions of at least ____% of compensation, pro rata, according to the compensation paid to them by the employer. [ ] (f) ____% of that portion of the compensation deferral contributions made by each participant which does not exceed ____% of the participant's compensation; plus ____% of that portion, if any, of the compensation deferral contributions made by each participant which exceeds ____% of the participant's compensation but does not exceed ____% of the participant's compensation; plus ____% of that portion, if any, of the compensation deferral contributions made by each participant which exceeds ____% of the participant's compensation but does not exceed ____% of the participant's compensation. Subsection 4.6 of the plan contains limitations on the percentage of compensation which a highly compensated participant can have credited to his account through employer matching contributions; and Section 17 of the plan contains limitations on the total amount which may be credited to a participant's account for any year. 22. COMPENSATION IN INITIAL YEAR OF PARTICIPATION. A participant's compensation which is used in the allocation of employer matching contributions under item 21(d) or (e) shall: [Select one] [ ] (a) exclude compensation before becoming a participant. [ ] (b) exclude compensation before meeting the plan's eligibility requirements. [ ] (c) include compensation in the first plan year of participation. 23. EMPLOYEES ELIGIBLE TO RECEIVE MATCHING CONTRIBUTION. Employer matching contributions made for each plan year shall be allocated and credited to the employer matching contribution accounts of the following participants: [Select one] -9- 11 [ ] (a) Participants who were employed by the employer during that plan year, other than participants who resigned or were dismissed prior to completing ____ (not more than 1,000) hours of service during that plan year. [X] (b) Participants who were employed by the employer during that plan year. [ ] (c) Participants who were employed by the employer on the last day of that plan year. [ ] (d) Participants who both were employed by the employer on the last day of that plan year and had completed at least ____ (not more than 1,000) hours of service during that plan year. [Selection of more than 501 hours in item 23(a) or selection of item 23(c) or 23(d) could result in discrimination in operation and plan disqualification.] 24. QUALIFIED MATCHING CONTRIBUTIONS. Employer matching contributions made under item 20 may constitute "qualified matching contributions" or the employer may make additional matching contributions which constitute "qualified matching contributions" that are fully vested and subject to distribution restrictions. [ ] (a) Yes. The portion of the employer matching contributions which constitutes qualified matching contributions shall be: [ ] (i) All matching contributions. [ ] (ii) Only the portion of the matching contributions required to satisfy the ADP test under subsection 4.5 of the plan. Qualified matching contributions shall be allocated to: [ ] (iii) All participants. [ ] (iv) All participants who are not highly compensated employees. [ ] (b) No. EMPLOYER CONTRIBUTIONS - ---------------------- 25. ALLOCATION FORMULA. Employer contributions shall be allocated to participants' accounts as follows: -10- 12 [ ] (a) COMPENSATION FORMULA: According to participants' compensation as provided in subparagraph 8.7(a) of the plan. [ ] (b) PERMITTED DISPARITY FORMULA: According to a formula which emphasizes compensation in excess of the taxable wage base, as provided in subparagraph 8.7(b) of the plan. The integration level shall be: [ ] (i) $ (a dollar amount less than the taxable wage base). [ ] (ii) % (up to 100%) of the taxable wage base in effect for the calendar year in which the plan year begins. If the employer has adopted this plan as a paired plan with State Street Solutions Prototype Defined Contribution Plan (Money Purchase - Nonstandardized), only one of the plans may provide for permitted disparity under item (b) above. 26. COMPENSATION IN INITIAL YEAR OF PARTICIPATION. A participant's compensation which is used in the allocation of employer contributions shall: [Select one] [ ] (a) exclude compensation before becoming a participant. [ ] (b) exclude compensation before meeting the plan's eligibility requirements. [ ] (c) include all compensation in the first plan year of participation. 27. EMPLOYEES ELIGIBLE TO RECEIVE EMPLOYER CONTRIBUTION. Employer contributions made for each plan year (and forfeitures, if applicable) shall be allocated and credited to the employer contribution accounts of the following participants: [Select one] [ ] (a) Participants who were employed by the employer during that plan year, other than participants who resigned or were dismissed prior to completing (not more than 1,000) hours of service during that plan year. [ ] (b) Participants who were employed by the employer during that plan year. [ ] (c) Participants who were employed by the employer on the last day of that plan year. [ ] (d) Participants who both were employed by the employer on the last day of that plan year and had completed at least (not more than 1,000) -11- 13 hours of service during that plan year. [Selection of more than 501 hours in item 27(a) or selection of item 27(c) or 27(d) could result in discrimination in operation and plan disqualification.] 28. QUALIFIED NONELECTIVE CONTRIBUTIONS. Employer contributions made under subparagraph 6.1(b) of the plan may constitute "qualified nonelective contributions" or the employer may make additional contributions which constitute "qualified nonelective contributions that are fully vested and subject to distribution restrictions. [X] (a) Yes. The portion of the employer contributions which constitutes qualified nonelective contributions shall be: [ ] (i) All employer contributions. [ ] (ii) Only the portion of the employer contributions required to satisfy the ADP test under subsection 4.5 of the plan and the ACP test under subsection 4.6 of the plan. Qualified nonelective contributions shall be allocated to: [ ] (iii) All participants. [X] (iv) All participants who are not highly compensated employees. [ ] (b) No. HIGHLY COMPENSATED EMPLOYEES - ---------------------------- 29. CONTRIBUTIONS BY HIGHLY COMPENSATED EMPLOYEES PROHIBITED -------------------------------------------------------- [ ] (a) COMPENSATION DEFERRAL CONTRIBUTIONS. Participants who are deemed to be "highly compensated employees" under subsection 2.12 of the plan (including certain family members) shall not be permitted to make compensation deferral contributions under the plan (subsection 4.7). [ ] (b) VOLUNTARY CONTRIBUTIONS. Participants who are deemed to be "highly compensated employees" under subsection 2.12 of the plan (including certain family members) shall not be permitted to make voluntary contributions under the plan (subsection 4.7). -12- 14 ACCOUNTING - ---------- 30. REGULAR ACCOUNTING DATE. A "regular accounting date" (under subsection 8.2) for purposes of the plan shall mean: [Select one] [X] (a) The last day of each plan year quarter. [ ] (b) The last day of the six month of each plan year and the last day of each plan year. [ ] (c) The last day of each plan year. 31. APPLICATION OF FORFEITURES. Forfeitures arising during a plan year (except forfeitures arising under subsection 4.6) under subsection 10.2 of the plan shall be applied as follows: [ ] (a) Forfeitures shall be allocated to participants, in accordance with subparagraph 8.8(a), or [X] (b) Forfeitures shall be applied to reduce employer matching contributions, if any, and then employer contributions required under the plan, in accordance with subparagraph 8.8(b) of the plan. PLAN INVESTMENTS - ---------------- 32. Investment Options. ------------------ [ ] (a) Investment options shall not be offered. [X] (b) INVESTMENT OPTIONS - ALL ACCOUNTS. Participants shall direct the investment of their account balances under the plan among the various investment options established by agreement between the employer and the trustee. [ ] (c) INVESTMENT OPTIONS - SPECIFIED ACCOUNTS ONLY. Participants shall direct the investment of the following accounts under the plan among the various investment options established by agreement between the employer and the trustee (select one or more): [ ] (i) Compensation deferral contribution account. -13- 15 [ ] (ii) Voluntary contribution account. [ ] (iii) Rollover account. [ ] (iv) Matching contribution account. [ ] (v) Employer contribution account. The administrator shall direct the investment among the investment options of the remaining accounts under the plan. 33. INVESTMENT INCREMENTS. If the employer has specified that participants may direct the investment of their accounts under item 32(b) or (c) above, such directions must be in increments of: [Select one] [ ] (a) 10% and multiples thereof. [X] (b) 1% (specify a whole number). VESTING AND DISTRIBUTION OF BENEFITS - ------------------------------------ 34. VESTING OF EMPLOYER CONTRIBUTIONS. A participant's vested percentage (subsection 10.2) in employer contributions will be determined under the vesting period selected below: [Select one] [ ] (a) 100% vested at all times (this box must be checked if the number "2" has been specified in item 10(b) or if you elected to treat all employer contributions as "qualified nonelective contributions" in item 28(a)(i) above for purposes of the anti-discrimination tests described in subsections 4.5 and 4.6 of the plan). [ ] (b) Years of Service Vested Percentage ---------------- ----------------- Less than 1 year % 1 year but less than 2 % 2 years but less than 3 % -14- 16 3 years but less than 4 % (20% or more) 4 years but less than 5 % (40% or more) 5 years but less than 6 % (60% or more) 6 years but less than 7 % (80% or more) 7 or more years 100% [ ] (c) Years of Service Vested Percentage ---------------- ----------------- Less than 1 year % 2 years but less than 3 % 3 years but less than 4 % 4 years but less than 5 % 5 or more year 100% If the plan becomes top-heavy (as defined in subsection 19.2 of the plan), the vesting period must meet the requirements of subsection 19.5 of the plan. 35. VESTING OF MATCHING CONTRIBUTIONS. If employer matching contributions may be made under item 20, a participant's vested percentage in employer matching contributions will be determined under the vesting period selected below: [Select one if applicable] [ ] (a) 100% vested at all times (this box must be checked if the number "2" has been specified in item 10(b) or if you elected to treat all employer matching contributions as "qualified matching contributions" in item 24(a)(i) above for purposes of the anti-discrimination test described in subsection 4.5 of the plan). [X] (b) Years of Service Vested Percentage ---------------- ----------------- Less than 1 year 0 % 1 year but less than 2 25 % 2 years but less than 3 50 % 3 years but less than 4 75 % (20% or more) 4 years but less than 5 100 % (40% or more) 5 years but less than 6 100 % (60% or more) 6 years but less than 7 100 % (80% or more) 7 or more years 100% -15- 17 [ ] (c) Years of Service Vested Percentage ---------------- ----------------- Less than 1 year % 1 year but less than 2 % 2 years but less than 3 % 3 years but less than 4 % 4 years but less than 5 % 5 or more years 100% 36. SERVICE BEFORE PLAN'S ESTABLISHMENT EXCLUDED. Years of service earned prior to establishment of the plan shall be disregarded for purposes of determining vesting under the plan: [ ] Yes. [X] No. 37. SERVICE BEFORE AGE 18 EXCLUDED. Years of service earned prior to attaining age 18 years shall be disregarded for purposes of determining vesting under the plan: [ ] Yes. [X] No. 38. NORMAL RETIREMENT AGE. For each participant, normal retirement age is: [X] (a) Age 65 (not to exceed 65) [ ] (b) The later of: (i) age ____ (not to exceed 65) (ii) the ____ (not to exceed 5th) anniversary of the participation commencement date. 39. EARLY RETIREMENT. The plan provides for early retirement at or after age ______ years and after completing ____ years of service. -16- 18 [ ] Yes. (If you select this option, you must fill in the early retirement age and service requirement above.) [X] No. 40. JOINT AND SURVIVOR ANNUITY. Benefits under the plan are subject to the joint and survivor annuity requirements. (Once you respond to this statement and select the optional form(s) of benefit, you cannot later amend the plan or adoption agreement to change your response or remove the option as to existing accounts.) [X] (a) No. Lump sum is normal form of benefit. Optional form(s) of benefit, if any: [ ] Installment payment. [ ] Joint and survivor annuity. (If you select this option, the joint and survivor annuity requirements of Section 11 of the plan will apply to this form of benefit). [ ] (b) Yes. Joint and survivor annuity is normal form of benefit. Optional form(s) of benefit: [ ] (i) Lump sum payment. [ ] (ii) Installment payment. 41. INSTALLMENTS FOR BENEFICIARIES. Participants may select an installment method of payment for their beneficiaries. [ ] Yes. [X] No. 42. PROTECTED BENEFITS. ------------------ [ ] Benefits under the plan are payable under another distribution option that is a "protected benefit" under Section 411(d)(6) of the Internal Revenue Code. [Check this box if the plan is a restatement, continuation, transferee, etc. of another plan under which benefits were payable in a form not selected in items 40 and 41. Attach a separate page identifying the protected distribution option(s).] -17- 19 LOANS AND WITHDRAWALS - --------------------- 43. LOANS. Loans to participants under subsection 12.4 of the plan are permitted. [X] Yes. [ ] No. 44. HARDSHIP WITHDRAWALS. Hardship withdrawals of participants' compensation deferral contributions shall be permitted (subsection 12.5). [X] Yes. [ ] No. 45. PRE-TERMINATION DISTRIBUTIONS. In addition to withdrawals described in item 44 and subsection 12.1 of the plan, if any, pre-termination distributions of account balances that are 100% vested (subsection 12.2) are permitted. [Select one] [ ] (a) No. [X] (b) Yes, after attaining age 59-1/2. [ ] (c) Yes [except for compensation deferral contribution accounts and employer contributions treated as qualified matching contributions or qualified nonelective employer contributions (and earnings thereon), if any] after both attaining age ____ and completing ____ years of participation in the plan (specify 5 or more). LIMITATION ON ALLOCATIONS (Section 17 of the plan) - ------------------------- 46. OTHER QUALIFIED PLANS MAINTAINED. If the employer maintains or ever maintained another qualified plan in which any participant in this plan is (or was) a participant or could become a participant, the employer must complete this item if it desires to apply the Code Section 415 limits in a manner other than as provided in Section 17 of the plan. The employer must also complete this item if it maintains a welfare benefit fund, as defined in Section 419(e) of the Code, or an individual medical account, as defined in Section 415(l)(2) of the Code, under which amounts are treated as annual additions with respect to any participant. [ ] (a) Other Defined Contribution Plan(s) Maintained. If the employer maintains other qualified defined contribution plans other than a master or prototype -18- 20 plan, any excess amount shall be considered attributable to amounts last allocated to such other plans and shall be handled in the manner provided for in such plans as follows: [Provide the method under which the plans will limit total annual additions to the maximum permissible amount, and will properly reduce any excess amounts in a manner that precludes employer discretion.] [ ] (b) DEFINED BENEFIT PLAN(S) MAINTAINED. If the employer maintains, or at any time maintained, one or more qualified defined benefit plans and the sum of the defined contribution fraction and the defined benefit fraction with respect to any participant for a limitation year exceeds 1.0, the 1.0 limitation under subsection 17.11 will be met by limiting the annual addition to this plan as provided for in subsection 17.4 for the limitation years so that the sum of the defined contribution fraction and the defined benefit fraction do not exceed 1.0. If in any limitation year the 1.0 limitation would be exceeded, the limitation will be satisfied as follows: [Provide the method under which the 1.0 limitation will be satisfied, in a manner that precludes employer discretion.] PREDECESSOR EMPLOYER - -------------------- 47. EMPLOYMENT WITH PREDECESSOR EMPLOYER. ------------------------------------ [ ] Employment with the following "predecessor employers" (as described in subsection 2.22) shall be considered employment with the employer for the periods and purposes of the plan set forth below: --------------------------------------- -19- 21 --------------------------------------- MINIMUM CONTRIBUTION (TOP-HEAVY) (Section 19 of the plan) - -------------------------------- 48. DEFINED BENEFIT PLAN MAINTAINED - 4% MINIMUM. The minimum employer contribution figure specified under subsections 19.6 and 19.8 of the plan will be 4 percent in order to preserve the method of calculating the defined benefit and defined contribution fractions under subsection 17.12 of the plan. [ ] Yes. [ ] No. 49. MINIMUM BENEFIT UNDER OTHER EMPLOYER PLAN. The minimum employer contribution or benefits required under Section 19 of the plan will be provided to participants under another plan or plans maintained by the employer. [ ] Yes. [ ] No. The plan provides that, in the event the plan becomes top heavy, a minimum contribution will be made by the employer, unless you specify that such contributions (or a minimum benefit) will be provided for all participants under another plan maintained by the employer. 50. DEFINED BENEFIT PLAN - ACTUARIAL ASSUMPTIONS. If the employer maintains any defined benefit plan, the actuarial assumptions utilized under such plan are as follows (subparagraph 19.2(c) of the plan): N/A [Provide the interest rate and mortality factors used to determine the present value of accrued benefits. If the employer does not maintain a defined benefit plan, specify "N/A".] The failure to properly complete the elections in this Adoption Agreement could result in disqualification of the plan. Only those elections that are completed shall be considered as provisions applicable to and forming a part of the plan. -20- 22 This Adoption Agreement may only be used in conjunction with basic plan document 01. Terms used in this Adoption Agreement which are defined in State Street Solutions Prototype Defined Contribution Plan shall have the meaning given them therein. The employer hereby acknowledges that it is adopting this profit sharing plan as part of State Street Solutions Prototype Defined Contribution Plan Program (the "program"). To the extent that federal legislation or other changes in the law relating to employee benefit plans requires that the plan be amended, the sponsor will amend the plan and furnish amended copies to the employer for adoption as long as the employer is part of the program. The sponsor will inform the employer of any amendment made to the plan or of the discontinuance or abandonment of the plan by the sponsor. If the employer declines to adopt an amendment furnished by the sponsor to comply with legal changes, the employer will no longer be considered part of the program. The employer may amend the plan or trust by giving notice to the sponsor in writing, but such amendment will remove the employer from the program. The preceding sentence shall not apply to the employer's addition of overriding plan language to this adoption agreement, where such language is necessary to satisfy Sections 415 or 416 of the Internal Revenue Code because of the required aggregation of multiple plans; provided that the employer must obtain a determination letter in order to continue reliance on the plan's qualified status. The sponsor reserves the right to discontinue the Prototype Plan at any time by giving the employer 60 days' prior written notice. The sponsor's address and telephone number are State Street Bank and Trust Company, Two International Place, Boston, Massachusetts 02110, (617) 654-6008. The employer may not rely on the notification letter issued to the sponsor by the Internal Revenue Service with respect to the qualification of the plan and should apply to the appropriate Key District Director of the Internal Revenue Service for a determination as to the qualification of the plan as adopted by the employer. * * * The undersigned duly authorized owner, partner, or officer of the employer hereby executes the plan and trust on behalf of the employer. Dated this day of , 199 . -------- ------------------- ------- --------------------------- Employer By ------------------------ Its ---------------------- -21- 23 The undersigned hereby consents to the adoption of the plan by the employer. Dated this day of , 199 . -------- ------------------- ------- STATE STREET BANK AND TRUST COMPANY By --------------------------- Title --------------------------- -22- 24 STATE STREET SOLUTIONS ------------------------ PROTOTYPE DEFINED CONTRIBUTION TRUST ------------------------------------ 25 TABLE OF CONTENTS -----------------
PAGE ---- ARTICLE I 1 - --------- Introduction 1 ------------ Name 1 ---- Purpose 1 ------- Controlling Law 1 --------------- Use of Terms 1 ------------ ARTICLE II 2 - ---------- Fiduciary Responsibility 2 ------------------------ ARTICLE III 2 - ----------- The Trust Fund and Its Administration 2 ------------------------------------- The Trust Fund 2 -------------- Plan Administration 2 ------------------- General Powers 2 -------------- Investment Manager Accounts 8 --------------------------- Investment Options 9 ------------------ Participant Directed Brokerage Accounts 9 --------------------------------------- Employer Stock Accounts 10 ----------------------- Employer Managed Investment Accounts 10 ------------------------------------ Trustee Managed Investment Accounts 10 ----------------------------------- Compensation and Expenses 10 ------------------------- Limit of Trustee's Responsibility 11 --------------------------------- ARTICLE IV 11 - ---------- General Provisions 11 - -------------------- Action by Employer 11 ------------------ Warranty 11 -------- Disagreement as to Acts 11 ----------------------- Courts 11 ------ Evidence 11 -------- Third Parties 12 ------------- No Reversion in Employer 12 ------------------------ Interests Not Transferable 12 -------------------------- Indemnification 13 --------------- Litigation by Participants 13 -------------------------- Liabilities Mutually Exclusive 13 ------------------------------ Waiver of Notice 13 ---------------- Counterparts 13 ------------ Gender and Number 13 ----------------- Successors 13 ---------- Severability 14 ------------ Statutory References 14 -------------------- Discretion of the Trustee Binding 14 ---------------------------------
-i- 26
PAGE ---- Duration of Trust 14 ----------------- No Liability for Acts of Predecessor and Successor Trustees 14 ----------------------------------------------------------- ARTICLE V 14 - --------- Amendment, Termination and Change of Trustee 14 -------------------------------------------- Amendment By Sponsor 14 -------------------- Amendment By Employer 15 --------------------- Termination 15 ----------- Resignation and Removal of Trustee 15 ---------------------------------- ARTICLE VI 16 - ---------- Incorporation of Collective Investment Trusts 16 ---------------------------------------------
-ii- 27 STATE STREET SOLUTIONS ---------------------- PROTOTYPE DEFINED CONTRIBUTION TRUST ------------------------------------ ARTICLE I --------- Introduction ------------ I-1. NAME. The trust set forth herein (the "trust") may be referred to as "State Street Solutions Prototype Defined Contribution Trust". I-2. PURPOSE. This trust agreement is intended to implement and form a part of State Street Solutions Prototype Defined Contribution Plan (the "plan") as adopted by the employer thereunder and sponsored by State Street Bank and Trust Company (the "sponsor"). By signing the adoption agreement, the employer has executed and become a party to this trust agreement, and the provisions of and benefits under the plan, as so adopted by the employer, are subject to the terms and conditions of this trust agreement. State Street Bank and Trust Company shall serve as "trustee" pursuant to this trust agreement. The trust is established, operated and maintained in the United States of America exclusively for the investment and reinvestment of funds contributed under the plan. I-3. CONTROLLING LAW. Except to the extent superseded by laws of the United States, the laws of the Commonwealth of Massachusetts shall be controlling in all matters relating to this agreement. I-4. USE OF TERMS. The terms "employer," "adoption agreement," and "administrator," and words and phrases used and defined for purposes of the plan are similarly used and defined for purposes of this trust. The terms "trust," "agreement," "herein," "hereunder," and similar terms mean this agreement and do not include the plan; but, unless qualified by the context or otherwise defined in this agreement, a word, term or phrase defined in this agreement is similarly defined for purposes of the plan. 28 ARTICLE II ---------- Fiduciary Responsibility ------------------------- The employer, the administrator, the trustee, any investment manager appointed pursuant to paragraph III-4, and any other fiduciaries with respect to the plan or trust shall discharge their duties thereunder solely in the interest of participants and beneficiaries, for the exclusive purpose of providing their benefits and defraying reasonable expenses of plan and trust administration, with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. ARTICLE III ----------- The Trust Fund and Its Administration ------------------------------------- III-1. THE TRUST FUND. The "trust fund" as at any date means all property then held by the trustee under this agreement. III-2. PLAN ADMINISTRATION. The plan is administered by the "administrator", as designated by the employer in its adoption agreement for the plan. The employer has also engaged the sponsor and its affiliates and agents (the "recordkeeper") to provide certain administrative services with re- spect to the plan, including but not limited to maintaining participant accounts for all contributions, loans and loan repayments, rollovers, and other deposits made for the purpose of determining how such deposits are to be allocated to the investment funds of the plan, for determining requirements for transfers among investment funds in accordance with the terms of the plan, for maintaining participant records for the purpose of voting or tendering shares in an investment fund, for distributing information about the investment funds provided for under the plan, and for distributing participant statements at periodic intervals. The trustee may rely upon a certification of the administrator or the recordkeeper with respect to any instruction, direction or approval of the administrator or the recordkeeper. The trustee shall be fully protected in acting upon any instrument, certificate, or paper of the employer, the administrator or the recordkeeper, believed by it to be genuine and to be signed or presented by any authorized person, and the trustee shall be under no duty to make any investigation or inquiry as to any statement contained in any such writing but may accept the same as fully authorized by the employer, the administrator or the recordkeeper, as the case may be. References in this agreement to actions by the administrator shall include similar actions by the recordkeeper. III-3. GENERAL POWERS. With respect to the management and control of the assets of the trust fund, the trustee shall have and exercise investment power and authority (i) -2- 29 over Trustee Managed Investment Accounts as provided in paragraph III-9, (ii) upon the direction of the administrator or named fiduciary with respect to an Employer Managed Investment Account under paragraph III-8, (iii) upon the direction of a participant with respect to a Participant Directed Brokerage Account under paragraph III-6, and (iv) upon the direction of an investment manager with respect to an Investment Manager Account under paragraph III-4. Subject to the preceding sentence, the trustee shall have the following powers, rights and duties in addition to those provided elsewhere in this agreement, the plan or by law: (a) To acquire and become the policyholder under group annuity contracts issued by a legal reserve life insurance company; and to manage, sell, contract to sell, grant options to purchase, convey, exchange, transfer, abandon, improve, repair, insure, lease for any term (although commencing in the future or extending beyond the term of this trust) and otherwise deal with all property, real or personal, in such way, for such considerations, and on such terms and conditions as the trustee decides. (b) To retain in cash such amounts as the trustee considers advisable and as are permitted by applicable law; to invest and reinvest part or all of the balance of the trust fund in stocks, bonds, notes, mortgages, mutual fund shares or other property of any kind, real or personal, including one or more group annuity, deposit administration or separate account contracts issued by a legal reserve life insurance company; and to diversify such investments so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so. (c) To deposit cash in any depositary (including the banking department of the trustee) without liability for interest and, without limiting the generality of the foregoing, to invest cash in savings accounts or time certificates of deposit bearing a reasonable rate of interest in the banking department of the trustee. (d) To trade in financial options and futures, including index options and options on futures and to execute in connection therewith such account agreements and other agreements including contracts for the exchange of interest rates, or investment performance, currencies or other notional principal contracts in such form and upon such terms as an investment manager or the administrator shall direct. (e) To make any payment or distribution from the trust fund as directed by the administrator without inquiring as to whether a payee or distributee is entitled thereto or as to whether it is proper, and the trustee shall not be liable for a payment or dis- -3- 30 tribution made as directed by the administrator without notice or knowledge that the payment or distribution is not proper under the terms of the plan or this agreement; and to notify the administrator if a payment or distribution is returned to the trustee, and the trustee shall have no obligation to search for or ascertain the whereabouts of a payee or distributee. (f) To the extent permitted by law, to borrow from anyone, with the employer's approval, such sum or sums from time to time as the trustee considers desirable to carry out this trust, and to mortgage or pledge all or part of the trust fund as security, provided that the trustee shall not borrow to acquire employer securities (as described in paragraph III-7), or pledge employer securities held under the trust as security for any loan. (g) To retain any funds or property subject to any dispute without liability for interest and to decline to make payment or delivery thereof until final adjudication by a court of competent jurisdiction or until an appropriate release is obtained. (h) To begin, maintain or defend any litigation necessary in connection with the administration of the plan or this trust, except that, unless otherwise required by law, the trustee shall not be obliged or required to do so unless indemnified to the trustee's satisfaction. (i) To compromise, contest, arbitrate or abandon claims or demands. (j) Except to the extent otherwise required by the Code or ERISA or agreed to between the trustee and the employer, or as provided in paragraph III-7 with respect to employer securities, to give proxies to vote stocks and other voting securities, to join in or oppose (alone or jointly with others) voting trusts, mergers, consolidations, foreclosures, reorganizations, liquidations, or other changes in the financial structure of any corporation, and to exercise or sell stock subscription or conversion rights, only as directed by the person or entity with investment authority over such stock or security. (k) To hold securities or other property in the name of a nominee, in a depositary, or in any other way, with or without disclosing the trust relationship; provided, however, that except as authorized by regulations issued by the Secretary of Labor, the indicia of ownership of the assets of the trust fund shall not be maintained -4- 31 outside the jurisdiction of the district courts of the United States. (l) To report to the employer and the administrator on each accounting date under the plan, or as soon thereafter as practicable, or at such other times as may be agreed to by the employer or administrator and the trustee, the then net worth of the trust fund (that is, the fair market value of all assets com- prising the trust fund, less liabilities, if any, other than liabilities to persons entitled to benefits under the plan) determined on the basis of such evidence, data or information as the trustee considers pertinent and reliable. (m) To furnish to the employer and the administrator an annual account or an account for such other period as may be agreed to by the employer or the administrator and the trustee, or as may be required under this agreement or the plan, showing all investments, receipts, disbursements, and other transactions involving the trust during the accounting period, and also showing the assets of the trust fund held at the end of the period, which, to the extent permitted by law, shall be conclusive on all persons, including the employer, except as to any act or transaction as to which the employer or the administrator files with the trustee written exceptions or objections within sixty days after receipt of the account. (n) To pay out of the trust fund all real and personal property taxes, income taxes and other taxes of any and all kinds levied or assessed under existing or future laws against the trust fund. (o) To maintain records and accounts reflecting all receipts and disbursements under this agreement and such other records and accounts as may be agreed to by the employer or the administrator and the trustee, all of which shall be open to the inspection of the employer or the administrator at all reasonable times, and may be audited from time to time by anyone named by the employer or the administrator. (p) To employ agents, attorneys, accountants or other persons (who also may be employed by the employer) and to delegate to them such powers as the trustee considers desirable (except that the trustee may not delegate its responsibilities as to the management or control of the assets of the trust fund), provided that such delegation, and the acceptance thereof, by such agents, attorneys, accountants or other persons, shall be in writing; and, -5- 32 to the extent permitted by law, the trustee shall be protected in acting or refraining from acting on the advice of persons so employed without court action. (q) To appoint a bank, trust company, or broker or dealer registered under the Securities Exchange Act of 1934 to act as custodian with respect to any portion of the trust fund; and a custodian so appointed shall have custody of such assets as are deposited with it and as custodian such rights, powers and duties with respect thereto as shall be agreed upon from time to time by the trustee and such custodian. (r) To furnish the employer with such information in the trustee's possession as the employer may need for tax or other purposes. (s) At the direction of the employer or the administrator, to receive, hold and invest any funds or other property transferred to the trustee from: (i) any other trust forming a part of a plan intended to meet the requirements of Section 401(a) of the Code; (ii) an employee of the employer if such funds or property qualify as a rollover described in Section 402(c) of the Code; or (iii) an individual retirement account or individual retirement annuity maintained by an employee of the employer, if such funds or property qualify as a rollover contribution described in Section 408(d)(3) of the Code; and to allocate, credit and distribute any such funds and other property so transferred in accordance with the terms of the plan. (t) To transfer all or any portion of the trust fund to another trust or trusts forming a part of a plan or plans that are intended to meet the requirements of Section 401(a) of the Code, as directed by the administrator. (u) To transfer an eligible rollover distribution described in Section 402(c)(4) of the Code directly to an eligible retirement plan described in Section 402(c)(8)(B) of the Code, as directed by the -6- 33 administrator. (v) To perform any and all other acts which in the trustee's judgment are necessary or appropriate for carrying out its duties under this agreement. The trustee shall transmit promptly to the administrator or the investment manager, as the case may be, all notices of conversion, redemption, tender, exchange, subscription, class action, claim in insolvency proceedings or other rights or powers relating to any of the securities in the trust fund, which notices are received by the trustee from its agents or custodians, from issuers of the securities in question and from the party (or its agents) extending such rights. The trustee shall have no obligation to determine the existence of any conversion, redemption, tender, exchange, subscription, class action, claim in insolvency proceedings or other right or power relating to any of the securities in the trust fund of which notice was given prior to the purchase of such securities by the trust fund, and shall have no obligation to exercise any such right or power unless the trustee is informed of the existence of the right or power. The trustee shall not be liable for any untimely exercise or assertion of such rights or powers described in the paragraph immediately above in connection with securities or other property of the trust fund at any time held by it unless (i) it or its agents or custodians are in actual possession of such securities or property and (ii) it receives directions to exercise any such rights or powers from the administrator or an investment manager, as the case may be, and both (i) and (ii) occur at least three business days prior to the date on which such rights or powers are to be exercised. If the trustee is directed by the administrator or an investment manager to purchase securities issued by any foreign government or agency thereof, or by any corporation or other entity domiciled outside of the United States, it shall be the responsibility of the administrator or investment manager, as the case may be, to advise the trustee in writing with respect to any laws or regulations of any foreign countries or any United States territory or possession which shall apply in any manner whatsoever to such securities, including, without limitation, receipt by the trustee of dividends, interest or other distributions on such securities. All Investment Company shares shall be registered in the name of the trustee or its nominee. Subject to any requirement of applicable law, the trustee will transmit to the administrator copies of any notices of shareholders' meetings, proxies and proxy-soliciting materials, prospectuses and the annual or other reports to shareholders, with respect to Investment Company shares held in the trust. The trustee shall act in accordance with appropriate directions received from the administrator with respect to matters to be voted upon by the shareholders of the Investment Company. Such directions must be in writing on a form approved by the trustee, signed by the addressee and delivered to the trustee within the time prescribed by it. The trustee will not vote Investment Company shares as to which it receives no written directions. For the purposes of this paragraph, Investment Company means a registered -7- 34 investment company provided that its prospectus offers its shares under the plan. III-4. INVESTMENT MANAGER ACCOUNTS. The employer may appoint one or more investment managers to manage the investment of any part or all of the assets of the trust fund. Except as otherwise provided by law, the trustee shall have no obligation for investment of any assets of the trust fund which are subject to management by an investment manager. Appointment of an investment manager shall be made by written notice to the investment manager and the trustee, which notice shall specify those powers, rights and duties of the trustee under this agreement that are allocated to the investment manager and that portion of the assets of the trust fund subject to investment management. An investment manager so appointed pursuant to this paragraph shall be either a registered investment adviser under the Investment Advisers Act of 1940, a bank, as defined in said Act, or an insurance company qualified to manage, acquire and dispose of the assets of the plan under the laws of more than one state of the United States. Any such investment manager shall acknowledge to the employer in writing that it accepts such appointment and that it is a fiduciary with respect to the plan and trust. An investment manager may resign at any time upon written notice to the trustee and the employer. The employer may remove an investment manager at any time by written notice to the investment manager and the trustee. The trustee shall have no liability (i) for the acts or omissions of any investment manager (except to the extent the trustee itself is serving as investment manager); (ii) for following directions, including investment directions of an investment manager (other than the trustee) or the employer or named fiduciary, which are given in accordance with this trust agreement; (iii) for failing to act in the absence of investment manager direction; or (iv) for any loss of any kind which may result by reason of the manner of division of the trust fund or investment fund into investment accounts. An investment manager shall certify, at the request of the trustee, the value of any securities or other property held in any investment account managed by such investment manager, and such certification shall be regarded as a direction with regard to such valuation. The trustee shall be entitled to conclusively rely upon such valuation for all purposes under this trust agreement. Except as otherwise provided in this trust agreement, the investment manager of an investment account shall have the power and authority, to be exercised in its sole discretion at any time and from time to time, to issue orders for the purchase or sale of securities directly to a broker. Written notification of the issuance of each such order shall be given promptly to the trustee by the investment manager and the confirmation of each such order shall be confirmed to the trustee by the broker. Unless otherwise directed by the investment manager, such notification shall be authority for the trustee to pay for securities purchased or to deliver securities sold as the case may be. Upon the direction of the investment manager, the trustee will execute and deliver appropriate trading authorizations, but no such authorization shall be deemed to increase the liability or responsibility of the trustee under this trust agreement. -8- 35 III-5. INVESTMENT OPTIONS. The employer from time to time and in accordance with provisions of the plan, may direct the trustee, with the trustee's consent, to establish one or more separate investment options within the trust fund, each separate option being hereinafter referred to as an "investment fund", which may be invested in (i) shares of investment companies registered under the Investment Company Act of 1940, (ii) collective funds maintained by a bank or trust company, (iii) various classes of securities of the employer, (iv) participant directed brokerage accounts, (v) pools of insurance contracts, (vi) funds managed by a registered investment manager, bank or insurance company, (vii) accounts managed by named fiduciaries for the plan; and (viii) other investment options available from time to time under the plan. The trustee shall have no liability for any loss of any kind which may result by reason of the manner of division of the trust fund into investment funds, or for the investment management of these accounts, except as provided in paragraph III-9 respecting a trustee managed investment account, if any. The trustee shall transfer to each such investment fund such portion of the assets of the trust fund as the employer or the administrator directs. The trustee shall not incur any liability on account of following any direction of the employer or the administrator, and the trustee shall be under no duty to review the investment guidelines, objectives and restrictions so established. To the extent that directions from the employer or the administrator to the trustee represent investment instructions of the plan's participants, the trustee shall have no responsibility for such investment elections and shall incur no liability on account of the direct and necessary results of investing the assets of the trust fund in accordance with such participant investment instructions. All interest, dividends and other income received with respect to, and any proceeds received from the sale or other disposition of, securities or other property held in an investment fund shall be credited to and reinvested in such investment fund. All expenses of the trust fund which are allocable to a particular investment fund shall be so allocated and charged. Subject to the provisions of the plan, the employer may direct the trustee to eliminate an investment fund or funds, and the trustee shall thereupon dispose of the assets of such investment fund and reinvest the proceeds thereof in accordance with the directions of the administrator. III-6. PARTICIPANT DIRECTED BROKERAGE ACCOUNTS. The trustee shall, if so directed by the employer, segregate all or a portion of the trust fund held by it into one or more separate investment accounts to be known as "Participant Directed Brokerage Accounts". Whenever a participant is directing the investment and reinvestment of a Participant Directed Brokerage Account, the participant shall have the powers and duties which an investment manager would have under this trust agreement if an investment manager were then serving, and the trustee shall be protected to the same extent as it would be protected under this trust agreement as to directions or the absence of directions of an investment manager. A participant shall be entitled to give orders directly to a broker for the purchases and sale of securities. The broker shall provide confirmation of each order to both the participant and to the administrator, which shall maintain records in such form as to satisfy reporting requirements of the plan. -9- 36 III-7. EMPLOYER STOCK ACCOUNTS. The employer may direct the trustee, with the trustee's consent, to establish one or more investment funds substantially all of the assets of which shall be invested in securities which constitute "qualifying employer securities" within the meaning of Section 407 of ERISA (an "Employer Stock Account"). It shall be the duty of the employer to determine that such investment is not prohibited by Sections 406 or 407 of ERISA. In addition, during any time when there is no investment manager with respect to an Employer Stock Account (such as before an investment management agreement takes effect or after it terminates), the administrator shall direct the investment and reinvestment of such Employer Stock Account. Except to the extent otherwise required by the Code or ERISA or agreed to between the trustee and the employer, the trustee shall exercise all voting or tender or exchange offer rights with respect to all qualifying employer securities held by it in an Employer Stock Account only as directed by the administrator. III-8. EMPLOYER MANAGED INVESTMENT ACCOUNTS. The trustee shall, if so directed in writing by the employer, segregate all or a portion of the trust fund held by it into one or more separate investment accounts to be known as "Employer Managed Investment Accounts". The employer, by written notice to the trustee, may at any time relinquish its powers under this paragraph III-8 and direct that an Employer Managed Investment Account shall no longer be maintained. Whenever the administrator or named fiduciary is directing the investment and reinvestment of an investment account or an Employer Managed Investment Account, the administrator or named fiduciary shall have the powers and duties which an investment manager would have under this trust agreement if an investment manager were then serving, and the trustee shall be protected to the same extent as it would be protected under this trust agreement as to directions or the absence of directions of an investment manager. III-9. TRUSTEE MANAGED INVESTMENT ACCOUNTS. The trustee shall have no duty or responsibility to direct the investment and reinvestment of the trust fund, any investment fund or any investment account unless expressly agreed to in writing between the trustee and the Employer. In the event that the trustee enters into such an agreement, it shall have the powers and duties of an investment manager under this trust agreement with regard to such investment account. III-10. COMPENSATION AND EXPENSES. Except as otherwise provided below in this agreement, all reasonable costs, charges, and expenses incurred in the administration of this trust and the plan, including compensation to the trustee (as agreed upon between the employer and the trustee), compensation to an investment manager (as agreed upon between the employer and the investment manager), and any compensation to agents, attorneys, accountants and other persons employed by the trustee, will be paid from the trust fund to the -10- 37 extent not paid by the employer. Expenses incurred in connection with the sale, investment and reinvestment of the trust fund (such as brokerage, postage, express and insurance charges and transfer taxes) shall be paid from the trust fund. III-11. LIMIT OF TRUSTEE'S RESPONSIBILITY. No power, duty or responsibility is imposed upon the trustee under the plan, except as set forth in this agreement. Until they determine or are advised to the contrary, the trustee and any investment manager (appointed as provided in paragraph III-4) may assume that this trust is qualified under Section 401(a), and is entitled to tax exemption under Section 501(a), of the Code. ARTICLE IV ---------- General Provisions ------------------ IV-1. ACTION BY EMPLOYER. Any action required or permitted to be taken by the employer under the trust shall be by resolution of its Board of Directors, by resolution of a duly authorized committee of its Board of Directors, or by a person or persons authorized by resolution of its Board of Directors or such committee, if the employer is a corporation; by written instrument signed by its managing partner or partners, or by a person or persons authorized by such managing partner or partners, if the employer is a partnership; and by written instrument signed by the employer, if the employer is a sole proprietor. IV-2. WARRANTY. The employer warrants that all directions or authorizations by it or by the administrator, whether for the payment of money or otherwise, will comply with the plan and this trust. IV-3. DISAGREEMENT AS TO ACTS. If there is a disagreement between the trustee and anyone as to any act or transaction reported in any accounting, the trustee shall have the right to a settlement of its account by any proper court. IV-4. COURTS. Except as otherwise provided by law, in case of any court proceedings involving the employer, the trustee or the trust fund, only the employer and the trustee shall be necessary parties to the proceedings, and no other person shall be entitled to notice of process. A final judgment entered in any such proceedings shall be conclusive. IV-5. EVIDENCE. Evidence required of anyone under this agreement may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. -11- 38 IV-6. THIRD PARTIES. Except as otherwise provided by law, the trustee's exercise or non-exercise of its powers and discretions in good faith shall be conclusive on all persons. No one shall be obliged to see to the application of any money paid or property delivered to the trustee, except to the extent such person is acting as an investment manager as respects such money or property. The certificate of the trustee that it is acting according to this agreement will fully protect all persons dealing with the trustee. An insurance company may assume that this agreement and the plan have not been amended or changed unless notice of such amendment or change is received by the insurance company at its home office. IV-7. NO REVERSION IN EMPLOYER. The employer shall have no right, title or interest in the trust fund, nor shall any part of the trust fund revert or be repaid to the employer, directly or indirectly, unless: (a) the Internal Revenue Service initially determines that the plan does not meet the requirements of Section 401(a) of the Code, in which event the contributions made to the plan by the employer shall be returned to it within one year after the adverse determination; (b) a contribution is made by the employer by mistake of fact and such contribution is returned to the employer within one year after payment to the trustee; or (c) a contribution conditioned on the deductibility thereof is disallowed as an expense for federal income tax purposes and such contribution (to the extent disallowed) is returned to the employer within one year after the disallowance of the deduction. Contributions may be returned to the employer pursuant to subparagraph (a) above only if they are conditioned upon initial qualification of the plan, and an application for determination was made by the time prescribed by law for filing the employer's Federal income tax return for the taxable year in which the plan was adopted (or such later date as the Secretary of the Treasury may prescribe). The amount of any contribution that may be returned to the employer pursuant to subparagraph (b) or (c) above must be reduced by any portion thereof previously distributed from the trust fund and by any losses of the trust fund allocable thereto, and in no event may the return of such contribution cause any participant's account balances to be less than the amount of such balances had the contribution not been made under the plan. The employer shall have sole responsibility for determining whether any of the conditions for repayment of contributions under subparagraphs (a) through (c) above have been met. IV-8. INTERESTS NOT TRANSFERABLE. The interests of persons entitled to benefits under the plan are not subject to their debts or other obligations and, except as may be required by a qualified domestic relations order as defined in Section 414(p) of the Code, may -12- 39 not be voluntarily or involuntarily sold, transferred, alienated, assigned or encumbered. IV-9. INDEMNIFICATION. To the extent permitted by applicable law, the employer shall indemnify and save harmless the trustee for and from any loss or expense (including reasonable attorneys' fees) arising (a) out of an authorized action hereunder taken in good faith by the trustee or any matter as to which this agreement provides that the trustee is directed, protected, not liable, or not responsible, or (b) by reason of any breach of any statutory or other duty owed to the plan by the employer, the administrator, or any investment manager or any delegate of any of them (and for the purposes of this sentence the trustee shall not be considered to be such a delegate), whether or not the trustee may also be considered liable for that other person's breach under the provisions of Section 405(a) of ERISA. IV-10. LITIGATION BY PARTICIPANTS. If a legal action begun against the trustee or the employer by or on behalf of any person results adversely to that person, or if a legal action arises because of conflicting claims to a participant's or other person's benefits, the cost to the trustee or the employer of defending the action will be charged to the extent permitted by law to the sums, if any, which were involved in the action or were payable to the person concerned. IV-11. LIABILITIES MUTUALLY EXCLUSIVE. To the extent permitted by law, the trustee, an investment manager and the employer shall be responsible only for its own acts or omissions and the trustee shall not be required to collect any contribution from the employer or any other person or to verify that it is in the proper amount. No insurance company shall be a party to this agreement for any purpose or be responsible for the validity of this agreement, it being intended that an insurance company shall be liable only for the obligations set forth in the contracts issued by it. IV-12. WAIVER OF NOTICE. Any notice required under this agreement may be waived by the person entitled to such notice. IV-13. COUNTERPARTS. This agreement may be executed in two or more counterparts, any one of which will be an original without reference to the others. IV-14. GENDER AND NUMBER. Where the context admits, words in the masculine gender shall include the feminine and neuter genders, the singular shall include the plural, and the plural shall include the singular. IV-15. SUCCESSORS. This agreement shall be binding on all persons entitled to benefits under the plan and their respective heirs and legal representatives, on the employer and its successors and assigns and on the trustee and its successors. The term "employer" as used in the plan and this agreement includes any entity that continues the plan and this trust in effect, as provided in the plan. -13- 40 IV-16. SEVERABILITY. If any provision of the plan or this agreement is held to be illegal or invalid, such illegality or invalidity shall not affect the remaining provisions of the plan and this agreement, and they shall be construed and enforced as if such illegal or invalid provision had never been inserted therein. IV-17. STATUTORY REFERENCES. Any references in the plan or this agreement to a Section of the Internal Revenue Code (the "Code"), the Employee Retirement Income Security Act of 1974 ("ERISA") or the Tax Reform of 1986 shall include any comparable section or sections of any future legislation which amends, supplements or supersedes said Section. IV-18. DISCRETION OF THE TRUSTEE BINDING. Wherever in this trust it is provided that a power may be exercised or an action taken by the trustee requiring the exercise of discretion, the exercise of discretion by the trustee in conformance with Article II of the trust shall be absolute and bind- ing on the employer and participants under the plan. IV-19. DURATION OF TRUST. Unless sooner terminated, the trust created under this trust agreement shall continue for the maximum period of time which the laws of the Commonwealth of Massachusetts shall permit. IV-20. NO LIABILITY FOR ACTS OF PREDECESSOR AND SUCCESSOR TRUSTEES. The trustee shall have no liability for the acts or omissions of any predecessors or successors in office. ARTICLE V --------- Amendment, Termination and Change of Trustee -------------------------------------------- V-1. AMENDMENT BY SPONSOR. The employer, by signing the adoption agreement, authorizes and empowers the sponsor to amend the trust from time to time, subject to the following: (a) Except as provided in subparagraphs (b) and (c) next below, no such amendment shall become effective until at least 30 days' prior written notice thereof has been given to the employer. (b) An amendment of the trust made under this paragraph, which the sponsor deems necessary or appropriate to enable the trust to -14- 41 meet the requirements of Section 401(a) of the Code, or any future legislation amending, supplementing or superseding said Section, may be made effective as of any date the sponsor deems appropriate. (c) An amendment of the trust made under this paragraph to conform the trust to any change in any law of the United States, any state or political subdivision thereof, or to any rule or regulation thereunder, may take effect as of the date such amendment is required to be effective under such law, rule or regulation. (d) Except as provided in paragraph IV-7, under no condition shall an amendment result in the return or repayment to the employer of any part of the trust fund or the income from it or result in the distribution of the trust fund for the benefit of anyone other than persons entitled to benefits under the plan. V-2. AMENDMENT BY EMPLOYER. This trust may not be amended by the employer, except with the advance written consent of the trustee. Except as provided in paragraph IV-7, under no condition shall an amendment result in the return or repayment to the employer of any part of the trust fund or the income from it or result in the distribution of the trust fund for the benefit of anyone other than persons entitled to benefits under the plan. V-3. TERMINATION. If the plan is terminated, this trust, including all rights, titles, powers, duties, discretions and immunities imposed on or reserved to the trustee, the administrator and the employer nevertheless shall continue in effect until all assets have been distributed by the trustee as directed by the administrator under the plan. Notwithstanding the foregoing, the trustee shall not be required to pay out any assets of the trust fund upon termination of the trust until the trustee has received written certification from the administrator that all provisions of law with respect to such termination have been complied with. The trustee shall rely conclusively on such written certification, and shall be under no obligation to investigate or otherwise determine its propriety. V-4. RESIGNATION AND REMOVAL OF TRUSTEE. The trustee acting hereunder may resign at any time by giving thirty days' prior written notice to the employer, which notice may be waived by the employer. The employer may remove the trustee at any time upon thirty days' prior written notice to the trustee, which notice may be waived by the trustee. In case of the resignation or removal of the trustee, the employer shall promptly appoint a successor trustee, and if no successor trustee has been appointed by the effective date of the trustee's resignation, the trustee may petition a court of competent jurisdiction to appoint a successor trustee at the expense of the trust fund. Any successor trustee shall have the same powers and duties as those conferred by this agreement as if originally named trustee. The removal of a trustee and the appointment of a new trustee shall be by a written instrument delivered to the -15- 42 trustee. Upon the appointment of a successor trustee, the resigning or removed trustee shall transfer or deliver the trust fund to such successor trustee. ARTICLE VI ---------- Incorporation of Collective Investment Trusts --------------------------------------------- Notwithstanding any other provisions of this agreement, the trustee or any investment manager may cause any part or all of the trust assets for which it has investment responsibility to be invested in any common, collective or commingled trust fund or pooled investment fund qualified under Section 401(a) and entitled to tax exemption under Section 501(a) of the Code. To the extent trust assets are invested in any such common, collective or commingled trust fund or pooled investment fund, the provisions of the documents under which such fund is maintained, as amended from time to time, shall govern any investment therein, and such provisions are hereby incorporated herein and made a part of this agreement. -16- EX-13 4 TIMBERLAND CO. PORTIONS OF ANNUAL REPORT 1 FINANCIAL REVIEW EXHIBIT 13 FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA SELECTED INCOME STATEMENT DATA (Dollars in Thousands Except Per Share Data)
Years Ended December 31, 1995 1994 1993 1992 1991 Revenues $ 655,138 $ 638,097 $ 420,062 $ 292,571 $ 227,094 Net income (loss) (11,635) 17,710 22,521 12,919 8,085 Earnings (loss) per share (1.04) 1.58 2.01 1.18 .75 SELECTED BALANCE SHEET DATA (Dollars in Thousands) December 31, 1995 1994 1993 1992 1991 Cash and equivalents $ 38,389 $ 6,381 $ 3,281 $ 1,220 $ 7,509 Working capital 268,115 266,529 155,660 94,427 87,610 Total assets 421,408 473,264 290,611 194,117 77,470 Notes payable -- 22,513 10,061 6,851 759 Long-term debt 199,454 206,767 90,809 41,533 44,199 Stockholders' equity 142,221 149,090 128,363 104,600 93,412
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discusses the Company's results of operations and liquidity and capital resources. The discussion should be read in conjunction with the Year in Review and the consolidated financial statements and related notes. RESULTS OF OPERATIONS (Amounts in Thousands Except Per Share Data)
Years Ended December 31, 1995 % 1994 % 1993 % Revenues $655,138 100.0% $638,097 100.0% $420,062 100.0% Gross profit 203,397 31.0 209,395 32.8 153,851 36.6 Total operating expenses 210,330 32.1 165,779 26.0 112,315 26.7 Operating income (loss)(1) (6,933) (1.1) 43,616 6.8 41,536 9.9 Interest expense 22,861 3.5 15,052 2.4 6,252 1.5 Net income (loss) (11,635) (1.8) 17,710 2.8 22,521 5.4 Earnings (loss) per share $(1.04) $1.58 $2.01 Weighted average shares outstanding 11,171 11,209 11,206 (1) Includes a $16.0 million pre-tax restructuring charge in 1995 which reduced earnings and earnings per share by $9.9 million and $.89, respectively, and a $12.1 million non-recurring pre-tax gain in 1995 which increased earnings and earnings per share by $7.5 million and $.67, respectively.
14 2 Revenues increased 2.7% to $655.1 million in 1995 from $638.1 million in 1994 and $420.1 million in 1993. The increase in 1995 was due to unit volume growth in apparel and accessories offset by a decrease in unit volume in footwear (shoes, boots and sandals). The increase in 1994 compared to 1993 was the result of unit volume growth in both footwear and apparel and accessories. Average selling prices of footwear, apparel and accessories declined in 1995 and 1994 when compared to the preceding year. Footwear revenues were $483.1 million in 1995, $513.5 million in 1994 and $349.5 million in 1993. This represents a decrease of 5.9% in 1995 and an increase of 46.9% in 1994 from the prior year. Revenues attributable to apparel and accessories were $162.3 million in 1995, $124.0 million in 1994 and $69.4 million in 1993. This represents increases of 30.9% and 78.5% in 1995 and 1994 from the prior year, respectively. Domestic revenues amounted to $459.8 million in 1995, $469.3 million in 1994 and $297.6 million in 1993 or 70.2%, 73.5% and 70.8% of total revenues for each of the three years. Revenues for 1995, 1994 and 1993 include licensing fees and royalties of $9.7 million, $.6 million and $1.1 million, respectively. The 1995 amount includes $7.8 million related to licensing fees. The gross profit margin was 31.0% in 1995, 32.8% in 1994 and 36.6% in 1993. The decrease in the margin in 1995 was due to a change in product sales mix; although first quality inventory represented a substantial majority of total revenues, off-price sales comprised a greater percentage of total revenues in 1995 compared with 1994 and 1993. In addition, lower production levels in the Company's manufacturing facilities in 1995 had a negative effect on overhead cost absorption, which further depressed gross profit margins. The decrease in the margin from 1993 to 1994 was primarily attributable to price reductions instituted in late 1993 and early 1994 on certain core footwear, to gain market share. During the second quarter of 1995, the Company closed its manufacturing facilities in Boone, North Carolina and Mountain City, Tennessee, and reduced its manufacturing operations in the Dominican Republic and downsized its corporate office workforce due to a reorganized management structure. These actions resulted in a one-time pre-tax charge of $16.0 million and the elimination of approximately 1,800 positions. The Company has two remaining manufacturing facilities: one in Puerto Rico and one in the Dominican Republic. All other product is sourced by the Company from third-party contract manufacturers. Of the total charge for restructuring in 1995, $9.9 million relates to anticipated losses associated with the disposal of assets and is a non-cash item; $3.9 million relates to payments for contractual lease obligations and anticipated expenditures to close idle facilities; and $2.2 million relates to anticipated payments for severance and other employee liabilities. The Company has substantially completed these restructuring actions with the exception of the sale of certain manufacturing equipment which is expected to occur in 1996. Cash expenditures related to the restructuring plan of $3.4 million have been incurred as of December 31, 1995. The Company has funded the cost of the restructuring plan from internal sources and available borrowing capacity. The restructuring plan began lowering operating costs in the third quarter of 1995 and is expected to continue reducing costs going forward. Based on recent manufacturing plant production levels, annual savings are expected to approximate $7 million. To the extent that actual production or sourcing levels change, actual savings could differ from the estimated savings. Savings from the restructuring will be used for general corporate and working capital purposes. Operating expenses were $210.3 million or 32.1% of revenues in 1995, $165.8 million or 26.0% of revenues in 1994 and $112.3 million or 26.7% of revenues in 1993. Excluding the one-time pre-tax restructuring charge, operating expenses in 1995 increased $28.6 million to $194.3 million, or 29.7% of revenues in 1995. The increase in operating expenses in 1995 is principally a result of the Company's growing retail organization, the inclusion of the Company's Italian operations for a full year, and the larger core infrastructure which was designed to support higher revenue levels. 15 3 The dollar increase from 1993 to 1994 reflected the significant growth in revenues realized by the Company, its continued investment in infrastructure, growth in the Company's retail organization and the termination of the Company's distribution agreement in Italy and acquisition of certain assets of the distributor during the second quarter of 1994. Operating income, which is pre-tax earnings before interest and other expenses, was $9.1 million in 1995 (excluding the $16.0 million restructuring charge), $43.6 million in 1994 and $41.5 million in 1993. As a percent of revenues, operating income declined in 1995 to 1.4% (before the restructuring charge), compared with 6.8% and 9.9% in 1994 and 1993, respectively. Interest expense increased to $22.9 million in 1995 from $15.1 million in 1994 and $6.3 million in 1993. The increases primarily reflect higher debt levels attributable to business growth and to support higher than anticipated inventory levels. The increase in 1994 also reflects higher interest rates. In January 1995, the Company appointed Inchcape plc as the exclusive distributor of Timberland [Registered Trademark] products throughout most of the Asia/Pacific region. The agreement also included Inchcape's acquisition of the Company's Australian and New Zealand subsidiaries for a total sum of $24 million. During the third quarter of 1995, the agreement was amended to include South Korea. The agreements resulted in a non-recurring pre-tax gain of approximately $12.1 million in 1995. The gain is included in other income in the Consolidated Statements of Operations. The effective income tax rate was 38.0% in 1995, 37.0% in 1994 and 34.0% in 1993. For an analysis of the changes in the effective tax rate, see the Income Taxes note to the Company's consolidated financial statements. The Company believes that inflation has not had a significant impact on the Company's operations over the past three years. Liquidity and Capital Resources Cash generated by operations amounted to $48.1 million in 1995 while operations absorbed $88.8 million and $26.7 million in 1994 and 1993, respectively. The significant improvement in operating cash flow in 1995 is primarily attributable to the reduction in inventory levels and improvement in accounts receivable days sales outstanding. Net cash used by operations in the prior two years was primarily the result of the Company's growth, and with respect to inventory, due to higher inventory positions than anticipated. The improvement in inventory levels experienced in 1995 was due to strengthening supply chain management which enhanced reliability and the Company's ability to react faster to marketplace change. Inventory turns were 1.9 times in 1995, compared with 2.3 times in 1994 and 2.7 times in 1993. Days sales outstanding at December 31, 1995 were 49 days, compared with 64 days at December 31, 1994 and 68 days at December 31, 1993. The improvement in days sales outstanding reflects an increase in retail sales as a percent of total revenues and also an improvement in and strengthening of credit and cash collection procedures and policies. Domestic wholesale days sales outstanding were 63 days, 74 days and 77 days at the end of 1995, 1994 and 1993, respectively. Net cash provided by investing activities amounted to $11.7 million in 1995 due primarily to the $24 million of cash proceeds received from the agreement with Inchcape plc discussed above. Cash used in investing activities amounted to $45.8 million in 1994 and $23.9 million in 1993. Capital expenditures were $13.5 million in 1995, $31.5 million in 1994 and $21.6 million in 1993. A significant portion of these expenditures were for manufacturing machinery and equipment, retail store additions and information systems improvements. Cash used for investing activities in 1994 included $14.1 million to terminate the Company's distributorship agreement in Italy and to acquire certain assets of that distributor. 16 4 During 1995, cash used for financing activities amounted to $28.2 million. This amount reflects the repayment of $22.5 million in short-term debt and $8.1 million of long-term debt. During 1994, $137.7 million was provided by financing activities. In April and December 1994, the Company completed private placements of senior unsecured notes of $65 million and $106 million, respectively. The proceeds from these private placements were principally used to repay existing indebtedness. Financing activities provided $52.5 million of cash in 1993, primarily from a $50 million long-term financing. The Company uses unsecured revolving and committed lines of credit as the primary sources of financing for its seasonal and other working capital requirements. On July 21, 1995, the Company amended the revolving credit agreement, which extends through February 1997, to provide for up to $50 million in letters of credit under the overall $125 million committed facility. The Company's debt to capital ratio was 59.3% at December 31, 1995, 61.4% at December 31, 1994 and 44.2% at December 31, 1993. Management believes that the Company's capital needs for 1996 will be met through its existing credit facilities and cash flow from operations without the need for additional permanent financing. However, the Company may need to raise additional capital through equity and/or debt financing in order to finance its anticipated growth and capital requirements beyond 1996. The terms and availability of any such financing would be subject to prevailing market conditions and other factors at that time. See the Summary of Significant Accounting Policies note to the Company's consolidated financial statements for a discussion of the effects of adopting new accounting pronouncements in 1996 on the Company's financial statements. QUARTERLY MARKET INFORMATION AND RELATED MATTERS The Company's Class A Common Stock is traded on the New York Stock Exchange under the symbol TBL. There is no market for shares of the Company's Class B Common Stock; however, shares of Class B Common Stock may be converted into shares of Class A Common Stock on a one-for-one basis and shall automatically be converted upon any transfer (except for estate planning transfers and any transfer approved by the Board of Directors). The following table presents the high and low closing sales prices of the Company's Class A Common Stock for the past two years as reported by the New York Stock Exchange.
1995 1994 High Low High Low First Quarter $28 1/4 $20 1/2 $60 1/4 $32 3/8 Second Quarter 26 1/8 20 3/4 43 1/4 33 7/8 Third Quarter 35 3/4 25 1/2 46 7/8 35 7/8 Fourth Quarter 31 3/8 18 3/8 36 20 1/4
As of March 1, 1996, the number of record holders of the Company's Class A Common Stock was approximately 1,040 and the number of record holders of the Company's Class B Common Stock was eight. The closing sales price of the Company's Class A Common Stock on March 1, 1996 was $20 1/2. No cash dividends have ever been declared on either the Company's Class A or Class B Common Stock and none are contemplated in the foreseeable future. In addition, the Company's ability to pay cash dividends is limited pursuant to various loan agreements. (See Notes to the Consolidated Financial Statements.) 17 5 FINANCIAL REVIEW CONSOLIDATED BALANCE SHEETS As of December 31, 1995 and 1994
(Dollars in Thousands, Except Per Share Data) 1995 1994 ASSETS Current assets Cash and equivalents $ 38,389 $ 6,381 Accounts receivable, net of allowance for doubtful accounts of $2,658 in 1995 and $2,704 in 1994 95,786 128,435 Inventories 180,636 218,219 Prepaid expenses 12,752 13,504 Deferred and refundable income taxes 10,267 7,112 Total current assets 337,830 373,651 Property, plant and equipment 95,937 110,650 Less-accumulated depreciation and amortization (43,533) (42,417) Net property, plant and equipment 52,404 68,233 Excess of cost over fair value of net assets acquired, net 24,271 25,956 Other assets, net 6,903 5,424 Total assets $421,408 $473,264 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable $ -- $ 22,513 Current maturities of long-term obligations 7,733 8,048 Accounts payable 25,207 37,035 Accrued expenses Payroll and related 7,882 6,038 Interest and other 28,001 24,459 Income taxes payable 892 9,029 Total current liabilities 69,715 107,122 Long-term obligations, less current maturities 199,454 206,767 Deferred income taxes 10,018 10,285 Commitments and contingencies Stockholders' equity Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued - -- Class A Common Stock, $.01 par value (1 vote per share); 30,000,000 shares authorized; 8,316,554 shares issued in 1995 and 8,221,615 shares in 1994 83 82 Class B Common Stock, $.01 par value (10 votes per share) convertible into Class A shares on a one-for-one basis; 15,000,000 shares authorized; 2,735,381 shares issued in 1995 and 2,737,121 shares issued in 1994 27 27 Additional paid-in capital 59,716 57,756 Retained earnings 80,181 91,816 Cumulative translation adjustment 2,334 (471) Less treasury stock at cost, 18,369 shares in 1995 and 1994 (120) (120) Total stockholders' equity 142,221 149,090 Total liabilities and stockholders' equity $421,408 $473,264
The accompanying notes are an integral part of these consolidated financial statements. 18 6 FINANCIAL REVIEW CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1995, 1994 and 1993
(Amounts in Thousands Except Per Share Data) 1995 1994 1993 Revenues $ 655,138 $ 638,097 $ 420,062 Cost of goods sold 451,741 428,702 266,211 Gross profit 203,397 209,395 153,851 Operating expenses Selling 145,924 124,386 82,585 General and administrative 46,721 40,213 28,956 Amortization of goodwill 1,685 1,180 774 Restructuring charge 16,000 -- -- Total operating expenses 210,330 165,779 112,315 Operating income (loss) (6,933) 43,616 41,536 Other expense (income) Interest expense 22,861 15,052 6,252 Other, net (11,028) 452 1,161 Total other expense 11,833 15,504 7,413 Income (loss) before income taxes (18,766) 28,112 34,123 Provision (benefit) for income taxes (7,131) 10,402 11,602 Net income (loss) $ (11,635) $ 17,710 $ 22,521 Earnings (loss) per share $ (1.04) $ 1.58 $ 2.01 Weighted average shares outstanding and share equivalents 11,171 11,209 11,206
The accompanying notes are an integral part of these consolidated financial statements. 19 7 FINANCIAL REVIEW CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended December 31, 1995, 1994 and 1993
Class A Class B Additional Cumulative Consolidated Common Common Paid-in Retained Translation Treasury Stockholders' (Dollars in Thousands) Stock Stock Capital Earnings Adjustment Stock Equity Balance, January 1, 1993 $75 $32 $53,758 $51,585 $ (850) $ -- $104,600 Issuance of shares under employee stock option and stock purchase plans and other transactions 1 -- 980 -- -- (120) 861 Tax benefit from stock option plans -- -- 1,067 -- -- -- 1,067 Net income -- -- -- 22,521 -- -- 22,521 Translation adjustment -- -- -- -- (686) -- (686) Balance, December 31, 1993 76 32 55,805 74,106 (1,536) (120) 128,363 Issuance of shares under employee stock option and stock purchase plans and other transactions 6 (5) 1,566 -- -- -- 1,567 Tax benefit from stock option plans -- -- 385 -- -- -- 385 Net income -- -- -- 17,710 -- -- 17,710 Translation adjustment -- -- -- -- 1,065 -- 1,065 Balance, December 31, 1994 82 27 57,756 91,816 (471) (120) 149,090 Issuance of shares under employee stock option and stock purchase plans and other transactions 1 -- 1,534 -- -- -- 1,535 Tax benefit from stock option plans -- -- 426 -- -- -- 426 Net loss -- -- -- (11,635) -- -- (11,635) Translation adjustment -- -- -- -- 2,805 -- 2,805 Balance, December 31, 1995 $83 $27 $59,716 $80,181 $ 2,334 $(120) $142,221
The accompanying notes are an integral part of these consolidated financial statements. 20 8 FINANCIAL REVIEW CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1995, 1994 and 1993
(Dollars in Thousands) 1995 1994 1993 Cash flows from operating activities: Net income (loss) $ (11,635) $ 17,710 $ 22,521 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Deferred income taxes (2,560) 2,383 2,339 Depreciation and amortization 19,138 15,348 10,279 Gain on distributorship transaction (12,107) -- -- Restructuring charge 9,914 -- -- Increase (decrease) in cash from changes in working capital items, net of effects of business acquisition and dispositions: Accounts receivable 29,186 (36,614) (39,484) Inventories 31,834 (101,009) (41,560) Prepaid expenses 884 (4,995) (3,170) Accounts payable (11,967) 4,270 18,497 Accrued expenses 4,427 8,762 5,084 Income taxes (8,999) 5,381 (1,184) Net cash provided (used) by operating activities 48,115 (88,764) (26,678) Cash flows from investing activities: Proceeds from distributorship transaction 24,000 -- -- Proceeds from sale of equipment 1,756 -- -- Additions to property, plant and equipment, net (13,508) (31,452) (21,645) Acquisition of Italian distributor -- (14,086) -- Other, net (567) (269) (2,234) Net cash provided (used) by investing activities 11,681 (45,807) (23,879) Cash flows from financing activities: Net borrowings (payments) under short-term credit facilities (22,513) 12,462 3,257 Proceeds from long-term obligations 525 173,990 50,000 Payments on long-term debt and capital lease obligations (8,137) (50,682) (2,643) Issuance of common stock 1,535 1,567 981 Tax benefit from stock option plans 426 385 1,067 Purchase of treasury stock -- -- (120) Net cash provided (used) by financing activities (28,164) 137,722 52,542 Effect of exchange rate changes on cash 376 (51) 76 Net increase in cash and equivalents 32,008 3,100 2,061 Cash and equivalents at beginning of year 6,381 3,281 1,220 Cash and equivalents at end of year $ 38,389 $ 6,381 $ 3,281 Supplemental disclosures of cash ow information: Interest paid $ 22,194 $ 13,688 $ 6,020 Income taxes paid 4,428 2,648 9,346
The accompanying notes are an integral part of these consolidated financial statements. 21 9 FINANCIAL REVIEW NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation The consolidated financial statements include the accounts of The Timberland Company and its subsidiaries (the "Company"). All intercompany transactions have been eliminated in consolidation. Recognition of Revenue Revenues consist of sales to customers, license fees and royalties. Sales are recognized upon shipment of product to customers. License fees and royalties are recognized when earned. License fees and royalties in 1994 and 1993 have been reclassified from other income to revenue for consistent presentation. Translation of Foreign Currencies The Company translates financial statements denominated in foreign currency by translating balance sheet accounts at the end of period exchange rate and statement of operations accounts at the average exchange rate for the period. Translation gains and losses are recorded in stockholders' equity, and transaction gains and losses are reflected in income. Financial Instruments and Concentration of Credit Risk The Company is exposed to foreign exchange risk when the Company sells goods in local currencies through its foreign subsidiaries. It is the Company's policy to hedge a portion of this risk through forward sales of foreign currencies, thereby locking in the future exchange rate. Cash and Equivalents Cash equivalents consist of short-term, highly liquid investments which have original maturities to the Company of three months or less. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Property, Plant and Equipment Property, plant and equipment are depreciated using the straight-line method over the estimated useful lives of the assets or over the terms of the related leases, if such periods are shorter. The principal estimated useful lives are: building and improvements, 4 to 30 years; machinery and equipment, 3 to 10 years; lasts, patterns and dies, 5 years. Excess of Cost Over Fair Value of Net Assets Acquired The excess of cost over the fair value of net assets acquired is being amortized on a straight-line basis over periods of 10, 15 and 40 years. Accumulated amortization amounted to $7,503 and $5,818 at December 31, 1995 and 1994, respectively. Accrued Insurance Costs The Company is self-insured for workers' compensation, healthcare, dental and short-term disability up to certain specified limits. Expenses associated with such self-insurance programs are accrued based upon estimates of the amounts required to cover incurred incidents. 22 10 FINANCIAL REVIEW New Accounting Pronouncements In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 is required to be adopted for fiscal years beginning after December 15, 1995. The Company does not expect that the adoption of SFAS No. 121 will have a material impact on the consolidated financial statements. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires expanded disclosure of stock-based compensation arrangements with employees and encourages, but does not require, application of the "fair value" recognition provisions in the new Statement. SFAS No. 123 is required to be adopted for fiscal years beginning after December 15, 1995. The Company has not yet determined whether it will change to the recognition provisions of SFAS No. 123 and has not yet determined the effect that adopting the new Statement will have on the consolidated financial statements. Income Taxes Income taxes are determined based on the income reported in the Company's financial statements, regardless of when such taxes are payable. In addition, tax assets and liabilities are adjusted to reflect changes in U. S. and applicable foreign income tax laws when enacted. Future tax benefits, such as net operating loss carry forwards, are recognized to the extent realization of such benefits is more likely to occur than not. Accounting for Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make assumptions that affect the estimates reported in these consolidated financial statements. Actual results may differ from these estimates. Earnings Per Share Earnings per share are calculated by dividing net income for each period by the weighted average number of common shares outstanding and equivalents during each period. Fully diluted earnings per share are not materially different from primary earnings per share. 23 11 FINANCIAL REVIEW 2. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The following table illustrates the U.S. dollar equivalent, including offsetting positions, of foreign exchange contracts at December 31, 1995 and 1994, along with maturity dates, net unrealized gain (loss), and net unrealized gain (loss) deferred.
Contract Unrealized Unrealized Net Net Unrealized Amount Maturity Gross Gross Unrealized Gain (Loss) December 31, 1995 ($U.S. Equivalent) Date Gain (Loss) Gain (Loss) Deferred Pound Sterling $ 5,547 1996 $112 $ -- $ 112 $ 112 Deutsche Marks 5,892 1996 135 (55) 80 17 French Francs 3,355 1996 75 (23) 52 5 Italian Lire 13,555 1996 5 (367) (362) (236) Spanish Peseta 2,044 1996 -- (9) (9) (9) Total $30,393 $327 $(454) $(127) $(111) December 31, 1994 Pound Sterling $15,463 1995 $ 68 $(261) $(193) $(201) Deutsche Marks 18,141 1995 110 (379) (269) (130) French Francs 15,948 1995 81 (310) (229) (198) Italian Lire 12,126 1995 57 (198) (141) (121) Australian Dollar 8,810 1995 -- (31) (31) -- Spanish Peseta 8,010 1995 -- (103) (103) (103) New Zealand Dollar 1,596 1995 -- (5) (5) -- Total $80,094 $316 $(1,287) $(971) $(753)
The unrealized net loss deferred on such contracts as of December 31, 1995 and 1994 were $(111) and $(753), respectively. Unrealized gains or losses are determined based on the difference between the settlement and year end rates. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit quality financial institutions, thereby minimizing exposure to concentrations of credit risk. Credit risk with respect to trade receivables is limited due to the large number of customers comprising the Company's customer base. The Company had an allowance for uncollectible accounts receivable of $2,658 and $2,704 at December 31, 1995 and 1994, respectively. 3. RESTRUCTURING CHARGE During the second quarter of 1995, the Company closed its manufacturing facilities in Boone, North Carolina and Mountain City, Tennessee, reduced its manufacturing operations in the Dominican Republic and downsized its corporate office work force due to a reorganized management structure. These actions resulted in a one-time pre-tax charge of $16,000. The Company has two remaining manufacturing facilities: one in Puerto Rico and one in the Dominican Republic. All other product is sourced by the Company from third-party contract manufacturers. Of the total charge for restructuring, $9,914 relates to anticipated losses associated with the disposal of assets and is a non-cash item; $3,891 relates to payments for contractual lease obligations and anticipated expenditures to close idle facilities; and $2,195 relates to anticipated payments for severance and other employee liabilities. 24 12 FINANCIAL REVIEW The Company has substantially completed these restructuring actions, with the exception of the sale of certain manufacturing equipment which is expected to occur in 1996. These assets amounted to $2,097 and are included in property, plant and equipment. Cash expenditures related to the restructuring plan of $3,441 have been incurred as of December 31, 1995. The Company has funded the restructuring plan from internal sources and available borrowing capacity. 4. OTHER INCOME On January 26, 1995, the Company appointed Inchcape plc ("Inchcape") as the exclusive distributor of Timberland [Registered Trademark] products throughout most of the Asia/Pacific region. The agreement included Inchcape's acquisition of the Company's Australian and New Zealand subsidiaries for the total sum of $24,000. During the third quarter of 1995, the agreement was amended to include South Korea. The agreements resulted in a pre-tax gain of approximately $12,107. In 1994, revenues of the Company's Australian and New Zealand subsidiaries combined accounted for less than 2% of total consolidated revenues. 5. ACQUISITION OF ITALIAN DISTRIBUTOR In April 1994, the Company entered into a Distributorship Termination Agreement (the "Termination Agreement") with its Italian distributor, which terminated all distribution rights of the distributor on May 31, 1994. In accordance with the Termination Agreement, the Company also acquired certain assets of the distributor. Effective on the termination date, the Company assumed the distribution of its own products in Italy. This transaction has been accounted for as a purchase and, accordingly, the results of operations of the Company's Italian business have been included in the consolidated statements of operations from the acquisition date. The results of the Italian operations are not significant to the consolidated results of operations and, accordingly, pro forma data has been omitted. The total purchase price of $14,086 exceeded the fair value of net assets acquired, consisting primarily of inventory, by $8,979. This excess is being amortized on a straight line basis over 10 years. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows:
December 31, 1995 1994 Carrying or Carrying or Contract Amount Fair Value Contract Amount Fair Value Cash and equivalents(1) $ 38,389 $ 38,389 $ 6,381 $ 6,381 Notes payable(1) -- -- 22,513 22,513 Long-term obligations(2) 207,187 220,494 214,815 210,543 Foreign currency contracts(3) 30,393 30,520 80,094 81,065 1 The carrying amounts of cash and equivalents and notes payable approximate their fair values. 2 The fair value of the Company's long-term obligations are estimated based on current rates available to the Company as of December 31, 1995 and 1994 for debt of the same remaining maturities. 3 The fair value of foreign currency contracts are estimated by obtaining the appropriate year end rates as of December 31, 1995 and 1994, respectively.
25 13 FINANCIAL REVIEW 7. INVENTORIES Inventories consist of the following:
December 31, 1995 1994 Raw materials $ 10,374 $ 19,806 Work-in-process 5,494 13,137 Finished goods 164,768 185,276 Total $180,636 $218,219
8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
December 31, 1995 1994 Land and improvements $ 649 $ 649 Building and improvements 31,534 29,739 Machinery and equipment 52,788 65,252 Lasts, patterns and dies 8,869 15,010 Assets held for sale 2,097 -- Total $ 95,937 $110,650
Property, plant and equipment are stated at cost, except for assets held for sale which are stated at net realizable value. 9. INCOME TAXES The components of the provision for income taxes are as follows:
Years Ended December 31, 1995 1994 1993 Current Deferred Current Deferred Current Deferred Federal $(5,255) $(3,920) $5,713 $1,548 $6,687 $ 935 State (228) 1,046 1,984 713 2,131 1,233 Puerto Rico 195 314 289 122 416 171 Foreign 717 -- 33 -- 29 -- Total $(4,571) $(2,560) $8,019 $2,383 $9,263 $2,339
The deferred tax provision consists of the following:
Years Ended December 31, 1995 1994 1993 (Increase) decrease in reserves not currently deductible $(6,058) $(1,111) $ 719 Tax depreciation over (under) book depreciation and amortization (900) 2,624 177 Puerto Rico tollgate taxes 314 122 172 Undistributed foreign earnings 4,159 849 1,355 Other, net (75) (101) (84) Total $(2,560) $ 2,383 $2,339
26 14 FINANCIAL REVIEW The provision for income taxes differs from the amount computed using the statutory federal income tax rate of 35% due to the following:
Years Ended December 31, 1995 1994 1993 Federal income tax at statutory rate $(6,568) (35.0)% $ 9,839 35.0% $11,943 35.0% Federal tax exempt operations in Puerto Rico (1,242) (6.6) (1,834) (6.5) (2,562) (7.5) State taxes, net of applicable federal benefit (207) (1.1) 1,753 6.2 2,187 6.4 Other, net 886 4.7 644 2.3 34 .1 Total $(7,131) (38.0)% $10,402 37.0 $11,602 34.0%
The tax effects of temporary differences and carry forwards that give rise to significant portions of deferred tax assets and liabilities at December 31, consist of the following: 1995 1994 Assets Liabilities Assets Liabilities Current: Inventories $ 2,446 $ -- $1,479 $ -- Receivable allowances 3,589 -- 2,216 -- Intercompany profit elimination 1,070 -- 2,355 -- Other 2,300 -- 1,062 -- Total $ 9,405 $ -- $7,112 $ -- Non-current: Accelerated depreciation and amortization $ -- $ (2,670) $ -- $ (3,570) Restructuring reserves 2,555 -- -- -- Puerto Rico tollgate taxes -- (1,665) -- (1,351) Undistributed foreign earnings -- (8,238) -- (5,364) Net operating loss carry forwards 1,020 -- 2,718 -- Less valuation allowance (1,020) -- (2,718) -- Total $ 2,555 $(12,573) $ -- $(10,285)
The valuation allowance at December 31, 1995 of $1,020 includes $213 which arose during the current year. The valuation allowance relates to foreign net operating loss carry forwards that may not be realized. The Company's consolidated income (loss) before income taxes included earnings from its subsidiary in Puerto Rico, which are substantially exempt from Puerto Rican and federal income taxes under an exemption which expires in 2002. However, if the earnings were remitted to the Company, they would be subject to a Puerto Rican tollgate tax not to exceed 10%. Deferred tollgate taxes have been provided on all of the accumulated earnings of the subsidiary in Puerto Rico. Deferred income taxes are also provided on the undistributed earnings of the Company's foreign subsidiaries. 27 15 FINANCIAL REVIEW Losses before income taxes from foreign operations were $(3,063), $(1,285) and $(835) for the years ended December 31, 1995, 1994 and 1993, respectively. At December 31, 1995, the Company had $2,685 of foreign operating loss carry forwards available to offset future foreign taxable income. Of these operating loss carry forwards, $105 will expire in 1997, $252 in 1998, $447 in 1999, $221 in 2000 and $1,660 thereafter. 10. NOTES PAYABLE The Company has an unsecured committed revolving credit agreement (the "Credit Agreement") with a group of banks through February 1997, that provides for up to $50,000 in letters of credit under an overall $125,000 committed facility, subject to a borrowing base formula. At December 31, 1995, the amount available under this formula was approximately $42,087, of which none was outstanding at that date. Under the terms of the Credit Agreement, the Company may borrow at interest rates which are based upon the lender's cost of funds (5.625% at December 31, 1995). The Credit Agreement provides for a facility fee of 3/8% per annum on the daily average aggregate amount of the commitment and places limitations on the payment of dividends and the incurrence of additional debt, and also contains certain other financial and operational covenants. Additionally, the Company had uncommitted lines of credit available from certain banks totaling $19,000 at December 31, 1995, of which none was outstanding at year end. Borrowings under these lines are at prevailing money market rates (6.25% at December 31, 1995). These arrangements may be terminated at any time at the option of the banks or the Company. The balance outstanding under all short-term borrowing arrangements was $22,513 at December 31, 1994; none were outstanding at December 31, 1995. The maximum short-term borrowings at any month end were $83,000, $119,200 and $52,679 during 1995, 1994 and 1993, respectively. Average borrowings under all short-term credit arrangements were $46,270 in 1995, $65,790 in 1994, and $37,596 in 1993. The weighted average interest rates were 6.55%, 5.38% and 4.16% in 1995, 1994 and 1993, respectively. 11. LONG-TERM OBLIGATIONS Long-term obligations consist of the following:
December 31, 1995 1994 Senior Notes-December 1994 $106,000 $106,000 Senior Notes-April 1994 65,000 65,000 Senior Notes-December 1989 28,000 35,000 Industrial revenue bonds 5,345 5,345 Other 2,842 3,470 Total long-term debt 207,187 214,815 Less-current maturities (7,733) (8,048) Long-term obligations $199,454 $206,767
28 16 FINANCIAL REVIEW The Company's unsecured senior notes issued in December 1994 in the amount of $106,000 bear interest at a rate of 8.94% and mature on December 15, 2001. The unsecured notes issued in April 1994 in the amount of $65,000 bear interest at a rate of 7.16% and mature on April 15, 2000. Both notes place limitations on the payment of dividends and the incurrence of additional debt, and also require maintenance of certain operational and financial covenants. The unsecured senior notes issued in December 1989 in the amount of $35,000 bear interest at a rate of 9.70% and mature on December 1, 1999. Commencing December 1, 1995, annual redemption payments of $7,000 are required until maturity. These notes place limitations on the payment of cash dividends and contain other financial and operational covenants. The industrial revenue bonds bear interest at 6.20% through November 30, 1999, at which time the rate will be reset for another five-year period. The bonds mature in 2014. According to the terms of the bonds, at every five-year anniversary date, beginning in 1989 and continuing through to the maturity date, the Company is required to repurchase any bonds tendered by the bondholders at face value. The next anniversary date will occur in November 1999 prior to the 1999 rate reset. The bonds are collateralized by a mortgage on certain real estate and equipment, and contain financial and operational covenants and limitations similar to the Credit Agreement described in note 10. Additionally, the Company has obtained an irrevocable standby letter of credit which secures the outstanding principal of the bonds through 1999. The Company's long-term obligations at December 31, 1995 are scheduled to become due as follows:
1996 $ 7,733 1997 7,778 1998 7,826 1999 7,505 2000 65,000 Thereafter 111,345 Total $207,187
12. LEASE COMMITMENTS The Company leases its corporate headquarters facility, manufacturing facilities, retail stores, showrooms and certain equipment under noncancellable operating leases expiring at various dates through 2015. The approximate minimum rental commitments under all noncancellable operating leases as of December 31, 1995, are as follows: 1996 $14,237 1997 13,359 1998 12,122 1999 9,449 2000 7,413 Thereafter 33,246 Total $89,826
29 17 FINANCIAL REVIEW Most of the leases for retail space provide for renewal options, contain normal escalation clauses and require the Company to pay real estate taxes, maintenance and other expenses. The aggregate base rent obligation for a lease is expensed on a straight-line basis over the term of the lease. Rental expense for all operating leases was $16,196, $9,726 and $7,490 for the years ended December 31, 1995, 1994 and 1993, respectively. 13. INDUSTRY SEGMENT AND GEOGRAPHICAL AREA INFORMATION The Company operates in a single industry segment which includes the designing, engineering and marketing of footwear, apparel and accessories. These products are sold primarily through better-grade department stores, other retail stores and specialty stores devoted exclusively to Timberland [Registered Trademark] products in the United States and in more than 60 countries worldwide. The following summarizes the Company's operations in different geographical areas for the years ended December 31, 1995, 1994 and 1993, respectively.
Adjustments United Other and 1995 States Europe Foreign Eliminations Consolidated Revenues from unaffiliated customers $498,144 $156,098 $ 896 $ -- $655,138 Transfers between geographic areas 56,149 -- 25,865 (82,014) -- Geographic revenues 554,293 156,098 26,761 (82,014) 655,138 Operating income (loss) (16,207) 6,314 220 2,740 (6,933) Identifiable assets at December 31, 1995 397,643 91,822 7,095 (75,152) 421,408 1994 Revenues from unaffiliated customers $505,182 $123,304 $ 9,611 $ -- $638,097 Transfers between geographic areas 78,195 -- 34,530 (112,725) -- Geographic revenues 583,377 123,304 44,141 (112,725) 638,097 Operating income 41,783 3,008 1,615 (2,790) 43,616 Identifiable assets at December 31, 1994 468,637 132,199 22,140 (149,712) 473,264 1993 Revenues from unaffiliated customers $341,955 $ 71,927 $ 6,180 $ -- $420,062 Transfers between geographic areas 42,388 -- 20,872 (63,260) -- Geographic revenues 384,343 71,927 27,052 (63,260) 420,062 Operating income 36,426 709 1,953 2,448 41,536 Identifiable assets at December 31, 1993 301,949 53,888 15,336 (80,562) 290,611
Export sales from the United States to unaffiliated customers, principally to distributors, amounted to 6.1% in 1995 and 1994 and 10.1% in 1993 of consolidated revenues. 30 18 FINANCIAL REVIEW 14. STOCKHOLDERS' EQUITY The Company's Class A and Class B Common Stock are identical in all respects except that shares of Class A Common Stock carry one vote per share while shares of Class B Common Stock carry ten votes per share. In addition, holders of Class A Common Stock have the right, voting separately as a class, to elect 25% of the directors of the Company and vote together with the holders of Class B Common Stock for the remaining directors. On February 14, 1995, 1,740 shares of Class B Common Stock were converted to Class A Common Stock. On December 29, 1994, a total of 500,477 shares of Class B Common Stock were converted to Class A Common Stock. 15. STOCK AND EMPLOYEE BENEFIT PLANS Under its 1987 Stock Option Plan (the "1987 Plan"), as amended, the Company has reserved 2,100,000 shares of Class A Common Stock for the granting of stock options to its employees. Pursuant to the terms of the 1987 Plan, grants may be made by the Board of Directors from time to time, but no grant shall be made ten years after the adoption of the 1987 Plan. The option price per share shall not be less than the fair market value of stock at the time such option is granted in the case of options intended to qualify as "incentive" stock options under the Internal Revenue Code of 1986, as amended, and shall not be less than 50% of such fair market value in the case of "non-qualified" stock options for employees who are subject to Section 16 of the Securities Exchange Act of 1934, as amended. To date, all stock options have been granted at fair market value. Stock options which have been granted to date under the 1987 Plan become exercisable in equal installments over four years beginning one year after the grant date, except for stock options granted in March 1995 to certain employees in lieu of cash bonus awards for 1994, which fully vest after one year and which expire six months after the date of full vesting. In addition to the 1987 Plan, the Company has, on occasion, granted "non-qualified" stock options at fair market value to non-employees to purchase Class A Common Stock. On December 19, 1995, the Board of Directors approved a plan to reprice outstanding stock options which have been granted under the 1987 Plan. Under the repricing plan, employees could elect to exchange some or all of their stock options issued under the 1987 Plan for new stock options repriced at an exercise price of $20.50, the fair market value on December 19, 1995, covering a reduced number of shares based on a formula. Repriced stock options will expire on the same date as the original stock options, and will have an extended vesting period of one year. Any repriced stock options exercisable as of December 19, 1995, may not be exercised prior to December 19, 1996. Stock options to purchase up to 609,050 shares (when originally granted) at a per share exercise price of $21.38-$83.25 were repriced, resulting in stock options to purchase up to 322,120 shares being granted. Under its 1991 Stock Option Plan for Non-Employee Directors (the "1991 Plan"), the Company has reserved 100,000 shares of Class A Common Stock for the granting of stock options to eligible non-employee directors of the Company. Under the terms of the 1991 Plan, stock option grants are awarded on a predetermined formula basis, and no grant can be made after November 15, 2001. The exercise price of stock options granted under the 1991 Plan shall be the fair market value of the stock on the date of grant, and the stock options become exercisable in equal installments over four years beginning one year after the grant date. Options under the 1987 Plan and the 1991 Plan generally expire 10 years after the date of grant. Options for 379,881 and 292,344 shares were exercisable under all option arrangements at December 31, 1995 and 1994, respectively. Under the existing Plans there were 1,053,031 and 253,112 shares available for future grants at December 31, 1995 and 1994, respectively. 31 19 The following summarizes transactions under all stock option arrangements for the years ended December 31, 1995, 1994 and 1993:
Number Per Share of Shares Option Price January 1, 1993 442,533 $ 6.38-18.88 Granted 434,655 26.00-83.25 Exercised (56,113) 6.38-15.25 Cancelled (66,389) 6.38-56.00 December 31, 1993 754,686 6.38-83.25 Granted 693,125 21.38-46.63 Exercised (59,551) 6.38-32.00 Cancelled (127,621) 6.38-83.25 December 31, 1994 1,260,639 6.38-83.25 Granted 531,105 19.50-31.13 Exercised (59,784) 6.38-26.00 Cancelled (830,524) 8.75-83.25 December 31, 1995 901,436 6.38-83.25
Pursuant to the terms of its 1991 Employee Stock Purchase Plan, as amended on May 18, 1995 (the "Plan"), the Company is authorized to issue up to an aggregate of 200,000 shares of its Class A Common Stock to eligible employees electing to participate in the Plan. Eligible employees may contribute, through payroll withholdings, from 2% to 10% of their regular base compensation during six-month participation periods beginning January 1 and July 1 of each year. At the end of each participation period, the accumulated deductions are applied toward the purchase of Class A Common Stock at a price equal to 85% of the market price at the beginning or end of the participation period, whichever is lower. Employee purchases amounted to 33,030 shares in 1995, 31,016 shares in 1994 and 24,340 shares in 1993 at prices ranging from $16.47 to $34.43. At December 31, 1995, a total of 85,468 shares were available for future purchases. The Company maintains a contributory 401(k) Retirement Earnings Plan (the "401(k) Plan") for eligible salaried and hourly employees who are at least 21 years of age with six or more months of service. Under the provisions of the 401(k) Plan, employees may contribute between 2% and 10% of their base salary up to certain limits. The 401(k) Plan provides for Company matching contributions not to exceed 2% of the employee's compensation or, if less, 50% of the employee's contribution. Vesting of the Company contribution begins at 25% after one year of service and increases by 25% each year until full vesting occurs. The Company's contribution expense was $499 in 1995, $334 in 1994 and $252 in 1993. The Company maintains a non-contributory profit sharing plan for eligible hourly employees not covered by the 401(k) Plan who are at least 21 years of age with one or more years of service. Contributions are at the discretion of the Company and fully vest to the employee upon completing three years of service. The Company's contribution expense was $175 in 1995, $360 in 1994 and $320 in 1993. 32 20 16. LITIGATION The Company is involved in litigation and various legal matters, including U.S. Customs claims, which have arisen in the ordinary course of business. Management believes that the ultimate resolution of these matters will not have a material effect on the Company's consolidated financial statements. The Company and two of its officers and directors have been named as defendants in two actions led in the United States District Court for the District of New Hampshire, one filed by Jerrold Schaffer on December 12, 1994, and the other filed by Gershon Kreuser on January 4, 1995. On April 24, 1995, the District Court granted plaintiffs' motion, assented to by defendants, to consolidate the two actions. On June 23, 1995, plaintiffs filed a consolidated amended complaint (the "Amended Complaint") with the District Court. The Amended Complaint alleges that defendants violated federal securities laws by making material misstatements and omissions in certain of the Company's public filings and statements in 1994. Specifically, the Amended Complaint alleges that such statements and omissions had the effect of artificially inflating the market price for the Company's Class A Common Stock until the disclosure by the Company on December 9, 1994 of its expectation that results for the fourth quarter were not likely to meet analysts' anticipated levels. Damages are unspecified. The Amended Complaint seeks class action status for all purchasers of the Company's Class A Common Stock between May 12, 1994 and December 9, 1994. Currently pending before the District Court are plaintiffs' motion for class certification, which defendants have opposed, and defendants' motion to dismiss the Amended Complaint, which plaintiffs have opposed. Discovery is continuing during the pendency of these motions. Management believes this action is without merit and intends to defend it vigorously. Accordingly, at this time, management does not expect the outcome of such litigation to have a material adverse effect on the Company's consolidated financial statements. 33 21 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the quarterly results of operations for the years ended December 31, 1995, 1994 and 1993.
1995 Quarter Ended March 31(1) June 30(2) September 29(1) December 31 Revenues $141,583 $125,143 $212,597 $175,815 Gross profit 44,972 36,079 63,556 58,790 Net income (loss) 919 (20,381) 7,068 759 Earnings (loss) per share .08 (1.83) .63 .07 1994 Quarter Ended April 1 July 1 September 30 December 31 Revenues $108,318 $127,254 $222,188 $180,337 Gross profit 32,716 40,459 76,520 59,700 Net income (loss) (1,619) 145 16,329 2,855 Earnings (loss) per share (.14) .01 1.45 .26 1993 Quarter Ended March 31 June 30 October 1 December 31 Revenues $ 71,047 $ 85,003 $140,513 $123,499 Gross profit 27,908 30,740 50,098 45,105 Net income 2,332 1,912 11,241 7,036 Earnings per share .21 .17 1.00 .62 1 Includes non-recurring pre-tax gains of $7.4 million and $4.7 million in the first quarter and third quarter of 1995, respectively. 2 Includes a $16.0 million pre-tax restructuring charge in the second quarter of 1995.
34 22 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of The Timberland Company: We have audited the accompanying consolidated balance sheets of The Timberland Company and subsidiaries as of December 31, 1995 and 1994 and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the companies at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Boston, Massachusetts February 7, 1996 35 23 CORPORATE INFORMATION DIRECTORS CORPORATE COUNSEL Ropes & Gray Robert M. Agate Boston, Massachusetts Senior Executive Vice President and Chief Financial Officer Colgate-Palmolive Company INDEPENDENT ACCOUNTANTS Deloitte & Touche LLP John F. Brennan Boston, Massachusetts Dean of the School of Management Suffolk University ANNUAL MEETING OF SHAREHOLDERS Jeffrey B. Swartz May 16, 1996 at 9:30 a.m. Executive Vice President and The Timberland Company Headquarters Chief Operating Officer 200 Domain Drive Stratham, New Hampshire Sidney W. Swartz Chairman, President and Chief Executive Officer FORM 10-K This report is available at no charge upon Abraham Zaleznik written request from the Director of Investor Professor Emeritus Relations, The Timberland Company, 200 Harvard Business School Domain Drive, Stratham, New Hampshire 03885, telephone 603-772-9500. CORPORATE OFFICERS Sidney W. Swartz CLASS A COMMON STOCK LISTING Chairman, President and New York Stock Exchange: TBL Chief Executive Officer Jeffrey B. Swartz STOCK CERTIFICATES, NAME CHANGES OR TRANSFERS Executive Vice President and The First National Bank of Boston Chief Operating Officer c/o Boston EquiServe Mail Stop 45-01-05 Keith D. Monda P.O. Box 644 Senior Vice President-Finance and Boston, Massachusetts 02102-0644 Administration and Chief Financial Officer 617-575-3120 Gregory W. VanWormer Senior Vice President-General Manager Apparel/Retail Dennis W. Hagele Vice President-Finance and Corporate Controller (Chief Accounting Officer) Jane E. Owens Vice President and General Counsel and Assistant Secretary Carden N. Welsh Treasurer John E. Beard Secretary Partner, Ropes & Gray Timberland, [LOGO], Active Comfort Technology, ACT, and Treeline are trademarks or registered trademarks of The Timberland Company. [COPYRIGHT] The Timberland Company 1996. All Rights Reserved.
36 EX-21 5 SUBSIDIARIES OF TIMBERLAND COMPANY 1 EXHIBIT 21 NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION THE OUTDOOR FOOTWEAR COMPANY DELAWARE THE TIMBERLAND FINANCE COMPANY DELAWARE THE TIMBERLAND WORLD TRADING COMPANY DELAWARE TIMBERLAND EUROPE, INC. DELAWARE TIMBERLAND INTERNATIONAL SALES CORPORATION U.S. VIRGIN ISLANDS TIMBERLAND DIRECT SALES, INC. DELAWARE TIMBERLAND RETAIL, INC. DELAWARE TIMBERLAND MANUFACTURING COMPANY DELAWARE TIMBERLAND AVIATION, INC. DELAWARE TIMBERLAND SCANDINAVIA, INC. DELAWARE TIMBERLAND INTERNATIONAL, INC. DELAWARE TIMBERLAND S.A.S. FRANCE THE TIMBERLAND WORLD TRADING GMBH GERMANY TIMBERLAND (U.K.) LIMITED UNITED KINGDOM TIMBERLAND GMBH AUSTRIA TIMBERLAND ESPANA, S.A. SPAIN THE RECREATIONAL FOOTWEAR COMPANY (DOMINICANA), S.A. DOMINICAN REPUBLIC COMPONENT FOOTWEAR DOMINICANA, S.A. DOMINICAN REPUBLIC TIMBERLAND FOOTWEAR & CLOTHING COMPANY INC. LES VETEMENTS & CHAUSSURES TIMBERLAND INC. CANADA THE RECREATIONAL FOOTWEAR COMPANY GRAND CAYMAN ISLANDS TIMBERLAND NETHERLANDS HOLDING B.V. THE NETHERLANDS EX-23 6 CONSENT OF DELOITTE & TOUCHE 1 Exhibit 23 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statement Nos.33-60457, 33-60459, 33-67128, 33-56913, 33-50998, 33-17552, 33-41660 and 33-19183 of The Timberland Company on Forms S-8 and Registration Statement No.33-56921 on Form S-3 of our reports dated February 7, 1996, appearing in and incorporated by reference in this Annual Report on Form 10-K of The Timberland Company for the year ended December 31, 1995. DELOITTE & TOUCHE LLP Boston, Massachusetts March 27, 1996 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 12-MOS DEC-31-1995 JAN-01-1996 DEC-31-1995 1 38,389 0 98,444 2,658 180,636 337,830 95,937 43,533 421,408 69,715 199,454 110 0 0 142,111 421,408 655,138 655,138 451,741 451,741 17,685 3,697 22,861 (18,766) (7,131) (11,635) 0 0 0 (11,635) (1.04) 0
EX-99 8 CAUTIONARY STATEMENTS 1 Exhibit 99 CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Timberland Company (the "Company") wishes to take advantage of The Private Securities Litigation Reform Act of 1995, which provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information. Prospective information is based on management's then current expectations or forecasts. Such information is subject to the risk that such expectations or forecasts, or the assumptions used in making such estimates or forecasts, may become inaccurate. The following discussion identifies important factors that could affect the Company's actual results and could cause such results to differ materially from those contained in forward-looking statements made by or on behalf of the Company: DEPENDENCE ON SALES FORECASTS. The Company's investments in infrastructure and product are based on sales forecasts and are necessarily made in advance of actual sales. The markets in which the Company does business are highly competitive, and the Company's business is affected by a variety of factors, including brand awareness, changing consumer preferences, fashion trends, retail market conditions, weather conditions and economic and other factors. One of management's principal challenges is to improve its ability to predict these factors, in order to enable the Company to better match what it produces and sells. In addition, the Company's rapid growth over the years has created the need to increase these investments in infrastructure and product and to enhance the Company's operational systems. To the extent sales forecasts are not achieved, these investments would represent a higher percentage of net revenues, and the Company would continue to experience high inventory levels and associated carrying costs, all of which could adversely affect the Company's financial performance. CONSUMER ACCEPTANCE OF NEW AND EXPANDED PRODUCT OFFERINGS. In 1996, the Company will offer a record number of new footwear products, an expanded men's apparel collection and a new line of performance apparel. The Company's new marketing strategy is based on merchandising Timberland[R] products within the dress casual, rugged casual and performance categories. The success of these products and marketing strategy will depend on a favorable reception by the Company's wholesale customers and consumers at retail. The Company's expanded men's dress casual footwear product line and its more fashion-focused women's footwear product line are also more susceptible to changing fashion trends and consumer preferences than are the Company's other product lines. In addition, any delays in production or delivery of such new products could affect the sales of such products. CONSUMER TRENDS AND RETAIL MARKET CONDITIONS. Sales of Timberland products are subject to consumer trends and economic and other factors affecting the retail market. For example, the trends in 1995 of decreased consumer spending, a shift towards discount retailers and continued softness in the retail market, if they continue, could adversely affect the Company's sales. In addition, warmer than anticipated weather conditions have, in past fall/winter selling seasons, reduced sales as a result of decreased consumer 2 demand at retail for the Company's higher margin products. Such conditions could adversely affect the Company's sales in the future, especially as the Company's business shifts towards "at-once" orders being adopted by many retailers. DEPENDENCE UPON INDEPENDENT MANUFACTURERS. In 1995, the Company downsized and restructured its own manufacturing facilities and increased its use of independent high quality manufacturers. During 1995, approximately 40% of the unit volume of the Company's footwear products was manufactured by the Company, compared to approximately 60% during 1994. The remainder of the Company's footwear products and all of its apparel and accessories were produced by independent manufacturers in Asia, Europe and the Americas. (See the "International" paragraph below for a discussion of the risks of doing business abroad to which the Company may be subject.) The Company believes that the shift towards sourcing product from independent manufacturers will reduce manufacturing overhead and product costs, increase product quality and increase the Company's flexibility to meet changing consumer demand for particular product lines. However, the success of these measures depends on the ability of the Company's independent manufacturers to provide high quality product at lower cost and to do so with rapid turn-around times. There can be no assurance that the Company will be able to maintain current relationships or locate additional manufacturers who can meet the Company's requirements. MANUFACTURING. The Company currently plans to retain its internal manufacturing capability in order to continue benefiting from expertise the Company has gained with respect to footwear manufacturing methods and from the research and development activities conducted at its manufacturing facilities. The Company continues to evaluate its manufacturing facilities and independent manufacturing alternatives in order to determine the appropriate size and scope of its manufacturing facilities. There can be no assurance that the costs of products that continue to be manufactured by the Company can remain competitive with sourced products. GROWING RETAIL ORGANIZATION. In 1986, the Company opened the first Timberland[R] store devoted exclusively to Timberland[R] products. At the end of 1995, the Company operated 29 specialty stores and 33 factory outlet stores worldwide, and revenues from these stores represented 19.6% of the Company's net revenues for 1995. The Company has made a significant capital investment in opening these stores and incurs significant expenditures in operating these stores. The performance of the Company's retail organization is subject to the same retail market conditions as the Company's wholesale customers described above. The Company's ability to recover the investment in and expenditures of its retail organization, particularly its specialty stores, could be adversely affected if sales at its retail stores are lower than anticipated. -2- 3 In 1995, the Company's gross profit margin was reduced, due, in part, to the greater percentage of revenues represented by off-price sales than in previous years. Although the Company believes its factory outlet stores enable the Company to control the sale of factory-second and close-out products and maximize the return associated with such sales, the Company's gross profit margin could be adversely affected if the off-price sales continue to remain relatively high or increase as a percentage of revenues. LICENSING. Since late 1994, the Company has entered into several licensing agreements which enable the Company to expand the Timberland[R] brand to product categories and geographic territories in which the Company has not had an appreciable presence. The rights granted under these agreements are typically exclusive, and the Company may not terminate these agreements at will, although the Company has reserved its right to terminate these agreements for cause. The success of the Timberland brand in these products or territories will, therefore, largely depend on the efforts of its licensees. Additionally, these licensing arrangements are too new to evaluate. Most of the products to be manufactured under the Company's existing product licensing agreements will not be available at retail until at least late 1996, and the Company's territorial licensing agreement covering parts of South America was signed in late 1995. Accordingly, the performance of the licensees under these agreements has not yet been fully tested. The Company is pursuing additional licensing opportunities. There can be no assurance that the Company will be able to locate licensees and negotiate acceptable terms with licensees for additional products and territories. PRICING OF PRODUCTS. In late 1993 and early 1994, the Company instituted price reductions on certain core footwear products, and the average selling prices of the Company's footwear, apparel and accessories products declined in 1994 and 1995. The prices the Company is able to obtain for its new and expanded product offerings, and Company's ability to increase prices of its other products, will depend upon consumer acceptance of such prices, as well as competitive and other market factors. COMPETITION. The Company markets its products in highly competitive environments. Many of the Company's competitors are larger and have substantially greater resources than the Company for marketing, research and development and other purposes. These competitors include athletic footwear companies and private labels established by retailers. LIMITED MARKETING FOCUS. The Company's marketing strategy is based on increasing consumer awareness and acceptance of the Timberland brand. To the extent the Company's marketing efforts are not effective, demand for Timberland[R] products may be adversely affected. LIQUIDITY AND CAPITAL RESOURCES. Management believes that the Company's capital needs for 1996 can be met through its existing credit facilities and cash flow from operations, without the need for additional permanent financing. However, the Company may need to raise additional capital in the future in order to finance its -3- 4 anticipated growth and capital requirements beyond 1996. In addition, the Company's revolving credit facility expires in February 1997. The terms and availability of any such additional or replacement financing would be subject to prevailing market conditions and other factors at that time. The Company's revolving credit facility and senior notes place limitations on the payment of cash dividends and contain other financial and operational covenants with which the Company must comply. If the Company does not comply with such covenants, the Company's ability to use such credit facilities or to obtain other financing could be adversely affected. At December 31, 1995, the Company's debt to equity ratio was 59.3%. Therefore, the Company is subject to the risks associated with relatively high levels of interest expense and financial leverage. MANAGEMENT AND CONTROL. Sidney W. Swartz, the Chairman, President and Chief Executive Officer of the Company, and various trusts established for the benefit of his family or for charitable purposes, hold approximately 88% of the combined voting power of the Company's capital stock in the aggregate, enabling Sidney Swartz to control the Company's affairs and to influence the election of the two directors entitled to be elected by the holders of Class A Common Stock voting separately as a class. Jeffrey B. Swartz, Executive Vice President and Chief Operating Officer of the Company, is the son of Sidney Swartz. The loss or retirement of these and other key executives could adversely affect the Company. INTERNATIONAL. The Company manufactures and sources a majority of its products outside the United States and sells its products in more than 60 countries worldwide through its stores, operating divisions, distributors and commission agents. Accordingly, the Company is subject to the risks of doing business abroad, including, among other risks, import restrictions, anti-dumping investigations, political or labor disturbances, expropriation and acts of war. In addition, a significant portion of the Company's revenues and expenses are subject to foreign exchange fluctuations. RAW MATERIALS. The Company depends on several key sources for leather, its principal raw material, and other proprietary materials used in its products. The Company could be adversely affected by unanticipated price increases or shortages of such materials. INTELLECTUAL PROPERTY. The Company may be required to spend significant amounts to protect and defend its trade name, trademarks, patents, designs and other proprietary rights. The Company is also susceptible to injury from parallel trade and counterfeiting of its products. LITIGATION. The Company is involved in various litigation and legal matters which have arisen and will arise in the ordinary course of business. The costs of prosecuting or defending these matters or an unfavorable outcome in these matters could adversely affect the Company's operating results. -4- 5 ACCOUNTING STANDARDS. Changes in the accounting standards promulgated by the Financial Accounting Standards Board or other authoritative bodies, including currently proposed changes in accounting for the impairment of long-term assets and in accounting for stock-based compensation arrangements, could have an adverse affect on the Company's future reported operating results. ENVIRONMENTAL AND OTHER REGULATION. The Company is subject to various environmental and other laws and regulations, which may change periodically. Compliance with such laws or changes therein could have a negative impact on the Company's future reported operating results. -5- -----END PRIVACY-ENHANCED MESSAGE-----