Hansen Plastics Corp., a 20-press custom injection molder, marked two milestones in 1998: In the spring, the company earned its ISO-QS certification and in September completed its employee stock ownership plan.
Though the Elgin, Ill., plant's achievements may not seem related, President David Watermann said the company could not have received its certification as quickly as it did without the ESOP in place.
``The auditors were amazed that our company was able to have all of the requirements in place and operating within a short six-month period,'' Watermann said.
The company applied in September 1997 and was recommended for certification after a two-day audit by QMI Corp. in March.
He credits the teamwork to the employee ownership plan, set up in 1991 by Elmer Hansen, who founded the company in 1971 and was looking for an exit strategy for his retirement.
Hansen opted for a program that enabled his employees to complete the buyout without using even a dime of their own money. The first loan, for 30 percent of the company's shares, was taken in 1991 and repaid using a pretax portion of the company's profit in 1994.
Almost immediately, Waterman said, the program generated a ``tremendous amount of pride'' in the employee owners, who realized ``they had to work hard and continue to work hard'' to ensure the company's success. They became more aware of the need to reduce waste and improve the quality of their products, he added.
The change in attitude helped improve sales and growth, which has resulted in a $10 per-share increase in the value of the company's stock, he said.
In 1994, the employees used another government loan to buy 35 percent more of the stock. That loan was paid off this year, and the final loan was taken in September to buy the remaining 35 percent of the firm's stock.
Upon paying off each loan, the shares are distributed among eligible employees based on seniority. Watermann said about 36 of the company's 42 employees are eligible to participate in the ESOP, which is set up as a retirement plan.
Watermann said the third loan will be repaid in about four years. Because the company is privately held, he would not disclose the total amount of the stock purchases.
For an ESOP to work, Watermann said, a company must be profitable and the owner must have the right managers in place to ensure the firm will remain profitable once he or she no longer is involved in operations.
A fully leveraged employee buyout has significant tax advantages for the owner, according to Steve Clem, program coordinator for the Ohio Employee Owner Center at Kent State University in Kent, Ohio.
Watermann said Elmer Hansen opted for the 1042 rollover, which means capital-gains taxes on the money he received from the buyout are deferred.
To be eligible for the deferral, at least 30 percent of the stock must be made available in the first phase of the buyout and the owner must reinvest the money in stocks of domestic companies, Clem said.
The capital-gains taxes will be deferred until the owner begins to draw on the money made from the sale. If the owner dies without drawing from the funds, his heirs are not required to pay the capital-gains taxes, Clem said.
Hansen Plastics' plant operates 19 horizontal injection molding machines, with clamping forces of 40-200 tons, and one 90-ton rotary press for insert molding. The company produces small thermoplastic parts for the automotive, telecommunications, electrical, and building and construction industries, among others.