-----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, O1irQXsDZFZ5BmNkkPg9ZWMfU8xULPzjtWOWKCUrmpXFUJQFfPs95ZGNARSdQeMO ewcgEF2lzpKb0Hqi/vtnSA== 0000898430-99-004459.txt : 19991208 0000898430-99-004459.hdr.sgml : 19991208 ACCESSION NUMBER: 0000898430-99-004459 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PACIFIC CORP CENTRAL INDEX KEY: 0000350832 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 596490478 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08137 FILM NUMBER: 99770218 BUSINESS ADDRESS: STREET 1: 3770 HOWARD HUGHES PKWY STE 300 CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027352200 MAIL ADDRESS: STREET 1: 3770 HOWARD HUGHES PKWY STE 300 STREET 2: 3770 HOWARD HUGHES PKWY STE 300 CITY: LAS VEGAS STATE: NV ZIP: 89109 10-K 1 ANNUAL REPORT ON FORM 10-K 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 September 30, 1999 Commission File Number 1-8137 AMERICAN PACIFIC CORPORATION (Exact name of registrant as specified in its charter) Delaware 59-6490478 (State or other jurisdiction (IRS Employer of incorporation) Identification No.) 3770 Howard Hughes Parkway, Suite 300, Las Vegas, Nevada 89109 (Address of principal executive office) (ZipCode) (702) 735-2200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.10 ar value) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 1, 1999, was approximately $52.2 million. Solely for the purposes of this calculation, shares held by directors and officers of the Registrant have been excluded. Such exclusion should not be deemed a determination by the Registrant that such individuals are, in fact, affiliates of the Registrant. The number of shares of Common Stock, $.10 par value, outstanding as of December 1, 1999 was 7,808,137. 1 DOCUMENTS INCORPORATED BY REFERENCE Part III Hereof Definitive Proxy Statement for 2000 Annual Meeting of Stockholders to be filed not later than January 28, 2000. Part IV Hereof S-14 Registration Statement (2-70830); Annual Reports on Forms 10-K for the years ended September 30, 1997, 1995, 1994 and 1993; S-2 Registration Statement (33-36664); Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, 1999, December 31, 1998 and March 31, 1998; Form 8-A dated August 6, 1999; S-3 Registration Statement (33-52196); S-8 Registration Statement (333-53449); S-4 Registration Statement (333-49883) and Current Reports on Forms 8-K dated February 28, 1992, February 19, 1998 and November 9, 1999. 2 PART I Item 1. Business - ---------------- American Pacific Corporation (the "Company") is principally engaged in the production of a specialty chemical, ammonium perchlorate ("AP"), which is used as an oxidizing agent in composite solid propellants for rockets, booster motors and missiles. AP is employed in the Space Shuttle, the U.S. military's Titan missile, the Delta family of commercial rockets and most other solid fuel rocket motors. AP customers include contractors of the National Aeronautics and Space Administration ("NASA"), the Department of Defense ("DOD") and certain commercial rocket programs used to launch satellites for communication, navigation, intelligence gathering, space exploration, weather forecasting and environmental monitoring. The Company also produces a variety of other specialty chemicals and environmental protection equipment for niche applications, including: (i) sodium azide, used in the inflation of automotive airbags; (ii) Halotron(TM) products, used to extinguish fires; and (iii) water treatment equipment, used to disinfect effluents from sewage treatment and industrial facilities and for the treatment of seawater. In addition, the Company has interests in two real estate assets in the Las Vegas, Nevada area, consisting of approximately 80 remaining acres of undeveloped land in an industrial park and a 50% interest in a master-planned residential community on approximately 320 acres. On March 12, 1998, the Company sold $75.0 million principal amount of unsecured senior notes (the "Notes"), consummated an acquisition (the "Acquisition") of certain assets from Kerr-McGee Chemical Corporation ("Kerr- McGee") described below and repurchased the remaining $25.0 million principal amount outstanding of subordinated secured notes (the "Azide Notes"). The Company is a party to agreements with Dynamit Nobel A.G., of Germany ("Dynamit Nobel") relating to the production and sale of sodium azide, the principal component of a gas generant used in automotive airbag systems. Dynamit Nobel licensed to the Company, on an exclusive basis for the North American market, its technology and know-how in the production of sodium azide, and provided technical support for the design, construction and start-up of the Company's sodium azide facility. The Company commenced commercial sales of sodium azide in fiscal 1994. In January 1996, the Company filed an antidumping petition with the United States International Trade Commission ("ITC") and the United States Department of Commerce ("Commerce") in response to the unlawful pricing practices of Japanese producers of sodium azide. In the fourth quarter of fiscal 1997, the Company recognized an impairment charge of $52.6 million relating to the fixed assets used in the production of sodium azide. See "Sodium Azide - Market" and "Sodium Azide - Competition." In February 1992, the Company acquired (by exercise of an option previously granted to it) the worldwide rights to Halotron(TM), a fire suppression system that includes chemical compounds and application technology intended to replace halons, which have been found to be ozone layer-depleting chemicals. Halotron(TM) has applications as a fire suppression agent for military, commercial and industrial uses. See Note 12 to the Consolidated Financial Statements of the Company for financial information concerning the Company's operating segments. The Company's perchlorate chemicals accounted for approximately 67%, 67% and 52% of revenues during the years ended September 30, 1999, 1998 and 1997, respectively. The term "Company" used herein includes, where the context requires, one or more of the direct and indirect subsidiaries or divisions of American Pacific Corporation. 3 Specialty Chemicals Ammonium Perchlorate Strategy The Company's strategy is to become the leading world-wide producer of AP and other perchlorate chemicals and derivatives. Upon consummation of the Acquisition, the Company effectively became the only North American producer of AP. Market AP is the sole oxidizing agent for solid fuel rockets, booster motors and missiles used in space exploration, commercial satellite transportation and national defense programs. A significant number of existing and planned launch vehicles providing access to space use solid fuel and thus depend, in part, upon AP. Many of the rockets and missiles used in national defense programs are also powered by solid fuel. The Company has supplied AP for use in space programs for over 30 years beginning with the Titan program in the early 1960s. Today, its principal space customers are Thiokol Propulsion, a division of Cordant Technologies Inc. ("Thiokol") for the Space Shuttle Program, and Alliant Techsystems, Inc. ("Alliant") for the Delta family of commercial rockets and the Titan program. The Company's AP is also used in rockets that launch satellites for communications, navigation, intelligence gathering, space exploration, weather forecasting and environmental monitoring. The Company is a qualified supplier of AP to a number of defense programs, including the Navy Standard Missile, Patriot, and Multiple Launch Rocket System programs. Demand for AP has declined steadily over the past five years but appears to have leveled off recently on a worldwide basis at approximately 20.0 to 25.0 million pounds annually. Supply capacity was substantially in excess of these demand levels. In an attempt to rationalize the AP industry, the Company consummated the Acquisition with Kerr-McGee. See "Ammonium Perchlorate - Kerr- McGee Acquisition." Customers Prospective purchasers of AP consist principally of contractors in programs of NASA and the DOD. As a practical matter, the specialized nature of the activities of these contractors restricts competitive entry by others. Therefore, there are relatively few potential customers for AP, and individual AP customers account for a significant portion of the Company's revenues. Prospective customers also include companies providing commercial satellite launch services and agencies of foreign governments and their contractors, although historically sales to foreign agencies and their contractors have not accounted for significant percentages of AP sales. See "Competition." Thiokol accounted for 35%, 39% and 35% of the Company's revenues during fiscal 1999, 1998 and 1997, respectively. Alliant accounted for approximately 14%, 16% and 10% of the Company's revenues during fiscal 1999, 1998 and 1997, respectively. Thiokol Agreement In connection with the Acquisition, the Company entered into an agreement with Thiokol with respect to the supply of AP through the year 2008. The agreement, which was contingent upon consummation of the Acquisition, provides that during its term Thiokol will make all of its AP purchases from the Company. The agreement also establishes a pricing matrix under which AP unit prices vary inversely with the quantity of AP sold by the Company to all of its customers. In addition to the AP purchased from the Company, Thiokol may use AP inventoried by it in prior years and AP recycled by it from certain existing solid rocket motors. 4 Alliant Agreement In connection with the Acquisition, the Company entered into an agreement with Alliant to extend an existing agreement through the year 2008. The agreement establishes prices for any AP purchased by Alliant from the Company during the term of the agreement as extended. Under this agreement, Alliant agrees to use its efforts to cause the Company's AP to be qualified on all new and current programs served by Alliant's Bacchus Works. Backlog As of October 31, 1999, the Company had a backlog of approximately $35.2 million for delivery of perchlorate chemicals in fiscal 2000. Manufacturing Capacity and Process Production of AP at the Company's current manufacturing facility in Iron County, Utah commenced in July 1989. This facility, as currently configured, is capable of producing 30.0 million pounds of AP annually and is readily expandable to 40.0 million pounds annually. The Company also produces commercial quantities of various forms of other perchlorate chemicals at this facility. AP produced at the facility and propellants incorporating such AP have qualified for use in all NASA and DOD programs for which testing has been conducted, including the Space Shuttle, Titan, Minuteman and Delta programs. The Company's AP facility is designed to site particular components of the manufacturing process in discrete areas of the facility. It incorporates modern equipment and materials-handling systems designed, constructed and operated in accordance with the operating and safety requirements of the Company's AP customers, insurance carriers and governmental authorities. AP is manufactured by electrochemical processes using the Company's proprietary technology. The principal raw materials used in the manufacture of AP (other than electrical energy) are salt, ammonia and hydrochloric acid. All of the raw materials used in the AP manufacturing process are available in commercial quantities, and the Company has had no difficulty in obtaining necessary raw materials. Prices paid by the Company for raw materials have been relatively stable, with no discernible long-term price fluctuations. The Company's AP production requires substantial amounts of electric power. The Company is a party to an agreement with Utah Power & Light Company ("UPL") for its electrical requirements at its AP facility. The Company's agreement with UPL provides for the supply of power for a minimum 10-year period, which began in 1988, and obligates the Company to purchase minimum amounts of power, while assuring the Company competitive pricing for its electricity needs for the duration of the agreement. The agreement has a three year notice of termination provision and, on April 7, 1999, UPL provided written notice of termination effective April 7, 2002. The Company is in the process of negotiating for its expected power requirements beyond April 7, 2002. Competition Upon consummation of the Acquisition, the Company effectively became the sole North American producer of AP. The Company is aware of production capacity for AP at a plant in France and a plant in Japan. Although the Company has limited information with respect to these plants, the Company believes that these foreign AP producers operate low volume, high cost production facilities and are not approved as AP suppliers for NASA or DOD programs, which represent the majority of domestic AP demand. In addition, the Company believes that the rigorous and sometimes costly NASA and DOD program qualification process, the strategic nature of such programs, the high cost of constructing an AP facility, and the Company's established relationships with key customers constitute significant hurdles to entry for prospective competitors. 5 Kerr-McGee Acquisition On March 12, 1998 (the "Closing Date"), the Company acquired, pursuant to a purchase agreement (the "Purchase Agreement") with Kerr-McGee, certain intangible assets related to Kerr-McGee's production of AP (the "Rights") for a purchase price of $39.0 million. The Acquisition did not include Kerr-McGee's production facilities (the "Production Facilities") and certain water and power supply agreements used by Kerr-McGee in the production of AP. Under the Purchase Agreement, Kerr-McGee ceased the production and sale of AP, although the Production Facilities may continue to be used by Kerr-McGee for production of AP under certain limited circumstances described below. Under the Purchase Agreement, Kerr-McGee reserved a perpetual, royalty-free, nonexclusive license to use any of the technology forming part of the Rights as may be necessary or useful to use, repair or sell the Production Facilities (the "Reserved License"). Under the Purchase Agreement, Kerr-McGee reserved the right to process and sell certain reclaimed AP that is not suitable for use in solid fuel rocket motors (the "Reclaimed Product"), and to produce and sell AP (i) to fulfill orders scheduled for delivery after the closing, subject to making payments to the Company with respect to such orders, as provided in the Purchase Agreement and (ii) in the event of the Company's inability to meet customer demand or requirements, breach of the Purchase Agreement or termination of the Company's AP business. The Purchase Agreement provides that, together with the Reserved License, Kerr-McGee is permitted in its discretion to (i) lease, sell, dismantle, demolish and/or scrap all or any portion of the Production Facilities, (ii) retain the Production Facilities for manufacture of Reclaimed Product and (iii) maintain the Production Facilities in a "standby" or "mothballed" condition so they will be capable of being used to produce AP under the limited circumstances referred to above. Under the Purchase Agreement, Kerr-McGee has agreed to indemnify the Company against loss or liability from claims associated with the ownership and use of the Rights prior to consummation of the Acquisition or resulting from any breach of its warranties, representations and covenants. The Company has agreed to indemnify Kerr-McGee against loss and liability from claims associated with the ownership and use of the Rights after consummation of the Acquisition or resulting from any breach of its warranties, representations and covenants. In addition, Kerr-McGee has agreed that it will, at the Company's request, introduce the Company to AP customers that are not currently customers of the Company and consult with the Company regarding the production and marketing of AP. The Company has agreed that, at Kerr-McGee's request, it will use reasonable efforts to market Reclaimed Product on Kerr-McGee's behalf for up to three years following consummation of the Acquisition. The Company has determined that a business was not acquired in the Acquisition and that the Rights acquired have no independent value to the Company apart from the overall benefit of the transaction that, as a result thereof, Kerr-McGee has ceased production of AP (except in the limited circumstances referred to above), thereby leaving the Company as the sole North American supplier of AP. Since they have no independent value to the Company, the Company has assigned no value to the Rights and assigned the entire purchase price to an unidentified intangible asset. The Company is amortizing the purchase price for the unidentified intangible over ten years, the length of the terms of the pricing agreements with its two principal AP customers referred to above. Financing On March 12, 1998, the Company sold $75.0 million in Notes. A portion of the net proceeds ($39.0 million) was used to effect the Acquisition. The Notes mature on March 1, 2005. Interest on the Notes is paid in cash at a rate of 9- 1/4% per annum on each March 1 and September 1, which commenced September 1, 1998. The indebtedness evidenced by the Notes represents a senior unsecured obligation of the Company, 6 ranks pari passu in right of payment with all existing and future senior indebtedness of the Company and is senior in right of payment to all future subordinated indebtedness of the Company. The Indenture under which the Notes were issued contains various limitations and restrictions including (i) change in control provisions, (ii) limitations on indebtedness and (iii) limitations on restricted payments such as dividends, stock repurchases and investments. Management believes the Company has complied with these limitations and restrictions. In April 1998, the Company filed a Form S-4 registration statement with the Securities and Exchange Commission for the purpose of effecting the exchange of the Notes for identical Notes registered for resale under the federal securities laws. The exchange offer was consummated on August 28, 1998. The Company repurchased and retired $3.0 million and $5.0 million in principal amount of Notes in fiscal 1999 and 1998, respectively. A portion of the net proceeds from sale of the Notes was applied to repurchase the Azide Notes (described below) for approximately $28.2 million (approximately 113% of the outstanding principal amount thereof). In connection with the repurchase, the Company recognized an extraordinary loss on debt extinguishment of approximately $5.0 million. The extraordinary loss consisted of the cash premium paid of $3.2 million upon repurchase and a charge of $1.8 million to write off the unamortized balance of debt issue and discount costs. Sodium Azide Sodium Azide Facility In July 1990, the Company entered into agreements (the "Azide Agreements") pursuant to which Dynamit Nobel has licensed to the Company on an exclusive basis for the North American market its most advanced technology and know-how for the production of sodium azide, the principal component of the gas generant used in certain automotive airbag safety systems. In addition, Dynamit Nobel provided technical support for the design, construction and startup of the facility. The facility was constructed on land owned by the Company in Iron County, Utah for its owner and operator, American Azide Corporation ("AAC"), a wholly-owned indirect subsidiary of the Company, and has an annual design capacity of 6.0 million pounds. Financing On February 21, 1992, the Company concluded a $40.0 million financing for the design, construction and startup of the sodium azide facility through the sale of the Azide Notes (11% noncallable subordinated secured term notes). As described above, on March 12, 1998, the Company repurchased the remaining $25.0 million principal amount outstanding of the Azide Notes with funds obtained through the issuance of the Notes. In connection with the issuance of the Azide Notes, the Company issued Warrants ("the Warrants") to the purchasers of the Azide Notes, which are exercisable for a 10-year period on or after December 31, 1993, to purchase shares of the Company's Common Stock. The exercise price of the Warrants is $14.00 per share. At a $14.00 per share exercise price, 2,857,000 shares could be purchased under the Warrants. The Warrants contain additional provisions for a reduction in exercise price in the event that the Company issues or is deemed to issue stock, rights to purchase stock or convertible debt at a price less than the exercise price in effect, or in the event of certain stock dividends or in the event of stock splits, mergers or similar transactions. The Warrants are exercisable, at the option of their holders, to purchase up to 20% of the Common Stock of AAC, rather than the Company's Common Stock. In the event of such an election, the exercise price of the Warrants will be based upon a pro rata share of AAC's capital, adjusted for earnings and losses, plus interest from the date of contribution. The holders of the Warrants had certain put rights that required the holders to deliver to the Secretary of the Company a written request (a "Put Notice") at least ninety days prior to a Put Purchase Date (a defined term in the Warrants). Since the last available Put Purchase Date under the Warrants is December 31, 1999, and the Company has received no Put Notices, the put rights under the Warrants have effectively expired. On or after December 31, 1999, the Company may call up to 50% of the Warrants at prices that would provide a 30% internal rate of return to the holders thereof through the date of call (inclusive of the Azide Notes' yield). 7 The holders of the Warrants were also granted the right to require that the Common Stock underlying the Warrants be registered under the Securities Act of 1933, as amended, on one occasion, as well as certain incidental registration rights. Market A number of firms have devoted extensive efforts for at least 25 years to the development of automotive airbag safety systems. These efforts have resulted in the acceptance by the automobile industry and the consuming public of an inflator for automotive airbags that initially was based principally upon sodium azide, combined in tablet or granule form with limited amounts of other materials. Recently, however, other inflator technologies have been commercially developed that have rapidly gained market share. The Company expects demand for airbag systems in North America and worldwide to increase although the level of demand for sodium azide will depend, in part, upon the penetration of competing inflator technologies that are not based upon the use of sodium azide. Based principally upon market information received from inflator manufacturers, the Company expects sodium azide use to decline significantly and that inflators using sodium azide will ultimately be phased out. The Company initially believed that demand for sodium azide in North America and the world would substantially exceed existing manufacturing capacity and announced expansions or new facilities (including the AAC plant) by the 1994 model year (which for sodium azide sales purposes was the period June 1993 through May 1994). Currently, demand for sodium azide is substantially less than supply on a worldwide basis. The Company believes this is the result of previous capacity expansions by producers coupled with declining demand, although the Company's information with respect to competitors' existing or planned capacity is limited. By reason of this highly competitive market environment, and other factors discussed below, sodium azide prices decreased significantly in the mid 1990's. The Company believes that the price erosion of sodium azide has been due, in part, to unlawful pricing procedures of Japanese sodium azide producers. In response to such practices, in January 1996, the Company filed an antidumping petition with the International Trade Commission ("ITC") and the Department of Commerce ("Commerce"). In August 1996, Commerce issued a preliminary determination that Japanese imports of sodium azide have been sold in the United States at prices that are significantly below fair value. Commerce's preliminary dumping determination applied to all Japanese imports of sodium azide, regardless of end-use. Commerce's preliminary determination followed a March 1996 preliminary determination by ITC that dumped Japanese imports have caused material injury to the U.S. sodium azide industry. On January 7, 1997, the anti-dumping investigation initiated by Commerce, based upon the Company's petition, against the three Japanese producers of sodium azide was suspended by agreement. It is the Company's understanding that, by reason of the Suspension Agreement, two of the three Japanese sodium azide producers have ceased their exports of sodium azide to the United States for an indeterminate period. As to the third and largest Japanese sodium azide producer, which has not admitted any prior unlawful conduct, the Suspension Agreement requires that it make all necessary price revisions to eliminate all United States sales at below "Normal Value," and that it conform to the requirements of sections 732 and 733 of the Tariff Act of 1930, as amended, in connection with its future sales of sodium azide in the United States. The Suspension Agreement contemplates a cost-based determination of "Normal Value" and establishes reporting and verification procedures to assure compliance. Accordingly, the minimum pricing for sodium azide sold in the United States by the remaining Japanese producer will be based primarily on its actual costs, and may be affected by changes in the relevant exchange rates. 8 Finally, the Suspension Agreement provides that it may be terminated by any party on 60 days' notice, in which event the anti-dumping proceeding would be re-instituted at the stage to which it had advanced at the time the Suspension Agreement became effective. Customers In May 1997 the Company entered into a three-year agreement with Autoliv ASP, Inc. ("Autoliv") to supply sodium azide used by Autoliv in the manufacture of automotive airbags. Deliveries under the agreement commenced in July 1997. The agreement has been extended an additional six months through December 31, 2000. Autoliv accounted for approximately 17%, 19% and 28% of the Company's revenues during fiscal 1999, 1998 and 1997, respectively. The Company is also qualified to supply sodium azide to TRW, Inc. ("TRW"), the other major supplier of airbag inflators in the United States, but TRW's requirements are supplied by competitors of the Company. Competition According to public announcements, a Canadian facility ceased the production of commercial quantities of sodium azide in the summer of 1998. The Company believes that current competing production capacity includes one producer in Japan and at least three producers in India. In addition, idle capacity is available and it is possible that domestic or foreign entities will seek to develop additional sodium azide production facilities in North America. However, the Company believes that the reduced level of demand and the underutilization of existing production facilities makes this unlikely. The Company incurred significant operating losses in its sodium azide operation in the 1997 fiscal year and prior fiscal years. Sodium azide performance improved in the fourth quarter of fiscal 1997, principally as a result of additional sodium azide deliveries under the Autoliv agreement referred to above. However, even though performance improved, management's view of the economics of the sodium azide market changed during the fourth quarter of fiscal 1997. One major inflator manufacturer announced the acquisition of non- azide based inflator technology and that it intended to be in the market with this new technology by model year 1999. In addition, although the Company had achieved significant gains in market share that appeared to relate to the Company's anti-dumping petition and the Suspension Agreement, management believed that the effects of the anti-dumping petition were likely fully incorporated into the sodium azide market by the end of fiscal 1997. Recognizing that the uncertainties respecting the market and discussed above continued to exist, during the fourth quarter of fiscal 1997, management concluded that the cash flows associated with sodium azide operations would not be sufficient to recover the Company's investment in sodium azide related fixed assets. As quoted market prices were not available, the present value of estimated future cash flows was used to estimate the fair value of sodium azide fixed assets. Under the requirements of Statement of Financial Accounting Standards ("SFAS") No. 121, and as a result of this valuation technique, an impairment charge of $52.6 million was recognized in the fourth quarter of fiscal 1997. (See Note 13 to the Consolidated Financial Statements of the Company.) Azide Agreements Under the Azide Agreements, Dynamit Nobel was to receive, for the use of its technology and know-how relating to its batch production process of manufacturing sodium azide, quarterly royalty payments of 5% of the quarterly net sales of sodium azide by AAC for a period of 15 years from the date the Company begins to produce sodium azide in commercial quantities. The Company and Dynamit Nobel agreed to suspend the royalty payment effective as of July 1, 1995. 9 Halotron(TM) Halotron(TM) is a fire suppression system designed to replace halons, which are chemicals that were widely used as fire suppression agents in military, industrial, and commercial applications. The impetus for the invention of Halotron(TM) was the discovery during the 1980s that halons are highly destructive to the stratospheric ozone layer, which acts as a shield against harmful solar ultraviolet radiation. Use of Halons Halons are used throughout the world in modalities that range from hand-held fire extinguishers to extensively engineered aircraft installations, but which are generally of two types, streaming and flooding systems. Streaming systems rely upon the focused projection of a slowly gasifying liquid over distances of up to 50 feet from the point of projection. Flooding systems release a quickly gasifying liquid into a confined space, rendering inert a combustible atmosphere and extinguishing any ongoing combustion. Halon 1211, principally a streaming agent, is used on aircraft and aircraft flightlines, on small boats and ships and in chemically clean rooms and laboratories, other commercial and industrial facilities, including those in the lumber and petroleum industries, offices and residences. Its worldwide production peaked in 1988 at 19,000 metric tons. Halon 1301, principally a flooding agent, protects such installations as computer, electronic and equipment rooms, ship and other engine room spaces, petroleum handling stations and repositories of literature and cultural heritage. Its worldwide production peaked in 1988 at 12,500 metric tons. Customers and Market The end-user market for halons and consequently, Halotron(TM), is divided into several segments. The government segment consists of the armed services and other agencies, including the Department of Energy, NASA and governmental offices, laboratories and data processing centers. Historically, military applications have predominated in this segment, and it is the military that has taken the lead in research for halon replacements, both in streaming and in flooding applications. It will be critical to the Company's efforts to market Halotron(TM) to the military that military specifications for the procurement of halon replacements include Halotron(TM). The Company is not aware of any military specifications for halon replacements that have been issued to date. Commercial market segments include fire critical industries such as utilities, telecommunications firms, the oil and gas exploration and production industry, lumbering, ocean transport and commercial aviation. Other market segments include other business organizations and small users that typically follow selections made by the industry users described above. The Company's efforts to produce, market and sell Halotron(TM) are dependent upon the political climate and environmental regulations that exist and may vary from country to country. The magnitude of future orders received, if any, will be dependent to a large degree upon political issues and environmental regulations that are not within the Company's control, as well as additional testing and qualification in certain jurisdictions, governmental budgetary constraints and the ultimate market acceptance of these new products. Halotron(TM) I, the first phase of Halotron(TM), has been extensively and successfully tested. In 1993, Halotron(TM) I was approved by the United States Environmental Protection Agency (the "EPA") as a replacement agent for Halon 1211 (the principal halon currently in use). During 1995, the Federal Aviation Administration ("FAA") approved Halotron(TM) I as an acceptable airport firefighting agent, concluding that Halotron(TM) I will suppress or extinguish fire in the same manner as halon. The Company, together with Amerex Corporation ("Amerex"), Badger Fire Protection, Inc. ("Badger") and Buckeye Fire Equipment Company ("Buckeye"), have successfully completed Underwriters Laboratories' ("UL") fire tests for a number of sizes of portable fire extinguishers using Halotron(TM) I. Domestic distribution of the 10 Buckeye Halotron(TM) extinguisher line began in early 1996. In May 1998, Amerex began distribution of a line of UL listed portable fire extinguishers using Halotron(TM) I. In June 1998, Badger also began distribution of a line of UL listed portable fire extinguishers using Halotron(TM) I. The Company now has three major domestic fire extinguisher companies manufacturing and distributing UL listed portable fire extinguishers using Halotron(TM) I. The Company is also marketing Halotron(TM) I to other domestic and international fire extinguisher manufacturers. In August 1997, the Company completed a study, which concluded that the market for halon substitutes anticipated by the Company when it entered into the Halotron(TM) business in 1992 had not materialized and that the market for "clean gas" substitutes for Halon 1211 would remain substantially smaller than the peak use in 1988. Although the study also concluded that the Company's Halotron(TM) I product could command a significant percentage of this smaller than anticipated market, there can be no assurance in that regard. In order for the Company to achieve and maintain market share for Halotron(TM) I and a long term presence in the industry, it may be necessary for the Company to expend considerable additional funds and effort in research and development. Although Halotron(TM) I has an Ozone Depletion Potential ("ODP") that is significantly lower than that of halons and that meets current environmental standards, potential users of halon replacements may eventually require a product with zero ODP. Environmental standards may also be expected to mandate this result. Accordingly, the product life of Halotron(TM) I may be limited, and the Company may be required to produce succeeding Halotron(TM) phases that can meet increasingly stringent standards. There can be no assurance that such phases will be capable of production or that a competitor or competitors will not develop fire suppression agents with comparable or superior qualities. Competition Potential halon alternatives and substitutes will compete as to performance characteristics, environmental effects and cost. Performance characteristics include throwability, visibility after application, after-fire damage, equipment portability and versatility, low temperature performance, corrosion probability, shelf life and efficiency. The environmental effects include ODP, global warming potential and toxicity. Potential halon substitutes include water, carbon dioxide and a variety of chemicals in liquid, foam and powder form. It is likely that competitors producing alternatives and substitutes will be larger, will have experience in the production of fire suppressing chemicals and systems and will have greater financial resources than those available to the Company. In 1996, Dupont introduced a new alternative fire extinguishing agent called FE-36(TM), which is intended to replace Halon 1211. Dupont claims that FE-36(TM) meets application, performance, toxicity and environmental standards as a Halon 1211 replacement. In addition, there are currently no domestic use restrictions on halon, so that potential customers for halon substitutes may continue to use existing halon-based systems in their possession until the supply is exhausted, which is believed to be a substantial period of time for some users. Halotron(TM) Agreement On August 30, 1991, the Company entered into an agreement (the "Halotron(TM) Agreement") with the inventors of Halotron(TM) (the "Inventors"), granting the Company the option (which was exercised in February, 1992) to acquire the exclusive worldwide rights to manufacture and sell Halotron(TM). The Halotron(TM) Agreement provides for disclosure to the Company of all confidential and proprietary information concerning Halotron(TM) I. On February 26, 1992, the Company acquired the rights provided for in the Halotron(TM) Agreement, gave notice to that effect to the Inventors, and exercised its option. In addition to the exclusive license to manufacture and sell Halotron(TM) I, the rights acquired by the Company include rights under all present and future patents relating to Halotron(TM) I throughout the world, rights to related and follow-on products and technologies and product and technology improvements, rights to reclaim, store and distribute halon and rights to utilize the productive capacity of the Inventors' Swedish manufacturing facility. Upon exercise of the option, the Company paid the sum of $0.7 million (the exercise price of $1.0 million, less advance payments previously made) and subsequently paid the further total sum of $1.5 million in monthly installments, commencing in March 1992. A license agreement between the Company and the Inventors of Halotron(TM) I provides for a royalty to the 11 Inventors of 5% of the Company's net sales of Halotron(TM) I over a period of 15 years (however, see below for a discussion of certain litigation associated with the Inventors' rights to royalties). In addition, the Company entered into employment and consulting agreements with the Inventors which have since been terminated. See Item 3. Legal Proceedings and Note 14 to the Consolidated Financial Statements of the Company for a discussion of litigation associated with the Halotron(TM) Agreement. Halotron(TM) Facility The Company has designed and constructed a Halotron(TM) facility that has an annual capacity of at least 6.0 million pounds, located on land owned by the Company in Iron County, Utah. Real Estate Assets The Company has interests in two real estate assets under development in Clark County, Nevada: the Gibson Business Park and the Ventana Canyon joint venture residential project. The Company also owns 4,700 acres of land at the site of its facility in Iron County, Utah that are dedicated to the Company's growth and diversification. At September 30, 1999, the Company owned approximately 80 acres of improved undeveloped land at the Gibson Business Park near Las Vegas, Nevada. The Company's land is held for sale. Ventana Canyon is a 320 acre master-planned community under development near Las Vegas, Nevada. The community is primarily residential in character, contemplating single family detached homes, townhomes and apartment buildings. The project is owned by Gibson Ranch Limited Liability Company ("GRLLC"), to which the Company has contributed approximately 240 acres and an unrelated local real estate development group (the "Developer") has contributed the remaining 80 acres. The Developer is the managing member of GRLLC and manages the business conducted by GRLLC. Certain major decisions, such as increasing debt and changes in the development plan or budget may be made only by a management committee on which the Company is represented. The property contributed by the Company had a carrying value of approximately $12.3 million at the date of contribution in 1993. The Company provides financing to the project under two revolving credit facilities: (i) a $2.4 million facility with GRLLC (the "GRLLC Facility") and (ii) a $1.7 million facility with the Developer (under which the Developer is required to advance funds to GRLLC) (the "Developer Facility"). As of September 30, 1999, all of the funds previously advanced under these facilities had been repaid. The credit facilities remain in effect until the property is fully developed. The profits and losses of GRLLC will be split equally between the Company and the Developer after the return of the advances and agreed upon values for initial contributions of property. The Company believes that development and sale of the property will be completed by the end of calendar 2001, although no assurance can be given in this regard, and that most of the cash flow that may be generated by the project will be received at or near the end of the development and sale process. Environmental Protection Equipment The Company designs, manufactures and markets systems for the control of noxious odors, the disinfection of waste water streams and the treatment of seawater. Its OdorMaster(TM) systems eliminate odors from gases at sewage treatment plants, composting sites and pumping stations and at chemical, food processing and other industrial plants. These systems, which use electrochemical technology developed in the Company's specialty chemical operations, chemically deodorize malodorous compounds in contaminated air. Advanced OdorMaster(TM) systems place two or three scrubber towers in series to treat complex odors, such as those 12 produced at sewage composting sites or in sewage sludge conditioning systems. ChlorMaster(TM) Brine and Sea water systems utilize a similar process to disinfect effluent at inland sewage treatment and industrial plants and to control marine growths in condenser cooling and service water at power and desalination plants and at oil drilling production facilities on seacoasts and offshore. The Company's customers for its OdorMaster(TM) System are municipalities and special authorities (and the contractors who build the sewage systems for such municipalities and authorities) and plant owners. Oil and other industrial companies are customers of its ChlorMaster(TM) systems. Its systems are marketed domestically by sales representatives and overseas by sales representatives and licensees. The Company competes both with companies that utilize other decontamination processes and those that utilize technology similar to the Company's. All are substantially larger than the Company. The Company's success to date is derived from the ability of its products both to generate sodium hypochlorite on site and to decontaminate effectively. Its future success will depend upon the competitiveness of its technology and the success of its sales representatives and licensees. At October 31, 1999, the backlog for environmental protection equipment was $2.6 million. Research and Development The Company's existing laboratory facilities are located on the premises of the Company's perchlorate production activities and are used to support those activities and its sodium azide and Halotron(TM) production activities. The Company conducts research and development programs directed toward enhancement of product quality and performance and the development of complementary or related products at these facilities. Insurance The Company's insurance currently includes property insurance at estimated replacement value on all of its facilities and business interruption insurance. The Company also maintains certain liability insurance. Management believes that the nature and extent of the Company's current insurance coverages are adequate. The Company has not experienced difficulty obtaining these types and amounts of insurance. Government Regulation As a supplier to United States government projects, the Company has been and may be subject to audit and/or review by the government of the negotiation and performance of, and of the accounting and general practice relating to, government contracts. Most of the Company's contracts for the sale of AP are in whole or in part subject to the commercial sections of the Federal Acquisition Regulations. The Company's AP costs have been and may be audited by its customers and by government audit agencies such as the United States Defense Contract Audit Agency. To date, such audits have not had a material effect on the Company's results of operations or financial position. Environmental Regulation The Company's operations are subject to extensive federal, state and local regulations governing, among other things, emissions to air, discharges to water and waste management. Management believes that the Company is currently in compliance in all material respects with all applicable environmental, safety and health requirements and does not anticipate any material adverse effects from existing or known future requirements. To meet changing licensing and regulatory standards, the Company may be required to make additional 13 significant site or operational modifications, potentially involving substantial expenditures or the reduction or suspension of certain operations. In addition, the operation of the Company's manufacturing plants entails risk of adverse environmental and health effects and there can be no assurance that material costs or liabilities will not be incurred to rectify any future occurrences related to environmental or health matters. The Southern Nevada Water Authority has detected trace amounts of perchlorate chemicals in Lake Mead and the Las Vegas Wash, bodies of water near the Company's real estate development property in Henderson, Nevada. Lake Mead is a source of drinking water for the City of Las Vegas, neighboring areas and certain areas of metropolitan Southern California. Perchlorate chemicals (including AP) are a potential health concern because they can interfere with the production of a growth hormone by the thyroid gland, although they are not currently included in the list of hazardous substances compiled by the EPA. However, perchlorates have been added to the EPA's Contaminant Candidate List and will likely eventually be regulated. The Company manufactured AP at a facility on the Henderson site until the facility was destroyed in the May 1988 incident, described below, after which the Company relocated its AP production to its current facilities in Iron County, Utah. Kerr-McGee for many years operated an AP production facility at a site near the Company's Henderson property. The Water Authority's testing showed perchlorate concentrations of 8 to 11 parts per billion (ppb) in drinking water. In response to this discovery, the Company has engaged environmental consultants to drill test wells in order to evaluate ground water at and in the vicinity of the Henderson site. The results of the Company's tests have shown perchlorate concentrations in the ground water at the Henderson property ranging from 0 to approximately 750,000 ppb at certain wells. The results have also indicated that the ground water containing perchlorate concentration from the Henderson site has not reached the Las Vegas Wash or Lake Mead and, accordingly, has not been introduced into any source of drinking water. It has been reported that levels as high as 3.7 million ppb have been detected at a well at the Kerr-McGee site. The State of California has adopted a preliminary standard of 18 ppb for perchlorate levels in drinking water, but there are currently no federal or State of Nevada standards for acceptable levels of perchlorate in ground water or drinking water. The Company is cooperating with State and local agencies, and with Kerr- McGee and other interested firms, in the investigation and evaluation of perchlorate found at its site and of the source or sources of perchlorates in Lake Mead and potential remediation methods. Until these investigations and evaluations have reached definitive conclusions, it will not be possible for the Company to determine the extent to which, if at all, the Company may be called upon to contribute to or assist with future remediation efforts, or the financial impact, if any, of such contributions or assistance. Safety Considerations AP, in the particle sizes and chemical purities produced by the Company, is categorized for transportation purposes by the United States Department of Transportation ("DOT") as a Class IV oxidizer. Such classification indicates that the DOT considers AP to be non-explosive, non-flammable and non-toxic. The Company's AP manufacturing plant was constructed in a manner intended to minimize, to the extent of known technologies and safety measures, the combination of AP with other materials in a manner that could result in explosions or combustion. However, no assurance can be given that the Company's safety precautions will be effective in preventing explosions, fires and other such events from occurring. On July 30, 1997, an explosion and fire occurred at the Company's AP production facility in Iron County, Utah. Although damage to the Company's property was confined to a relatively small area, the incident left one employee dead and three others injured, one seriously. As a result of this incident, the Utah Occupational Safety and Health Division of the Utah Labor Commission cited the Company for violation of certain applicable Utah safety regulations in connection with the handling of AP and assessed fines totaling $5,250. Although the Company has taken steps to improve safety measures and training in response to this incident, there can be no assurance that such measures will be effective in preventing other such events in the future. The Company has one major operating facility located in Iron County, Utah. The loss or shutdown of operations over an extended period of time at such facility would have a material adverse effect on the 14 Company. The Company's operations are subject to the usual hazards associated with chemical manufacturing and the related storage and transportation of products and wastes, including explosions, fires, inclement weather and natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, chemical spills, discharges or releases of toxic or hazardous substances or gases and other environmental risks, such as required remediation of contamination. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. The Company maintains property, business interruption and casualty insurance at levels which it believes are in accordance with customary industry practice, but there can be no assurance that the Company will not incur losses beyond the limits or outside the coverage of its insurance. On May 4, 1988, the former manufacturing and office facilities of the Company in Henderson, Nevada were destroyed by a series of massive explosions and associated fires. Extensive property damage occurred both at the Company's facilities and in immediately adjacent areas, the principal damage occurring within a three-mile radius. Production of AP, the Company's principal business, ceased for a 15-month period. Significant interruptions were also experienced in the Company's other businesses, which occupied the same or adjacent sites. Although the Company's current facility is designed to site particular components of the manufacturing process in discrete areas of the facility and incorporates modern equipment and materials handling systems designed, constructed and operated in accordance with the operating and safety requirements of the Company's customers, insurance carriers and governmental authorities, there can be no assurance that another incident could not interrupt some or all of the activities carried on at the Company's current manufacturing site. Sodium azide is a strong reducing agent and is classified by the DOT as a poison. Its manufacture entails certain hazards with which Dynamit Nobel has become familiar over the course of time. The Company's method of production is intended to limit the quantity of sodium azide in process at any one time and to utilize known safety measures in an effort to lessen attendant risks. In late 1992, a fire occurred in a sodium azide reactor vessel at the Company's facility during start-up and testing of the reactor vessel. In addition, fires are reported to have affected production at a competitor's facility in the past. There can be no assurance that a fire or other incident will not occur at the Company's sodium azide production facility in the future. The Company believes that exposure to sodium azide after an airbag is installed in an automobile is highly unlikely due to the way in which sodium azide is used and to the housing in which it is encased. However, the Company understands that claims have been asserted by automobile drivers and passengers that they have suffered hand burns from heated gas and facial abrasions from airbag fabric after its deployment, although no such claims have been asserted against the Company. Employees At September 30, 1999, the Company employed approximately 222 persons in executive, administrative, sales and manufacturing capacities. Although efforts have been made by union representatives to seek certification to represent certain Company employees, no such certification has been granted and the Company does not have collective bargaining agreements with any of its employees. The Company considers relationships with its employees to be satisfactory. 15 Item 2. Properties - ------------------ The following table sets forth certain information regarding the Company's properties at September 30, 1999.
Approximate Area or Approximate Location Principal Use Floor Space Status Annual Rent -------- ------------- ----------- ------ ----------- Iron County, UT Perchlorate Manufacturing Facility /(a)/ 217 acres Owned ___ Iron County, UT Sodium Azide Manufacturing Facility /(b)/ 41 acres Owned ___ Iron County, UT Halotron(TM) Manufacturing Facility /(c)/ 6,720 sq. ft. Owned ___ Las Vegas, NV Executive Offices 22,262 sq. ft. Leased (d) $550,000
(a) This facility is used for the production of perchlorate products and consists of approximately 112,000 sq. ft. of enclosed manufacturing space, a 12,000 sq. ft. administration building and a 3,200 sq. ft. laboratory building. Capacity utilization rates for this production facility were approximately 80%, 62% and 34% during the fiscal years ended September 30, 1999, 1998 and 1997, respectively. (b) This facility is used for the production of sodium azide and consists of approximately 34,600 sq. ft. of enclosed manufacturing and laboratory space. Capacity utilization rates for this production facility were approximately 47%, 39% and 45% during the fiscal years ended September 30, 1999, 1998 and 1997 , respectively. (c) Capacity utilization rates for the Halotron production facility were approximately 4% during the fiscal years ended September 30, 1999, 1998 and 1997. (d) These facilities are leased from 3770 Howard Hughes Parkway Associates- Limited Partnership for an initial term of 10 years, which began on March 1, 1991. See Note 5 to the Consolidated Financial Statements of the Company. The Company's facilities are considered by it to be adequate for its present needs and suitable for their current use. See Item 1. Business-"Real Estate Assets" for a description of the Company's development properties in Iron County, Utah and Clark County, Nevada. Item 3. Legal Proceedings - ------------------------- On August 30, 1991, the Company entered into the Halotron(TM) Agreement. In February 1992, following successful technical evaluations and field tests, the Company exercised its option to acquire the rights provided for in the Halotron(TM) Agreement. In 1992, the Company sued the Inventors, claiming they had breached the agreements and contracts in which they had sold the rights to Halotron(TM). This initial litigation was settled when the Inventors promised to perform faithfully their duties and to honor the terms of the contracts that, among other things, gave the Company exclusive rights to the Halotron(TM) chemicals and delivery systems. Following the settlement of the initial litigation, however, the Inventors failed to perform the acts they had promised in order to secure dismissal of that litigation. As a result, the Company brought an action in the Utah state courts in March 1994, for the purpose of establishing the Company's exclusive rights to the Halotron(TM) chemicals and delivery systems. On August 15, 1994, the court entered a default judgment against the Inventors granting the injunctive relief requested by the Company and awarding damages in the amount of $42.2 million. The trial court further ordered the Inventors to execute documents required for patent registration of Halotron(TM) in various countries. 16 When the Inventors ignored this court order, the Court directed the Clerk of the Court to execute these documents on behalf of the Inventors. Finally, the Court ordered that the Inventors' rights to any future royalties from sales of Halotron(TM) were terminated. In 1996, the Company initiated arbitration proceedings by filing a notice of Arbitration with the American Arbitration Association against the Inventors to enforce, among other things, the Company's rights under the Halotron(TM) Agreement. In August 1999, the Arbitration Panel (the "Tribunal") issued a partial award that required the Inventors to refrain from using the trade-name and know-how associated with Halotron(TM), to produce all documents, information and test data relating to the Halotron(TM) products, to allow the Company to inspect the Inventors' business location to verify compliance with the partial award, to disclose all patent, trademark or tradename applications related to Halotron(TM) products and transfer ownership of such to the Company, and to provide all documents relating to the sale of Halotron(TM) products. The Tribunal reserved its decision on monetary damages to which the Company may be entitled and rejected the Inventors' counterclaims except that the Inventors may be entitled to royalties after the date of the partial award if the Inventors fully comply with the requirements of the partial award. Based on information available to the Company, the Inventors have not complied with any of the requirements of the partial award. The Company is in the process of preparing a motion to the Tribunal seeking a final award. Trace amounts of perchlorate chemicals have been found in Lake Mead. Clark County, Nevada, where Lake Mead is situated, was the location of Kerr-McGee's AP operations, and was also the location of the Company's AP operations until May 1988. The Company is cooperating with State and local agencies, and with Kerr- McGee and other interested firms, in the investigation and evaluation of the source or sources of these trace amounts, possible environmental impacts, and potential remediation methods. Until these investigations and evaluations have reached definitive conclusions, it will not be possible for the Company to determine the extent to which, if at all, the Company may be called upon to contribute to or assist with future remediation efforts, or the financial impacts, if any, of such cooperation, contributions or assistance. See Item I. Business-"Environmental Regulation." In 1999, two lawsuits were filed in Utah State court against the Company and certain unrelated equipment and product manufacturers claiming unspecified monetary damages as a result of the fire and explosion on July 30, 1997 at the Company's AP production facility (see Item 1. Business-"Safety Considerations"). The Company believes it has statutory immunity as an employer under the applicable worker's compensation laws of the State of Utah and that there was no negligence on the part of the Company that contributed to the accident. These lawsuits are currently in a discovery phase. The information set forth in Notes 10 and 14 to the Consolidated Financial Statements of the Company regarding litigation and contingencies is incorporated herein by reference. Reference is also made to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- Not Applicable. 17 PART II Item 5. Market for Registrant's Common Stock and Related Security Holder - -------------------------------------------------------------------------- Matters - ------- The Company's Common Stock is traded on the Nasdaq National Market under the symbol "APFC." The table below sets forth the high and low bid prices of the Common Stock on the Nasdaq National Market for the periods indicated. Nasdaq National Market High Low Fiscal Year 1999 ---------------- 1st Quarter $ 8 $6 1/2 2nd Quarter 9 1/16 7 3/8 3rd Quarter 8 1/2 7 5/8 4th Quarter 9 7/16 7 5/8 Fiscal Year 1998 ---------------- 1st Quarter 8 1/4 6 3/8 2nd Quarter 11 5/8 5 3/4 3rd Quarter 11 1/4 9 1/2 4th Quarter 10 3/8 7 3/8 At December 1, 1999, there were approximately 1,300 shareholders of record of the Company's Common Stock. The Company has not paid a dividend on the Common Stock since the Company's incorporation and does not anticipate paying cash dividends in the foreseeable future. In addition, covenants contained in the Indenture associated with the Notes restrict the Company's ability to pay dividends. (See Note 6 to Notes to Consolidated Financial Statements of the Company.) 18 Item 6. Selected Financial Data - -------------------------------- FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA FOR THE YEARS ENDED - ----------------------------------------------------------------------------- SEPTEMBER 30, - ------------
1999 1998 1997 1996 1995 ----------------------------------------------------------- ......(in thousands except per share amounts)..... STATEMENT OF OPERATIONS DATA: Sales and operating revenues $ 72,834 $ 52,339 $ 44,050 $ 42,381 $ 39,250 Cost of sales 45,834 35,792 36,420 32,579 29,861 Gross profit 27,000 16,547 7,630 9,802 9,389 Operating expenses 10,024 9,246 9,509 9,367 11,210 Impairment charge 52,605 Employee separation and management reorganization cost 3,616 226 Operating income (loss) 16,976 7,301 (58,100) 435 (2,047) Equity in real estate venture 300 200 700 Interest and other income 1,588 1,294 1,115 1,381 1,429 Interest and other expense 6,951 5,734 2,001 2,836 1,709 Income (loss) before credit for income taxes 11,613 3,161 (58,786) (320) (2,327) Credit for income taxes (10,101) (109) (791) Net income (loss) before extraordinary losse 11,613 3,161 (48,685) (211) (1,536) Extraordinary loss-debt extinguishments 174 5,172 Net income (loss) 11,439 (2,011) (48,685) (211) (1,536) Basic net income (loss) per share 1.41 (.24) (6.01) (.03) (.19) Diluted net income (loss) per share $ 1.39 $ (.24) $ (6.01) $ (.03) $ (.19) BALANCE SHEET DATA: Cash and cash equivalents and short-term investments $ 40,434 $ 20,389 $ 18,881 $ 20,501 $ 26,540 Restricted cash 1,195 1,176 3,580 4,969 3,743 Inventories and accounts and notes receivable 18,883 23,193 17,304 16,199 13,086 Property, plant and equipment - net 17,254 19,529 19,314 77,217 80,944 Intangible assets-net 34,210 38,252 1,540 1,760 2,995 Development property 6,440 7,036 7,362 8,631 10,296 Real estate equity investments 11,237 17,112 20,248 18,698 17,725 Total assets 132,882 130,759 90,081 150,019 157,789 Working capital 53,088 34,786 23,479 24,905 26,440 Notes payable and current portion of long-term debt 1,195 1,176 6,166 7,334 8,500 Long-term debt 67,000 70,000 24,900 29,452 34,054 Shareholders' equity $ 52,204 $ 44,029 $ 45,551 $ 94,156 $ 94,251
19 Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- Overview The Company is principally engaged in the production of AP for the aerospace and national defense industries. In addition, the Company produces and sells sodium azide, the primary component of a gas generant used in automotive airbag safety systems, and Halotron(TM), a chemical used in fire suppression systems ranging from portable fire extinguishers to airport firefighting vehicles. The perchlorate, sodium azide and Halotron(TM) facilities are located on the Company's property in Southern Utah and the chemicals produced and sold at these facilities collectively represent the Company's specialty chemicals operating segment. The Company's other lines of business include the development of real estate in Nevada and the production of environmental protection equipment, including waste water and seawater treatment systems. The Company believes that North American demand for AP is currently approximately 20 to 25 million pounds annually. However, supply capacity has historically been substantially in excess of these estimated demand levels. In an effort to rationalize the economics of the existing AP market, the Company entered into the Purchase Agreement with Kerr-McGee. Upon consummation of the Acquisition, the Company effectively became the sole North American producer of AP. Sales and Operating Revenues. Sales of the Company's perchlorate chemical products, consisting almost entirely of AP sales, accounted for approximately 67%, 67% and 52% of revenues during the fiscal years ended September 30, 1999, 1998 and 1997, respectively. In general, demand for AP is driven by a relatively small number of DOD and NASA contractors; as a result, any one individual AP customer usually accounts for a significant portion of the revenues of AP manufacturers. For example, Thiokol accounted for approximately 35%, 39% and 35% of the Company's revenues during the fiscal years ended September 30, 1999, 1998 and 1997, respectively. In addition, Alliant accounted for approximately 14%, 16% and 10% of the Company's revenues during fiscal 1999, 1998 and 1997, respectively. Sodium azide sales accounted for approximately 19%, 21% and 30% of sales during fiscal years ended September 30, 1999, 1998 and 1997, respectively. Autoliv, the Company's principal sodium azide customer, accounted for approximately 17%, 19% and 28% of the Company's revenues during fiscal 1999, 1998 and 1997, respectively. The Company incurred significant operating losses in its sodium azide operation in the 1997 fiscal year and prior fiscal years. Sodium azide performance improved in the fourth quarter of fiscal 1997, principally as a result of additional sodium azide deliveries under the Autoliv agreement referred to below, and the operations were cash flow positive during the year ended September 30, 1997. However, even though performance improved, management's view of the economics of the sodium azide market changed during the fourth quarter of fiscal 1997. One major inflator manufacturer announced the acquisition of non-azide based inflator technology and that it intended to be in the market with this new technology by model year 1999. In addition, although the Company had achieved significant gains in market share that appeared to relate to the Company's anti-dumping petition and the Suspension Agreement, management believed that the effects of the anti-dumping petition were likely fully incorporated into the sodium azide market by the end of fiscal 1997. Recognizing that the uncertainties respecting the market and discussed above continued to exist, during the fourth quarter of fiscal 1997, management concluded that the cash flows associated with sodium azide operations would not be sufficient to recover the Company's investment in sodium azide related fixed assets. As quoted market prices were not available, the present value of estimated future cash flows was used to estimate the fair value of sodium azide fixed assets. Under the requirements of SFAS No. 121, and as a result of this valuation technique, an impairment charge of $52.6 million was recognized in the fourth quarter of fiscal 1997. See 20 Note 13 to the Consolidated Financial Statements of the Company for further discussion of the impairment charge. Sales of Halotron(TM) amounted to approximately 2%, 3% and 4% of revenues during the fiscal years ended September 30, 1999, 1998 and 1997, respectively. Halotron(TM) is designed to replace halon-based fire suppression systems. Accordingly, demand for Halotron(TM) depends upon a number of factors including the willingness of consumers to switch from halon-based systems, as well as existing and potential governmental regulations. Real estate and related sales amounted to approximately 9%, 5% and 8% of revenues during the fiscal years ended September 30, 1999, 1998 and 1997, respectively. The nature of real estate development and sales is such that the Company is unable reliably to predict any pattern of future real estate sales or recognition of the equity in earnings of real estate ventures. Environmental protection equipment sales accounted for approximately 3%, 4% and 6% of revenues during the fiscal years ended September 30, 1999, 1998 and 1997, respectively. Cost of Sales. The principal elements comprising the Company's cost of sales are raw materials, electric power, labor, manufacturing overhead and the basis in the real estate sold. The major raw materials used by the Company in its production processes are graphite, sodium chlorate, ammonia, hydrochloric acid, sodium metal, and nitrous oxide. Significant increases in the cost of raw materials may have an adverse impact on margins if the Company is unable to pass along such increases to its customers, although all the raw materials used in the Company's manufacturing processes have historically been available in commercial quantities with relatively stable pricing, and the Company has had no difficulty obtaining necessary raw materials. The Company is in the process of negotiating for its expected power requirements beyond April 2002 (see note 10 to the Consolidated Financial Statements of the Company). The costs of operating the Company's specialty chemical plants are, however, largely fixed. Operating Expenses. Operating (selling, general and administrative) expenses were $10.0 million, $9.2 million and $9.5 million during the fiscal years ended September 30, 1999, 1998 and 1997, respectively. Operating expenses in both fiscal 1999 and fiscal 1998 include approximately $1.0 million in costs related to the investigation and evaluation of the trace amounts of perchlorate chemicals found in Lake Mead (see Note 10 to the Consolidated Financial Statements of the Company). The Company is unable to determine the extent to which similar costs will be incurred in the future. Income Taxes. The Company's effective income tax rates were approximately 0% in fiscal 1999 and 1998, and 17% in fiscal 1997. The Company's effective income tax rate decreased to 17% in fiscal 1997 as a result of the establishment of a $10.1 million deferred tax valuation allowance. The Company's effective tax rate will be 0% until the Company's net operating losses expire or the Company has taxable income necessary to eliminate the need for the valuation allowance (see Note 8 to the Consolidated Financial Statements of the Company). Net Income (Loss). Although the Company's net income (loss) and diluted net income (loss) per common share have not been subject to seasonal fluctuations, they have been and are expected to continue to be subject to variations from quarter to quarter and year to year due to the following factors, among others: (i) as discussed in Note 10 to the Consolidated Financial Statements of the Company, the Company may incur material legal and other costs associated with certain litigation and contingencies; (ii) the timing of real estate and related sales and equity earnings of real estate ventures is not predictable; (iii) the recognition of revenues from environmental protection equipment orders not accounted for as long-term contracts depends upon orders generated and the timing of shipment of the equipment; (iv) weighted average common and common equivalent shares for purposes of calculating diluted net income (loss) per common share are subject to significant fluctuations based upon changes in the market price of the Company's Common Stock due to outstanding warrants and options; and (v) the magnitude, pricing and timing of AP, sodium azide, Halotron(TM), 21 and environmental protection equipment sales in the future is uncertain. (See "Forward Looking Statements/Risk Factors" below.) Results of Operations Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended September 30, 1998 Sales and Operating Revenues. Sales increased $20.5 million, or 39%, to $72.8 million in fiscal 1999, from $52.3 million in fiscal 1998. This increase was attributable to increased specialty chemical and real estate sales. Specialty chemical sales increased $16.8 million, or 35%, to $64.5 million in fiscal 1999, from $47.7 million in fiscal 1998. This increase was principally attributable to an increase in perchlorate sales of $13.6 million. The increase in perchlorate sales was attributable to a full year of additional AP sales volume resulting from the Acquisition. In addition, sodium azide sales increased $3.4 million, or 31%, to $14.3 million in fiscal 1999, from $10.9 million in fiscal 1998. Real estate sales increased $3.7 million, or 148%, to $6.2 million in fiscal 1999, from $2.5 million in fiscal 1998 due to an increase in land sales in fiscal 1999 compared to fiscal 1998. Environmental protection sales were $2.1 million in both fiscal 1999 and 1998. Cost of Sales. Cost of sales increased $10.0 million, or 28%, in fiscal 1999 to $45.8 million from $35.8 million in fiscal 1998. Cost of sales as a percentage of sales decreased to 63% in fiscal 1999 as compared to 68% in fiscal 1998. The decrease in cost of sales as a percentage of sales was primarily attributable to operating efficiencies resulting from an increase in specialty chemical sales volumes (perchlorates and sodium azide). Operating Expenses. Operating (selling, general and administrative) expenses increased $0.8 million, or 9%, in fiscal 1999 to $10.0 million from $9.2 million in fiscal 1998. The increase in operating expenses was primarily due to an increase in net periodic pension cost of approximately $0.5 million (see Note 9 to the Consolidated Financial Statements of the Company) and approximately $0.2 million in fiscal 1999 costs incurred related to the arbitration of the Halotron Agreement (see Note 14 to the Consolidated Financial Statements of the Company). Segment Operating Income (Loss). Operating income (loss) of the Company's operating segments during the fiscal years ended September 30, 1999 and 1998 was as follows:
---------------------------------------------------- 1999 1998 ---------------------------------------------------- Specialty chemicals $14,847,000 $6,422,000 Environmental protection equipment (888,000) (2,000) Real estate 3,485,000 1,082,000 ---------------------------------------------------- Total $17,444,000 $7,502,000 ====================================================
The increase in operating income of the specialty chemicals segment was attributable to the increase in perchlorate sales and operating performance as a result of the Acquisition. The increase in operating loss of the environmental protection equipment segment was primarily due to an unusual charge in the amount of approximately $0.7 million associated with certain warranty items. The increase in operating income of the real estate segment was attributable to an increase in revenues from $2.5 million in fiscal 1998 to $6.2 million in fiscal 1999. 22 Interest and Other Income. Interest and other income increased to $1.6 million in fiscal 1999 from $1.3 million in 1998. The increase was principally due to higher average cash and cash equivalent balances. Interest and Other Expense. Interest and other expense increased to $7.0 million in fiscal 1999 from $5.7 million in fiscal 1998. The increase was primarily due to the issuance of the Notes. Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September 30, 1997 Sales and Operating Revenues. Sales increased $8.2 million, or 19%, to $52.3 million in fiscal 1998 from $44.1 million in fiscal 1997. This increase was attributable to increased sales in the Company's specialty chemical operations. The increase in specialty chemical sales was partially offset by decreases in environmental protection equipment and real estate sales. Specialty chemical sales increased $9.7 million, or 26%, to $47.7 million in fiscal 1998 from $38.0 million in fiscal 1997. This increase was principally attributable to an increase in perchlorate sales of $12.3 million, partially offset by a decrease in sodium azide sales. The increase in perchlorate sales was attributable to additional AP sales volume subsequent to the Acquisition. Sodium azide sales decreased $2.4 million, or 18%, to $10.9 million in fiscal 1998, from $13.3 million in fiscal 1997 due principally to a decrease in shipments to Autoliv in the fourth quarter as a result of a strike at certain General Motor's ("GM") facilities. In May 1997, the Company entered into a three-year agreement with Autoliv. The agreement provides for the Company to supply sodium azide used by Autoliv in the manufacture of automotive airbags. Deliveries under the agreement commenced in July 1997. The agreement has been extended an additional six months through December 31, 2000. Environmental protection sales decreased $0.3 million, or 8%, to $2.1 million in fiscal 1998 from $2.4 million in fiscal 1997 as a result of a decrease in equipment shipments. Real estate sales decreased $1.2 million, or 31%, to $2.5 million in fiscal 1998 from $3.7 million in fiscal 1997 due to a decrease in land sales in fiscal 1998 compared to fiscal 1997. Cost of Sales. Cost of sales decreased $0.6 million, or 2%, in fiscal 1998 to $35.8 million from $36.4 million in fiscal 1997. Cost of sales as a percentage of sales decreased to 68% in fiscal 1998 as compared to 83% in fiscal 1997. These decreases were primarily attributable to the increase in perchlorate sales volume offset by a reduction in depreciation expense of approximately $4.0 million as a result of the sodium azide impairment charge referred to above. Operating Expenses. Operating (selling, general and administrative) expenses decreased $0.3 million, or 3%, in fiscal 1998 to $9.2 million from $9.5 million in fiscal 1997. Equity in Earnings of Real Estate Venture. During fiscal 1998 and 1997, the Company recognized its share of the equity in the Company's Ventana Canyon joint venture. The Company's equity in the earnings of the project amounted to approximately $0.3 million and $0.2 million, respectively. Profits and losses are split equally between the Company and its venture partner, a local real estate development company. 23 Segment Operating Income (Loss). Operating income (loss) of the Company's operating segments during the fiscal years ended September 30, 1998 and 1997 was as follows:
-------------------------------------------------- 1998 1997 -------------------------------------------------- Specialty chemicals $6,422,000 $(55,227,000) Environmental protection equipment (2,000) (659,000) Real estate 1,082,000 1,624,000 -------------------------------------------------- Total $7,502,000 $(54,262,000) ==================================================
The increase in operating income of the specialty chemicals segment was attributable to the fixed asset impairment charge in fiscal 1997 of $52.6 million discussed above and the increase in perchlorate sales and operating performance as a result of the Acquisition. The decrease in operating income of the real estate segment was attributable to a decrease in revenues from $3.6 million in fiscal 1997 to $2.5 million in fiscal 1998. Interest and Other Income. Interest and other income increased to $1.3 million in fiscal 1998 from $1.1 million in 1997. The increase was principally due to higher average cash and cash equivalent balances. Interest and Other Expense. Interest and other expense increased to $5.7 million in fiscal 1998 from $2.0 million in fiscal 1997. The increase was primarily due to the issuance of the Notes. Inflation Inflation did not have a significant effect on the Company's sales and operating revenues or costs during the three-year period ended September 30, 1999. Inflation may have an effect on gross profit in the future as certain of the Company's agreements with AP and sodium azide customers require fixed prices, although certain of such agreements contain escalation features that should somewhat mitigate the risks associated with inflation. Liquidity and Capital Resources As discussed in Notes 6 and 7 to the Consolidated Financial Statements of the Company, in March 1998, the Company sold Notes in the principal amount of $75.0 million, acquired certain assets from Kerr-McGee for a cash purchase price of $39.0 million and paid $28.2 million to repurchase the remaining $25.0 million principal amount outstanding of the Azide Notes. The Company incurred approximately $3.6 million in costs associated with the issuance of the Notes. In connection with the Azide Notes repurchase, the Company recognized an extraordinary loss on debt extinguishment of approximately $5.0 million. The Company repurchased and retired $3.0 million and $5.0 million principal amount of Notes in fiscal 1999 and 1998, respectively. The Company incurred extraordinary losses on debt extinguishment of approximately $0.2 million on each of these repurchases principally as a result of writing off costs associated with the issuance of the Notes. Cash flows provided by operating activities were $22.6 million, $7.7 million and $9.6 million during the fiscal years ended September 30, 1999, 1998 and 1997, respectively. The increase in cash flows from operating activities in fiscal 1999 resulted from increased sales and margins in the Company's specialty chemical and real estate operations. The changes in cash flows from operating activities between fiscal 1998 and fiscal 1997 resulted principally from changes in certain working capital balances. The Company believes that its cash flows from operations and existing cash balances will be adequate for the foreseeable future to satisfy the needs of its operations, including debt related payments. However, the resolution of litigation and 24 contingencies, and the timing, pricing and magnitude of orders for AP, sodium azide and Halotron(TM), may have an effect on the use and availability of cash. Capital expenditures were $2.1, $2.8 million and $1.6 million during the fiscal years ended September 30, 1999, 1998 and 1997, respectively. Capital expenditures relate principally to specialty chemical segment capital improvement projects. Capital expenditures are expected to be funded from existing cash balances and operating cash flow. During the three-year period ended September 30, 1999, the Company made debt related payments of approximately $48.6 million, repurchased $4.2 million in common stock and issued $1.5 million in common stock as a result of the exercise of outstanding stock options. As discussed in Note 6 to the Consolidated Financial Statements of the Company, in December 1999, the Company expects to make an offer to purchase approximately $8.6 million in principal amount of Notes at 102%, or at a cost of approximately $8.8 million. The Company will fund any purchases made under this offer from existing cash balances. During the three-year period ended September 30, 1999, the Company received net cash of approximately $8.0 million from its Ventana Canyon joint venture. The Company currently anticipates that cash returns of invested capital and equity in earnings will continue through the conclusion of the project currently projected to be the end of calendar 2001. As a result of the litigation and contingencies discussed in Note 10 to the Consolidated Financial Statements of the Company, the Company has incurred legal and other costs, and it may incur material legal and other costs associated with the resolution of litigation and contingencies in future periods. Any such costs, to the extent borne by the Company and not recovered through insurance, would adversely affect the Company's liquidity. The Company is currently unable to predict or quantify the amount or range of such costs or the period of time over which such costs will be incurred. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major system failure or miscalculations. The Company has completed an evaluation and is in the process of resolving the problems that might be associated with the Year 2000 issue. The Company's Year 2000 project has four major components: 1. Evaluation of all major manufacturing and business computing systems to determine which systems are Year 2000 compliant. 2. For each computing system found not to be Year 2000 compliant, development of a strategy to replace, modify or upgrade the system to a Year 2000 compliant system. 3. Evaluation of core vendors for Year 2000 compliance. 4. Preparation of contingency plans. The Company's evaluation found that the most critical digital control system, which is used in the manufacture of specialty chemical products, is Year 2000 compliant. The Company has received a letter of certification from its vendor, and the Company has tested the system by turning the dates forward on the computers to the year 2000, and all systems functioned normally. 25 The Company's accounting system has been upgraded to a Year 2000 compliant version. This upgrade was completed in the fourth quarter of fiscal 1999. New maintenance and manufacturing (MRP) software packages have been implemented, and each is certified and tested as Year 2000 compliant. The majority of PC computers used by the Company are Pentium class, running Microsoft's Windows 95 operating system, and are Year 2000 compliant. The Company's file servers are running on Pentium computers with Microsoft NT 4.0, and each of these is also certified Year 2000 compliant. The Company also uses Microsoft's office suite, which is Year 2000 compliant. During the evaluation phase of its Year 2000 project, the Company identified certain potential issues related to many of its programmable logic controller units used in the manufacturing process and certain of the Company's laboratory instruments and the computers and software with which they operate. The Company has updated the equipment that was not Year 2000 compliant. The Company has identified all critical vendors of raw materials, supplies and services. Each such vendor has been contacted and asked to describe to the Company their year 2000 readiness program. All such critical vendors have indicated to the Company that they are or will be prepared for the Year 2000 issue. However, the Company can provide no assurance as to the readiness of its critical vendors for the Year 2000 issue. A contingency plan for plant and corporate operations has been prepared and approved by senior management. The Year 2000 issue and related risks could potentially have a material impact on the Company's operations, working capital, results of operations and financial condition. In a worst case situation, long delays or interruptions in deliveries of critical raw materials, supplies or services could materially impact the Company's ability to produce and deliver products. In addition, problems encountered by the Company's customers could cause delays or possibly cancellations of shipments and billings of the Company's products. The Company has considered these risks, among others, in the preparation of its contingency plan. The Company recently reevaluated its estimates and assumptions of the costs directly associated with its Year 2000 project and currently estimates that approximately $0.5 million in costs will be incurred that are directly associated with the project. Through September 30, 1999, the Company had incurred most of these costs. Given the inherent risks for a project of this nature, the costs involved could differ materially from those anticipated by the Company in the event of project failure. Accordingly, there can be no assurance that the Year 2000 project will be completed on schedule or within budget. Forward-Looking Statements/Risk Factors Certain matters discussed in this Report may be forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, the risk factors set forth below. The following risk factors, among others, may cause the Company's operating results and/or financial position to be adversely affected from time to time: 1. (a) Declining demand or downward pricing pressure for the Company's products as a result of general or specific economic conditions, (b) governmental budget decreases affecting the DOD or NASA that would cause a decrease in demand for AP, (c) the results achieved by the Suspension Agreement resulting from the Company's anti-dumping petition against foreign sodium azide producers and the 26 possible termination of such agreement, (d) technological advances and improvements with respect to existing or new competitive products causing a reduction or elimination of demand for AP, sodium azide or Halotron(TM), (e) the ability and desire of purchasers to change existing products or substitute other products for the Company's products based upon perceived quality, environmental effects and pricing, and (f) the fact that perchlorate chemicals, sodium azide, Halotron(TM) and the Company's environmental products have limited applications and highly concentrated customer bases. 2. Competitive factors including, but not limited to, the Company's limitations respecting financial resources and its ability to compete against companies with substantially greater resources, significant excess market supply in the sodium azide market and the development or penetration of competing new products, particularly in the propulsion, airbag inflation and fire suppression businesses. 3. Underutilization of the Company's manufacturing facilities resulting in production inefficiencies and increased costs, the inability to recover facility costs and reductions in margins. 4. Risks associated with the Company's real estate activities, including, but not limited to, dependence upon the Las Vegas commercial, industrial and residential real estate markets, changes in general or local economic conditions, interest rate fluctuations affecting the availability and cost of financing, the performance of the managing partner of its residential real estate joint venture (GRLLC) and regulatory and environmental matters that may have a negative impact on sales or costs. 5. The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies or similar organizations, including, but not limited to, environmental, safety and transportation issues. 6. The cost and effects of legal and administrative proceedings, settlements and investigations, particularly those investigations described in Note 10 to the Consolidated Financial Statements of the Company and claims made by or against the Company relative to patents or property rights. 7. Integration of new customers and the ability to meet additional production and delivery requirements resulting from the Acquisition. 8. The effects, if any, of problems associated with the Year 2000 issue. 9. The results of the Company's periodic review of impairment issues under the provisions of SFAS No. 121. 10. The dependence upon a single facility for the production of most of the Company's products. 11. Provisions of the Company's Certificate of Incorporation and By-laws and recently-adopted Series D Preferred Stock, dividend of preference stock purchase rights and related Rights Agreement could have the effect of making it more difficult for potential acquirors to obtain a control position in the Company. See Note 11 to the Consolidated Financial Statements of the Company. Item 7A. Quantitative and Qualitative Disclosure About Market Risk The Company has certain fixed-rate debt (the Notes) which it believes to have a fair value that approximates reported amounts. The Company believes that any market risk arising from these financial instruments is not material. 27 Item 8. Financial Statements and Supplementary Data - --------------------------------------------------- Financial statements called for hereunder are included herein on the following pages:
Page(s) ------ Independent Auditors' Report 37 Consolidated Balance Sheets 38 Consolidated Statements of Operations 39 Consolidated Statements of Cash Flows 40 Consolidated Statements of Changes in Shareholders' Equity 41 Notes to Consolidated Financial Statements 42-60
28 SUMMARIZED QUARTERLY FINANCIAL DATA (unaudited) (amounts in thousands except per share amounts)
------------------------------------------------ Quarters For Fiscal Year 1999 1st 2nd 3rd 4th Total - -------------------------------------------------------------------------------- (1) (1) Sales and Operating Revenues $18,854 $16,891 $18,659 $18,430 $72,834 Gross Profit 7,266 5,921 6,230 7,583 27,000 Net Income Before Extraordinary Loss 3,301 2,064 2,356 3,892 11,613 Net Income 3,301 2,064 2,182 3,892 11,439 Diluted Net Income Before Extraordinary Loss Per Share $ .40 $ .25 $ .28 $ .48 $ 1.41 Diluted Net Income Per Share $ .40 $ .25 $ .26 $ .48 $ 1.39
(1) Net income includes an extraordinary loss on debt extinguishment of approximately $0.2 million in the third quarter.
------------------------------------------------ Quarters For Fiscal Year 1998 1st 2nd 3rd 4th Total - -------------------------------------------------------------------------------- (1) (1) (1) Sales and Operating Revenues $11,268 $14,119 $13,136 $13,816 $52,339 Gross Profit 3,162 4,990 4,089 4,306 16,547 Net Income Before Extraordinary Loss 566 1,993 214 388 3,161 Net Income (Loss) 566 (3,012) 214 221 (2,011) Diluted Net Income Before Extraordinary Loss Per Share $ .07 $ .24 $ .02 $ .05 $ .38 Diluted Net Income (Loss) Per Share $ .07 $ (0.36) $ .02 $ .03 $ (.24)
/(1)/ Net income (loss) includes an extraordinary loss on debt extinguishment of approximately $5.0 million in the second quarter and $0.2 million in the fourth quarter. Item 9. Changes in and Disagreements with Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure - -------------------- Not Applicable. 29 PART III Item 10. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- The required information regarding directors and executive officers is incorporated herein by reference from the Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than January 28, 2000. Item 11. Executive Compensation - ------------------------------- The required information regarding executive compensation is incorporated herein by reference from the Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than January 28, 2000. Item 12. Security Ownership of Certain Beneficial Owners and Management - ----------------------------------------------------------------------- The required information regarding security ownership of certain beneficial owners and management is incorporated herein by reference from the Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than January 28, 2000. Item 13. Certain Relationships and Related Transactions - ------------------------------------------------------- The required information regarding certain relationships and related transactions is incorporated by reference from the Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than January 28, 2000. 30 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------- (a) (1) Financial Statements -------------------- See Part II, Item 8 for an index to the Registrant's financial statements and supplementary data. (2) Financial Statement Schedules ----------------------------- None applicable. (3) Exhibits -------- (a) The following Exhibits are filed as part of this Report (references are to Regulation S-K Exhibit Numbers): 2.1 Asset Purchase Agreement dated as of October 10, 1997 between AMPAC, Inc. and Kerr-McGee Chemical Corporation, incorporated herein by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated February 19, 1998. 3.1 Registrant's Restated Certificate of Incorporation, incorporated by reference to Exhibit 3A to Registrant's Registration Statement on Form S-14 (File No. 2-70830), (the "S-14"). 3.2 Registrant's By-Laws, incorporated by reference to Exhibit 3B to the S-14. 3.3 Amendments to Registrant's By-Laws, incorporated by Reference to the Registrant's Current Report on Form 8-K dated November 9, 1999. 3.4 Articles of Amendment to the Restated Certificate of Incorporation, as filed with the Secretary of State, State of Delaware, on October 7, 1991, incorporated by reference to Exhibit 4.3 to Registrant's Registration Statement on Form S-3 (File No. 33-52196) (the "S-3"). 3.5 Articles of Amendment to the Restated Certificate of Incorporation as filed with the Secretary of State, State of Delaware, on April 21, 1992, incorporated by reference to Exhibit 4.4 to the S-3. 4.1 American Pacific Corporation 1991 Nonqualified Stock Option Plan, incorporated by reference to Exhibit 10.26 to the Registrant's Registration Statement on Form S-2 (File No. 33-36664) (the "1990 S-2"). 4.2 American Pacific Corporation 1994 Directors' Stock Option Plan incorporated by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (the "1995 10-K"). 31 4.3 Stock Option Agreement between Registrant and General Technical Services, Inc. dated July 11, 1995 incorporated by reference to Exhibit 10.35 to the 1995 10-K. 4.4 Stock Option Agreement between Registrant and John R. Gibson dated July 8, 1997 incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 (the "1997 10-K"). 4.5 Stock Option Agreement between Registrant and David N. Keys dated July 8, 1997 incorporated by reference to Exhibit 10.19 to the 1997 10-K. 4.6 Form of Stock Option Agreement between Registrant and certain Directors dated May 21, 1997 incorporated by reference to Exhibit 10.21 to the 1997 10-K. 4.7 American Pacific Corporation 1997 Stock Option Plan (the "1997 Plan") incorporated by reference to Exhibit 4.1 to Registrant's Form S-8 (File No. 333-53449) (the "1998 S-8"). 4.8 Form of Option Agreement under the 1997 Plan incorporated by reference to Exhibit 4.2 to the 1998 S-8. 4.9 Form of Note and Warrants Purchase Agreement dated February 21, 1992, relating to the Registrant's previously outstanding Subordinated Secured Term Notes, incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K dated February 28, 1992 (the "1992 8-K"). 4.10 Form of Warrant to purchase Common Stock of the Registrant dated February 21, 1992, incorporated by reference to Exhibit 10.4 to the 1992 8-K. 4.11 Form of Warrant to purchase Common Stock of American Azide Corporation dated February 21, 1992, incorporated by reference to Exhibit 10.5 to the 1992 8-K. 4.12 Indenture dated as of March 1, 1998 by and between the Registrant and United States Trust Company of New York, incorporated by reference to Exhibit 4.1 to Form S-4 (File No. 333-49883) (the "1998 S-4"). 4.13 Registration Rights Agreement dated March 12, 1998, by and between the Company and Credit Suisse First Boston Corporation, incorporated by reference to Exhibit 99.1 to the 1998 S-4. 4.14 Form of Letter of Transmittal for Tender of outstanding 9 1/4% Senior Notes Due 2005 in exchange for 9 1/4% Senior Notes Due 2005 of the Registrant, incorporated by reference to Exhibit 99.2 to the 1998 S-4. 4.15 Form of Tender for outstanding 9 1/4% Senior Notes Due 2005 in exchange for 91/4% Senior Notes due 2005 of the Registrant, incorporated by reference to Exhibit 99.3 to the 1998 S-4. 4.16 Form of Instruction to Registered Holder from Beneficial Owner of 9 1/4% Senior Unsecured Notes due 2005 of the Registrant, incorporated by reference to Exhibit 99.4 to the 1998 S-4. 32 4.17 Form of Notice of Guaranteed Delivery for outstanding 9 1/4% Senior Notes Due 2005 in exchange for 9 1/4% Senior Notes Due 2005 of the Registrant, incorporated by reference to Exhibit 99.5 to the 1998 S-4. 4.18 Form of Rights Agreement, dated as of August 3, 1999, between Registrant and American Stock Transfer & Trust Company, incorporated by reference to the Registrant's Registration Statement on Form 8-A dated August 6, 1999 (the "Form 8-A"). 4.19 Form of Letter to Stockholders with copies of Summary of Rights to Purchase Preference Shares incorporated by reference to the Form 8-A. 10.1 Employment agreement dated November 7, 1994 between the Registrant and David N. Keys, incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 10.2 Employment agreement dated May 11, 1999 between the Registrant and John R. Gibson, incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1999. * 10.3 Consulting Agreement between the Registrant and Fred D. Gibson, Jr. dated October 1, 1999. * 10.4 Amended and Restated American Pacific Corporation Defined Benefit Pension Plan. * 10.5 Amended and Restated American Pacific Corporation Supplemental Executive Retirement Plan effective January 1, 1999. * 10.6 Trust Agreement for the Amended and Restated American Pacific Corporation Supplemental Executive Retirement Plan. 10.7 Lease Agreement between 3770 Hughes Parkway Associates Limited Partnership and the Registrant, dated July 31, 1990, incorporated by reference to Exhibit 10.22 to the 1990 S-2. 10.8 Limited Partnership Agreement of 3770 Hughes Parkway Associates, Limited Partnership, incorporated by reference to Exhibit 10.23 to the 1990 S-2. 10.9 Cooperation and Stock Option Agreement dated as of July 4, 1990 by and between Dynamit Nobel AG and the Registrant, including exhibits thereto, incorporated by reference to Exhibit 10.24 to the 1990 S-2. 10.10 Articles of organization of Gibson Ranch Limited - Liability Company dated August 25, 1993, incorporated by reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 (the "1993 10-K"). 10.11 Operating agreement of Gibson Ranch Limited - Liability Company, a Nevada Limited - Liability Company, incorporated by reference to Exhibit 10.34 to the 1993 10-K. 10.12 Settlement Agreement between Registrant and C. Keith Rooker dated July 17, 1997 incorporated by reference to Exhibit 10.20 to the 1997 10-K. 33 10.13 Long-Term Pricing Agreement dated as of December 12, 1997 between Thiokol Corporation-Propulsion and the Registrant incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 (the "1998 March 10-Q"). 10.14 Partnershipping Agreement between Alliant Techsystems Incorporated ("Alliant") and Western Electrochemical Company and letter dated November 24, 1997 from the Registrant to Alliant and revised Exhibit B with respect thereto, incorporated by reference to Exhibit 10.2 to the 1998 March 10-Q. *21 Subsidiaries of the Registrant. *23 Consent of Deloitte & Touche LLP. *24 Power of Attorney, included on Page 35. *27 Financial Data Schedule * Filed herewith. (b) Reports on Form 8-K ------------------- Date of Report Event Reported -------------- -------------- August 3, 1999 American Pacific Adopts Stockholder Rights Plan 34 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 7, 1999 AMERICAN PACIFIC CORPORATION (Registrant) By: /s/ JOHN R. GIBSON -------------------------------- John R. Gibson President & Chief Executive Officer By: /s/ DAVID N. KEYS -------------------------------- David N. Keys Executive Vice President, Chief Financial Officer, Secretary and Treasurer, Principal Financial and Accounting Officer POWER OF ATTORNEY ----------------- American Pacific Corporation and each of the undersigned do hereby appoint John R. Gibson and David N. Keys and each of them severally, its or his true and lawful attorneys, with full power of substitution and resubstitution, to execute on behalf of American Pacific Corporation and the undersigned any and all amendments to this Report and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. Each of such attorneys shall have the power to act hereunder with or without the others. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on behalf of the Registrant by the following persons in the capacities and on the dates indicated. /s/ John R. Gibson Date: December 7, 1999 - -------------------------------------- John R. Gibson Chief Executive Officer, President, and Director /s/ David N. Keys Date: December 7, 1999 - -------------------------------------- David N. Keys Executive Vice President, Chief Financial Officer, Secretary and Treasurer; Principal Financial and Accounting Officer and Director 35 /s/ Fred D. Gibson, Jr. Date: December 7, 1999 - --------------------------------- Fred D. Gibson, Jr. Director /s/ C. Keith Rooker Date: December 7, 1999 - --------------------------------- C. Keith Rooker Director /s/ Norval F. Pohl Date: December 7, 1999 - --------------------------------- Norval F. Pohl, Ph.D. Director /s/ Thomas A. Turner Date: December 7, 1999 - --------------------------------- Thomas A. Turner Director /s/ Berlyn D. Miller Date: December 7, 1999 - --------------------------------- Berlyn D. Miller Director /s/ Jane L. Williams Date: December 7, 1999 - --------------------------------- Jane L. Williams Director /s/ Victor M. Rosenzweig Date: December 7, 1999 - --------------------------------- Victor M. Rosenzweig Director /s/ Dean M. Willard Date: December 7, 1999 - --------------------------------- Dean M. Willard Director /s/ Eugene A. Cafiero Date: December 7, 1999 - --------------------------------- Eugene A. Cafiero Director /s/ Jan H. Loeb Date: December 7, 1999 - --------------------------------- Jan H. Loeb Director 36 INDEPENDENT AUDITORS' REPORT To the Board of Directors of American Pacific Corporation: We have audited the accompanying consolidated balance sheets of American Pacific Corporation and its Subsidiaries (the "Company") as of September 30, 1999 and 1998, and the related consolidated statements of operations, cash flows and changes in shareholders' equity for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1999 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Las Vegas, Nevada November 19, 1999 37 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND 1998 - --------------------------------------------------------------------------------
1999 1998 --------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 40,434,000 $ 20,389,000 Accounts and notes receivable 8,859,000 8,927,000 Related party notes receivable 447,000 536,000 Inventories 9,577,000 13,730,000 Prepaid expenses and other assets 680,000 839,000 Restricted cash 1,195,000 1,176,000 --------------------------------- Total Current Assets 61,192,000 45,597,000 PROPERTY, PLANT AND EQUIPMENT, NET 17,254,000 19,529,000 INTANGIBLE ASSETS, NET 34,210,000 38,252,000 REAL ESTATE EQUITY INVESTMENTS 11,237,000 17,112,000 DEVELOPMENT PROPERTY 6,440,000 7,036,000 DEBT ISSUE COSTS, NET 2,547,000 3,156,000 OTHER ASSETS 2,000 77,000 --------------------------------- TOTAL ASSETS $132,882,000 $130,759,000 ================================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 6,909,000 $ 9,635,000 Notes payable and current portion of long-term debt 1,195,000 1,176,000 --------------------------------- Total Current Liabilities 8,104,000 10,811,000 LONG-TERM PAYABLES 2,005,000 2,350,000 LONG-TERM DEBT 67,000,000 70,000,000 --------------------------------- TOTAL LIABILITIES 77,109,000 83,161,000 --------------------------------- COMMITMENTS AND CONTINGENCIES WARRANTS TO PURCHASE COMMON STOCK 3,569,000 3,569,000 SHAREHOLDERS' EQUITY: Common stock - $.10 par value, 20,000,000 authorized, issued - 8,467,791 in 1999 and 8,423,791 in 1998 847,000 842,000 Capital in excess of par value 79,757,000 79,488,000 Accumulated deficit (23,279,000) (34,718,000) Treasury stock (635,354 shares in 1999 and 206,654 shares in 1998) (5,034,000) (1,486,000) Note receivable from the sale of stock (87,000) (97,000) --------------------------------- Total Shareholders' Equity 52,204,000 44,029,000 --------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $132,882,000 $130,759,000 =================================
See Notes to Consolidated Financial Statements. 38 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
1999 1998 1997 ----------------------------------------------- SALES AND OPERATING REVENUES $72,834,000 $52,339,000 $ 44,050,000 COST OF SALES 45,834,000 35,792,000 36,420,000 ----------------------------------------------- GROSS PROFIT 27,000,000 16,547,000 7,630,000 OPERATING EXPENSES 10,024,000 9,246,000 9,509,000 FIXED ASSET IMPAIRMENT CHARGE 52,605,000 EMPLOYEE SEPARATION AND MANAGEMENT REORGANIZATION COSTS 3,616,000 ----------------------------------------------- OPERATING INCOME (LOSS) 16,976,000 7,301,000 (58,100,000) EQUITY IN EARNINGS OF REAL ESTATE VENTURE 300,000 200,000 INTEREST AND OTHER INCOME 1,588,000 1,294,000 1,115,000 INTEREST AND OTHER EXPENSE 6,951,000 5,734,000 2,001,000 ----------------------------------------------- INCOME (LOSS) BEFORE CREDIT FOR INCOME TAXES 11,613,000 3,161,000 (58,786,000) CREDIT FOR INCOME TAXES (10,101,000) ----------------------------------------------- NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSSES 11,613,000 3,161,000 (48,685,000) EXTRAORDINARY LOSS-DEBT EXTINGUISHMENTS 174,000 5,172,000 ----------------------------------------------- NET INCOME (LOSS) $11,439,000 $(2,011,000) $(48,685,000) =============================================== BASIC NET INCOME (LOSS) PER SHARE: INCOME (LOSS) BEFORE EXTRAORDINARY LOSS $ 1.43 $ .39 $ (6.01) EXTRAORDINARY LOSS (.02) (.63) ----------------------------------------------- NET INCOME (LOSS) $ 1.41 $ (.24) $ (6.01) =============================================== AVERAGE SHARES OUTSTANDING 8,111,000 8,198,000 8,105,000 ----------------------------------------------- DILUTED NET INCOME (LOSS) PER SHARE: INCOME (LOSS) BEFORE EXTRAORDINARY LOSS $ 1.41 $ .38 $ (6.01) EXTRAORDINARY LOSS (.02) (.62) ----------------------------------------------- NET INCOME (LOSS) $ 1.39 $ (.24) $ (6.01) =============================================== DILUTED SHARES 8,236,000 8,321,000 8,105,000 -----------------------------------------------
See Notes to Consolidated Financial Statements. 39 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
1999 1998 1997 --------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $11,439,000 $ (2,011,000) $(48,685,000) --------------------------------------------- Adjustments to reconcile net income (loss ) to net cash from operating activities: Depreciation and amortization 7,684,000 5,322,000 7,685,000 Fixed asset impairment charge 52,605,000 Employee separation and management reorganization costs 3,616,000 Basis in development property sold 1,913,000 822,000 1,498,000 Development property additions (96,000) (496,000) (229,000) Equity in real estate venture (300,000) (200,000) Cash received on equity in real estate venture 300,000 200,000 Extraordinary debt charges 174,000 5,172,000 Changes in assets and liabilities: Short-term investments 2,000,000 Accounts and notes receivable 167,000 (3,275,000) (1,286,000) Inventories 4,153,000 (2,614,000) 181,000 Restricted cash 2,404,000 1,389,000 Prepaid expenses and other 234,000 188,000 32,000 Accounts payable and accrued liabilities (3,071,000) 2,148,000 870,000 Deferred income taxes (10,101,000) --------------------------------------------- Total adjustments 11,158,000 9,671,000 58,260,000 --------------------------------------------- Net cash from operating activities 22,597,000 7,660,000 9,575,000 --------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (2,100,000) (2,766,000) (1,557,000) Payment for acquisition intangible (39,000,000) Real estate equity advances (2,680,000) Return of capital on real estate equity investments 5,875,000 3,135,000 1,130,000 --------------------------------------------- Net cash from investing activities 3,775,000 (38,631,000) (3,107,000) --------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Debt related payments (3,053,000) (39,416,000) (6,168,000) Issuance of common stock 274,000 940,000 236,000 Treasury stock acquired (3,548,000) (451,000) (156,000) Issuance of notes 75,000,000 Debt issue costs (3,594,000) --------------------------------------------- Net cash from financing activities (6,327,000) 32,479,000 (6,088,000) --------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 20,045,000 1,508,000 380,000 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 20,389,000 18,881,000 18,501,000 --------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $40,434,000 $ 20,389,000 $ 18,881,000 ============================================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during year for interest $ 6,463,000 $ 5,118,000 $ 1,427,000 ============================================= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Excess additional pension liability $ 1,175,000 =============================================
See Notes to Consolidated Financial Statements. 40 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Retained Note Net Outstanding Par Value Capital in Earnings Receivable Number of of Shares excess of (Accumulated Treasury from the Sale Common Shares Issued Par Value Deficit) Stock of Stock -------------------------------------------------------------------------------------------------- BALANCES, OCTOBER 1, 1996 8,098,621 $823,000 $78,331,000 $ 15,978,000 $ (879,000) $(97,000) Net loss (48,685,000) Issuance of common stock 61,000 6,000 230,000 Treasury stock acquired (22,084) (156,000) -------------------------------------------------------------------------------------------------- BALANCES, SEPTEMBER 30, 1997 8,137,537 829,000 78,561,000 (32,707,000) (1,035,000) (97,000) Net loss (2,011,000) Issuance of common stock 134,000 13,000 927,000 Treasury stock acquired (54,400) (451,000) -------------------------------------------------------------------------------------------------- BALANCES, SEPTEMBER 30, 1998 8,217,137 842,000 79,488,000 (34,718,000) (1,486,000) (97,000) Net income 11,439,000 Issuance of common stock 44,000 5,000 269,000 Treasury stock acquired (428,700) (3,548,000) Note payments 10,000 -------------------------------------------------------------------------------------------------- BALANCES, SEPTEMBER 30, 1999 7,832,437 $847,000 $79,757,000 $(23,279,000) $(5,034,000) $(87,000) ==================================================================================================
See Notes to Consolidated Financial Statements. 41 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include --------------------------- the accounts of American Pacific Corporation and Subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents - All highly liquid investment securities with a ------------------------- maturity of three months or less when acquired are considered to be cash equivalents. The Company's investment securities, along with certain cash and cash equivalents that are not deemed securities under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," are carried on the consolidated balance sheets in the cash and cash equivalents category. SFAS No. 115 requires all securities to be classified as either held-to-maturity, trading or available-for-sale. Management determines the appropriate classification of its investment securities at the time of purchase and re-evaluates such determination at each balance sheet date. Pursuant to the criteria that are prescribed by SFAS No. 115, the Company has classified its investment securities as available-for-sale. Available-for-sale securities are required to be carried at fair value, with material unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. Realized gains and losses are taken into income in the period of realization. The estimated fair value of the Company's portfolio of investment securities at September 30, 1999 and 1998 closely approximated amortized cost. There were no material unrealized gains or losses on investment securities and no recorded adjustments to amortized cost at September 30, 1999 or 1998. Related Party Notes Receivable - Related party notes receivable represent ------------------------------ demand notes bearing interest at a bank's prime rate from the former Chairman and a current officer of the Company. Inventories - Inventories are stated at the lower of cost or market. Cost of ----------- the specialty chemicals segment inventories is determined principally on a moving average basis and cost of the environmental protection equipment segment inventories is determined principally on the specific identification basis. Property, Plant and Equipment - Property, plant and equipment are carried at ----------------------------- cost less accumulated depreciation. The Company periodically assesses the recoverability of property, plant and equipment and evaluates such assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Asset impairment (including intangible assets) is determined to exist if estimated future cash flows, undiscounted and without interest charges, are less than the carrying amount. An impairment charge of $52.6 million relating to certain specialty chemical assets was recognized in fiscal 1997. (See Note 13.) Depreciation is computed on the straight line method over the estimated productive lives of the assets (3 to 12 years for machinery and equipment and 15 to 31 years for buildings and improvements). Development Property - Development property consists of commercial and -------------------- industrial land (principally improved land). During fiscal 1993, approximately 240 acres of development property was contributed to a real estate limited-liability company. (See Note 5.) Development property is carried at cost not in excess of estimated net realizable value. Estimated net realizable value is based upon the net sales proceeds anticipated in the normal course of business, less estimated costs to complete or improve the property to the condition used in determining the estimated selling price, including future interest and property taxes through the point of substantial completion. Cost includes the cost of land, initial 42 planning, development costs and carrying costs. Carrying costs include interest and property taxes until projects are substantially complete. No interest was capitalized on development property during the three-year period ended September 30, 1999. Debt Issue Costs - Debt issue costs are amortized on the effective interest ---------------- method over the terms of the related indebtedness. Fair Value Disclosure as of September 30, 1999: ----------------------------------------------- Cash and cash equivalents, accounts and notes receivable, restricted cash, and accounts payable and accrued liabilities - The carrying value of these items is a reasonable estimate of their fair value. Long-term debt and warrants - Market quotations are not available for the Company's Warrants. However, the $14 strike price of the Warrants (see Note 6) is substantially in excess of the recent trading prices of the Company's common stock. During fiscal 1999, the Company repurchased $3.0 million in principal amount of its unsecured senior notes at a price of about par (see Note 6). Although these notes are thinly traded, the Company believes the recent repurchase price represents a reasonable estimate of the fair value of the notes. Sales and Revenue Recognition - Sales of the specialty chemicals segment are ----------------------------- recognized as the product is shipped and billed pursuant to outstanding purchase orders. Sales of the environmental protection equipment segment are recognized on the percentage of completion method for long-term contracts and when the product is shipped for other contracts. Profit from sales of development property and the Company's equity in real estate equity investments is recognized when and to the extent permitted by SFAS No. 66, "Accounting for Sales of Real Estate". Research and Development - Research and development costs are charged to ------------------------ operations as incurred. These costs are for proprietary research and development activities that are expected to contribute to the future profitability of the Company. Net Income (Loss) Per Common Share - Basic per share amounts are computed by ---------------------------------- dividing net income (loss) by average shares outstanding during the period. Diluted net income (loss) per share amounts are computed by dividing net income (loss) by average shares outstanding plus the dilutive effect of common share equivalents. Since the Company incurred a net loss before extraordinary loss during the fiscal year ended September 30, 1997, diluted per share calculations are based upon average shares outstanding during this year. Accordingly, the effect of stock options and warrants outstanding for approximately 3.8 million shares at September 30, 1997 was not included in diluted net loss per share calculations. Diluted net income (loss) per share amounts during the fiscal years ended September 30, 1999 and 1998 is determined considering the dilutive effect of stock options and warrants. The effect of stock options and warrants outstanding to purchase approximately 2.9 million shares was not included in diluted per share calculations during the 1999 and 1998 fiscal years as the average exercise price of such options and warrants was greater than the average price of the Company's common stock. Income Taxes - The Company accounts for income taxes under the provisions of ------------ SFAS No. 109, "Accounting for Income Taxes". (See Note 8.) Estimates and Assumptions - The preparation of financial statements in ------------------------- conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by the Company include estimated useful lives for depreciable and 43 amortizable assets, the estimated valuation allowance for deferred tax assets, and estimated cash flows in assessing the recoverability of long- lived assets. Actual results may differ from estimates. Recently Adopted Accounting Standards - During 1999, the Company adopted ------------------------------------- SFAS No. 132, "Employers' Disclosures about Pensions and other Postretirement Benefits" which is an amendment of SFAS No. 87, 88 and 106. SFAS No. 132 revises employer's disclosures about pension and other postretirement benefits plans but does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets and eliminates certain disclosures. (See Note 9.) During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement redefines how operating segments are determined and requires qualitative disclosure of certain financial and descriptive information about a company's operating segments. (See Note 12.) Recently Issued Accounting Standards - SFAS No. 133, "Accounting for ------------------------------------ Derivative Instruments and Hedging Activities" was issued in June 1998. The statement establishes accounting and reporting standards for derivative instruments, including certain derivatives instruments embedded in other contracts, and for hedging activities. This statement is effective for all fiscal quarters and all fiscal years beginning after June 15, 2000, although earlier application is encouraged. This statement may not be applied retroactively. The Company expects to adopt this statement effective July 1, 2000, and does not expect the adoption to have a material effect on its financial position or results of operations. Reclassifications - Certain reclassifications have been made in the 1998 and ----------------- 1997 consolidated financial statements in order to conform to the presentation used in 1999. 2. INVENTORIES Inventories at September 30, 1999 and 1998 consist of the following:
1999 1998 -------------------------------------------------- Work-in-process $5,938,000 $ 8,685,000 Raw material and supplies 3,639,000 5,045,000 -------------------------------------------------- Total $9,577,000 $13,730,000 ==================================================
3. RESTRICTED CASH At September 30, 1999, restricted cash consists of approximately $1.2 million held in a cash collateral account by a lender which provided a term loan (the "AP Facility Loan") as the principal financing for an ammonium perchlorate ("AP") manufacturing facility erected and operated by the Company. Funds in the cash collateral account are restricted for future indemnity payments relating to the AP Facility Loan. The AP Facility Loan was repaid in 1994. The $1.2 million will be retained in the cash collateral account until the balance remaining after any indemnity payments is returned to Thiokol Propulsion, a division of Cordant Technologies Inc. ("Thiokol"). The Company's obligation to return such funds is included in the current portion of long-term debt at September 30, 1999. Any indemnity payments made will serve to reduce the cash collateral account and the Company's obligation to Thiokol. 44 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at September 30, 1999 and 1998 are summarized as follows:
1999 1998 ------------------------------------------------------- Land $ 117,000 $ 352,000 Buildings, machinery and equipment 25,158,000 24,741,000 Construction in progress 1,065,000 874,000 ------------------------------------------------------- Total 26,340,000 25,967,000 Less: accumulated depreciation 9,086,000 6,438,000 ------------------------------------------------------- Property, plant and equipment, net $17,254,000 $19,529,000 =======================================================
A fixed asset impairment charge of $52.6 million was recognized in 1997. (See Note 13.) 5. REAL ESTATE EQUITY INVESTMENTS During fiscal 1993, the Company contributed approximately 240 acres of development property to Gibson Ranch Limited Liability Company ("GRLLC"). A local real estate development group ("Developer") contributed an adjacent 80-acre parcel to GRLLC. GRLLC is developing the 320-acre parcel principally as a residential real estate development. Each of the Company and Developer is obligated to loan to GRLLC, under a revolving line of credit, up to $2.4 million at an annual interest rate of 10 percent. However, Developer will not be required to advance funds under its revolving line of credit until the Company's line is exhausted. In November, 1995, the Company committed to advance an additional $1.7 million to Developer. Developer is required to advance any funds received to GRLLC. Funds advanced under this additional commitment bear annual interest of 12 percent. There were no advances outstanding under these lines at September 30, 1999. Developer is the managing member of GRLLC and is managing the business conducted by GRLLC. Certain major decisions, such as incurring debt and changes in the development plan or budget may be made only by a management committee on which the Company is equally represented. The profits and losses of GRLLC will be split equally between the Company and Developer after the return of advances and agreed upon values for initial contributions. GRLLC operates on a calendar year. The Company recognizes its share of the equity in GRLLC on a current quarterly basis. Summarized financial information for GRLLC as of and for the nine months ended September 30, 1999 and as of and for the years ended December 31, 1998 and 1997 was as follows:
---------------------------------------------------------- September 30, December 31, December 31, 1999 1998 1997 ---------------------------------------------------------- Income Statement: Revenues $25,302,000 $36,975,000 $21,647,000 Gross Profit 4,983,000 2,766,000 3,422,000 Operating expenses 980,000 1,542,000 1,223,000 Net Income $ 4,003,000 $ 1,224,000 $ 2,199,000 Balance Sheet: Assets $21,837,000 $25,007,000 $27,659,000 Liabilities 9,765,000 13,628,000 13,334,000 Equity $12,072,000 $11,379,000 $14,325,300 - ---------------------------------------------------------------------------------------------------------
45 The Company has applied the provisions of SFAS No. 58 "Capitalization of Interest Cost of Financial Statements that Include Investments Accounted for by the Equity Method" to its investment in GRLLC. As of September 30, 1999, the Company has capitalized approximately $6.2 million of interest since the joint venture began undergoing activities to start its planned principal operations of real estate development and sale of such real estate. Capitalization of interest on the joint venture ceased in September 1997 since the Company's recorded investment in GRLLC approximates the amount of cash flow that is estimated to be generated from the project. The Company amortizes the difference resulting from the application of SFAS No. 58 on a current quarterly basis based upon the ratio of acres sold to total salable acres in the joint venture. Such difference will be completely amortized upon the build-out and sale of the joint venture's real estate project which is estimated to occur in calendar 2001. As of September 30, 1999, approximately $3.1 million in capitalized interest resulting from the application of SFAS No. 58 had been amortized against the equity in earnings of GRLLC. GRLLC's balance sheet is not classified. Assets consist principally of inventories and liabilities consist principally of notes and accounts payable. Inventories were $20.7 million at September 30, 1999 and $21.4 million and $25.7 million at December 31, 1998 and December 31, 1997, respectively. In July 1990, the Company contributed $0.7 million to Gibson Business Park Associates 1986-I, a real estate development limited partnership (the "Partnership"), in return for a 70% interest as a general and limited partner, and other limited partners contributed $0.3 million in return for a 30% interest as limited partners. Such other limited partners include certain members of the Company's Board of Directors. The Partnership, in turn, contributed $1.0 million to 3770 Hughes Parkway Associates Limited Partnership, a Nevada limited partnership ("Hughes Parkway"), in return for a 33% interest as a limited partner in Hughes Parkway. The Company entered into an agreement with Hughes Parkway pursuant to which the Company leases office space in a building in Las Vegas, Nevada. (See Note 10.) 6. NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt at September 30, 1999 and 1998 are summarized as follows:
1999 1998 ---------------------------------------- 9 1/4% Senior unsecured notes $67,000,000 $70,000,000 Indemnity obligation (see Note 3) 1,195,000 1,176,000 ---------------------------------------- Total 68,195,000 71,176,000 Less current portion 1,195,000 1,176,000 ---------------------------------------- Total $67,000,000 $70,000,000 ========================================
On March 12, 1998, the Company sold $75.0 million principal amount of unsecured senior notes (the "Notes"), consummated an acquisition (the "Acquisition") of certain assets from Kerr-McGee Chemical Corporation ("Kerr-McGee") described in Note 7 and repurchased the remaining $25.0 million principal amount outstanding of subordinated secured notes (the "Azide Notes"). The Notes mature on March 1, 2005. Interest on the Notes is payable in cash at a rate of 9-1/4% per annum on each March 1 and September 1, commencing September 1, 1998. The indebtedness evidenced by the Notes represents a senior unsecured obligation of the Company, ranks pari passu in right of payment with all existing and future senior indebtedness of the Company and is senior in right of payment to all future subordinated indebtedness of the Company. The Indenture under which the Notes were issued contains various limitations and restrictions including (i) change in control provisions, (ii) limitations on indebtedness and (iii) limitations on restricted payments such as dividends, stock 46 repurchases and investments. Management believes the Company has complied with these limitations and restrictions. In April 1998, the Company filed a Form S-4 registration statement with the Securities and Exchange Commission for the purpose of effecting the exchange of the Notes for identical Notes registered for resale under the federal securities laws. The exchange was consummated on August 28, 1998. Within ninety days following the end of each fiscal year, the Indenture requires the Company to make an offer to all holders of the Notes to purchase Notes at an offer price equal to 102% of the principal amount of the Notes to be purchased, in an amount equal to 50% of the excess cash flow (a defined term in the Indenture) for the applicable fiscal year. In December 1999, the Company expects to make an offer to purchase approximately $8.6 million in principal amount of Notes at 102%, or at a cost of approximately $8.8 million. Under the provisions of the Indenture, the offer will remain open for 20 business days. The Company repurchased and retired $3.0 million and $5.0 million in principal amount of Notes in fiscal 1999 and fiscal 1998, respectively. The Company incurred extraordinary losses on each of these debt extinguishments of approximately $0.2 million, principally as a result of writing off costs associated with the issuance of the Notes. The Azide Notes were 11% noncallable subordinated secured term notes, which were issued and sold in February 1992 to finance the design, construction and start-up of the Company's sodium azide facility. A portion of the net proceeds from sale of the Notes was applied to repurchase the Azide Notes for approximately $28.2 million (approximately 113% of the outstanding principal amount thereof). In connection with the repurchase, the Company recognized an extraordinary loss on debt extinguishment of approximately $5.0 million. The extraordinary loss consisted of the cash premium paid of $3.2 million upon repurchase and a charge of $1.8 million to write off the unamortized balance of debt issue and discount costs. The Company issued to the purchasers of the Azide Notes warrants (the "Warrants"), exercisable for a ten-year period commencing on December 31, 1993, to purchase shares of Common Stock at an exercise price of $14.00 per share. The maximum number of shares purchasable upon exercise of the Warrants is 2,857,000 shares. The Warrants are exercisable, at the option of their holders, to purchase up to 20 percent of the common stock of American Azide Corporation ("AAC"), a wholly-owned subsidiary of the Company, rather than the Company's Common Stock. In the event of such an election, the exercise price of the Warrants will be based upon a pro rata share of AAC's capital, adjusted for earnings and losses, plus interest from the date of contribution. The Warrants contain certain provisions for a reduction in exercise price in the event the Company issues or is deemed to issue stock, rights to purchase stock or convertible debt at a price less than the exercise price in effect, or in the event of certain stock dividends, stock splits, mergers or similar transactions. The holders of the Warrants had certain put rights that required the holders to deliver to the Secretary of the Company a written request (a "Put Notice") at least ninety days prior to a Put Purchase Date (a defined term in the Warrants). Since the last available Put Purchase Date under the Warrants is December 31, 1999, and the Company has received no Put Notices, the put rights under the Warrants have effectively expired. On or after December 31, 1999, the Company may call up to 50% of the Warrants at prices that would provide a 30% internal rate of return to the holders thereof through the date of call (inclusive of the 11% Azide Notes' yield). The holders of the Warrants were also granted the right to require that the Common Stock underlying the Warrants be registered on one occasion, as well as certain incidental registration rights. 47 The Company has accounted for the proceeds of the financing applicable to the Warrants as temporary capital. Any adjustment of the value assigned at the date of issuance will be reported as an adjustment to retained earnings. The value assigned to the Warrants was determined in accordance with Accounting Principle Board Opinion No. 14 "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants" and was based upon the relative fair value of the Warrants and indebtedness at the time of issuance. Notes payable and long-term debt maturities are as follows:
---------------------------- For the Years Ending September 30, ---------------------------- 2000 $ 1,195,000 2005 67,000,000 -------------------- Total $ 68,195,000 ====================
7. ACQUISITION On March 12, 1998 (the "Closing Date"), the Company acquired, pursuant to a purchase agreement (the "Purchase Agreement") with Kerr-McGee, certain intangible assets related to Kerr-McGee's production of AP (the "Rights") for a purchase price of $39.0 million. The Acquisition did not include Kerr- McGee's production facilities (the "Production Facilities") and certain water and power supply agreements used by Kerr-McGee in the production of AP. Under the Purchase Agreement, Kerr-McGee ceased the production and sale of AP although the Production Facilities may continue to be used by Kerr- McGee for production of AP under certain limited circumstances described below. Under the Purchase Agreement, Kerr-McGee reserved a perpetual, royalty-free, nonexclusive license to use any of the technology forming part of the Rights as may be necessary or useful to use, repair or sell the Production Facilities (the "Reserved License"). Under the Purchase Agreement, Kerr-McGee reserved the right to process and sell certain reclaimed AP that is not suitable for use in solid fuel rocket motors (the "Reclaimed Product"), and to produce and sell AP (i) to fulfill orders scheduled for delivery after the closing, subject to making payments to the Company with respect to such orders, as provided in the Purchase Agreement and (ii) in the event of the Company's inability to meet customer demand or requirements, breach of the Purchase Agreement or termination of the Company's AP business. The Purchase Agreement provides that, together with the Reserved License, Kerr-McGee is permitted in its discretion to (i) lease, sell, dismantle, demolish and/or scrap all or any portion of the Production Facilities, (ii) retain the Production Facilities for manufacture of Reclaimed Product and (iii) maintain the Production Facilities in a "standby" or "mothballed" condition so they will be capable of being used to produce AP under the limited circumstances referred to above. Under the Purchase Agreement, Kerr-McGee has agreed to indemnify the Company against loss or liability from claims associated with the ownership and use of the Rights prior to consummation of the Acquisition or resulting from any breach of its warranties, representations and covenants. The Company has agreed to indemnify Kerr-McGee against loss and liability from claims associated with the ownership and use of the Rights after consummation of the Acquisition or resulting from any breach of its warranties, representations and covenants. In addition, Kerr-McGee has agreed that it will, at the Company's request, introduce the Company to AP customers that are not currently customers of the Company, and consult with the Company regarding the production and marketing of AP. The Company has agreed that, at Kerr-McGee's request, it will use reasonable efforts to market Reclaimed Product on Kerr-McGee's behalf for up to three years following consummation of the Acquisition. 48 The Company has determined that a business was not acquired in the Acquisition and that the Rights acquired have no independent value to the Company apart from the overall benefit of the transaction that, as a result thereof, Kerr-McGee has ceased production of AP (except in the limited circumstances referred to above), thereby leaving the Company as the sole North American supplier of AP. The Company is amortizing the purchase price of $39.0 million for the unidentified intangible over ten years, the length of the terms of pricing contracts with two principal AP customers referred to below. In connection with the Acquisition, the Company entered into an agreement with Thiokol with respect to the supply of AP through the year 2008. The agreement, which was contingent upon consummation of the Acquisition, provides that during its term Thiokol will make all of its AP purchases from the Company. The agreement also establishes a pricing matrix under which AP unit prices vary inversely with the quantity of AP sold by the Company to all of its customers. The Company understands that, in addition to the AP purchased from the Company, Thiokol may use AP inventoried by it in prior years and AP recycled by it from certain existing rocket motors. In connection with the Acquisition, the Company also entered into an agreement with Alliant Techsystems Incorporated ("Alliant") to extend an existing agreement through the year 2008. The agreement establishes prices for any AP purchased by Alliant from the Company during the term of the agreement as extended. Under this agreement, Alliant agrees to use its efforts to cause the Company's AP to be qualified on all new and current programs served by Alliant's Bacchus Works. 8. INCOME TAXES The Company accounts for income taxes using the asset and liability approach required by SFAS No. 109. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of the Company's assets and liabilities. Future tax benefits attributable to temporary differences are recognized to the extent that realization of such benefits are more likely than not. These future tax benefits are measured by applying currently enacted tax rates. The following table provides an analysis of the Company's credit for income taxes for the years ended September 30:
=================================================== 1999 1998 1997 --------------------------------------------------- Current $ $ $ Deferred (federal and state) (10,101,000) --------------------------------------------------- Credit for income taxes $ $ $(10,101,000) ===================================================
A valuation allowance for a deferred tax asset was established in the amount of $10.4 million in 1997 and such allowance has decreased to $9.5 million at September 30, 1999. The valuation allowance is necessary due to the uncertainty related to the realizability of future tax benefits. The deferred tax assets are composed, for the most part, of alternative minimum tax credits and net operating losses. The alternative minimum tax credit carryforward, valued at approximately $1.2 million, may be carried 49 forward indefinitely as a credit against regular tax. The net operating loss carryforwards, valued at approximately $41.7 million, will begin to expire for tax purposes in 2009 as follows:
------------------------------------------------------------------------- NOL Deduction Tax Rate NOL Asset ------------------------------------------------------------------------- Expiration of net operating losses 2009 $13,999,000 34.0% $ 4,760,000 2010 14,080,000 34.0% 4,787,000 2011 and thereafter 13,597,000 34.0% 4,673,000 ------------------------------------------------------------------------- TOTAL $41,676,000 $14,170,000 =========================================================================
The Company's effective tax rate was 0% in fiscals 1999 and 1998, and 16.7% in fiscal 1997 as a result of the establishment of the valuation allowance. The Company's effective tax rate will be approximately 0% until the net operating losses expire or until the Company believes the valuation allowance is no longer required. Income taxes for the years ended September 30, 1999, 1998 and 1997, differ from the amount computed at the federal income tax statutory rate as a result of the following:
===================================================================== 1999 % 1998 % 1997 % --------------------------------------------------------------------- Expected provision (credit) for Income taxes $ 3,890,000 34.0% $(518,000) (34.0)% $(20,591,000) (34.0)% Adjustment: Nondeductible expenses 29,000 0.3% 16,000 1.1% 59,000 0.1% Tax benefit (provision) limitation due to the valuation allowance (3,919,000) (34.3)% 502,000 32.9% 10,431,000 17.2% --------------------------------------------------------------------- Credit for income taxes $ $ $(10,101,000) (16.7)% =====================================================================
The components of net deferred taxes at September 30, 1999, 1998 and 1997 consisted of the following:
1999 1998 1997 ------------------------------------------------ Deferred tax assets: Net operating losses $14,170,000 $ 19,272,000 $ 16,278,000 Alternative minimum tax credits 1,187,000 976,000 1,233,000 Employee separation and management reorganization costs 534,000 795,000 1,172,000 Inventory capitalization 375,000 500,000 436,000 Accruals 447,000 490,000 408,000 Other 978,000 461,000 250,000 ------------------------------------------------ Total deferred tax assets $17,691,000 $ 22,494,000 $ 19,777,000 ------------------------------------------------ Deferred tax liabilities: Property $(3,993,000) $ (5,416,000) $ (4,350,000) Accrued income and expenses (332,000) (661,000) (653,000) State taxes (600,000) (600,000) (600,000) Other taxes payable (98,000) (1,476,000) (1,251,000) Amortization (838,000) (1,315,000) (1,020,000) Other (2,372,000) (2,093,000) (1,472,000) ------------------------------------------------ Total deferred tax liabilities (8,233,000) (11,561,000) (9,346,000) ------------------------------------------------ Preliminary net deferred tax asset 9,458,000 10,933,000 10,431,000 Valuation allowance for deferred tax asset (9,458,000) (10,933,000) (10,431,000) ------------------------------------------------ Net deferred taxes $ $ $ ================================================
50 9. EMPLOYEE BENEFIT PLANS The Company maintains a group health and life benefit plan, an employee stock ownership plan ("ESOP") that includes a Section 401(k) feature, and a defined benefit pension plan (the "Plan"). The ESOP permits employees to make contributions. The Company does not presently match any portion of employee ESOP contributions. All full-time employees age 21 and over with one year of service are eligible to participate in the Plan. Benefits are paid based on an average of earnings, retirement age, and length of service, among other factors. The tables below provide relevant financial information about the Plan as of and for the fiscal years ended September 30:
--------------------------------------------------------------- 1999 1998 --------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation, beginning of year $13,495,000 $11,275,000 Service cost 994,000 687,000 Interest cost 992,000 863,000 Actuarial (gains)/losses (862,000) 1,320,000 Benefits paid (697,000) (650,000) --------------------------------------------------------------- Benefit obligation, end of year $13,922,000 $13,495,000 --------------------------------------------------------------- Change in Plan Assets: Fair value of plan assets, beginning of year $10,177,000 $ 9,937,000 Actual return on plan assets 1,223,000 582,000 Employer contribution 750,000 308,000 Benefits paid (697,000) (650,000) --------------------------------------------------------------- Fair value of plan assets, end of year $11,453,000 $10,177,000 --------------------------------------------------------------- Reconciliation of Funded Status: Funded status $(2,469,000) $(3,318,000) Unrecognized net actuarial (gains)/losses (118,000) 1,236,000 Unrecognized transition obligation 458,000 611,000 Unrecognized prior service costs 387,000 423,000 --------------------------------------------------------------- Accrued benefit liability recognized $(1,742,000) $(1,048,000) ===============================================================
========================================= 1999 1998 1997 ----------------------------------------- Net Periodic Pension Cost: Service cost $ 994,000 $ 687,000 $ 687,000 Interest cost 992,000 863,000 772,000 Expected return on assets (819,000) (783,000) (704,000) Net total of other components 277,000 189,000 231,000 ----------------------------------------- Net periodic pension cost $1,444,000 $ 956,000 $ 986,000 ----------------------------------------- Actuarial Assumptions: Discount rate 7.75% 6.75% 7.75% Rate of compensation increase 5.00% 5.00% 5.00% Expected return on plan assets 8.00% 8.00% 8.00% =========================================
51 In connection with the Company's 1997 reorganization discussed in Note 15, an accrued benefit liability of approximately $1.4 million was recognized related to the Company's Supplemental Executive Retirement Plan ("SERP"). At that time, the former Chief Executive Officer was the sole participant in the SERP. Effective January 1, 1999, the Company amended and restated the SERP and added the Company's Chief Executive Officer and Chief Financial Officer as participants. Benefits paid under the plan were approximately $0.1 million in fiscal 1999 and 1998, respectively. Net periodic pension cost was approximately $0.3 million and $0.1 million during the years ended September 30, 1999 and 1998, respectively. At September 30, 1999, the accrued pension liability recognized was approximately $1.6 million. During fiscal 2000, the Company expects to establish and fund a trust for the SERP. 10. COMMITMENTS AND CONTINGENCIES Trace amounts of perchlorate chemicals have been found in Lake Mead. Clark County, Nevada, where Lake Mead is situated, is the location of Kerr-McGee's AP operations, and was the location of the Company's AP operations until May 1988. The Company is cooperating with State and local agencies, and with Kerr-McGee and other interested firms, in the investigation and evaluation of the source or sources of these trace amounts, possible environmental impacts, and potential remediation methods. The Company spent approximately $1.0 million in both fiscal 1999 and fiscal 1998 on the investigation and evaluation of this matter. Until these investigations and evaluations have reached definitive conclusions, it will not be possible for the Company to determine the extent to which, if at all, the Company may be called upon to contribute to or assist with future remediation efforts, or the financial impacts, if any, of such contributions or assistance. Accordingly, no accrual for potential losses has been made in the accompanying Consolidated Financial Statements of the Company. In 1999, two lawsuits were filed in Utah state court against the Company and certain unrelated equipment and product manufacturers claiming unspecified monetary damages as a result of a fire and explosion on July 30, 1997 at the Company's AP production facility that resulted in the death of one employee and the injury of three employees. The Company believes that it has statutory immunity as an employer under the applicable worker's compensation laws of the State of Utah and that there was no negligence on the part of the Company that contributed to the incident. The lawsuits are currently in a discovery phase. The Company is a party to an agreement with Utah Power and Light Company ("UPL") for its electrical requirements. The agreement provides for the supply of power for a minimum of a ten-year period, which began in 1988, and obligates the Company to purchase minimum amounts of power, while assuring the Company competitive pricing for its electricity needs for the duration of the agreement. Under the terms of the agreement, the Company's minimum monthly charge for firm and interruptible demand is approximately $22,000. The agreement has a three year notice of termination provision and, on April 7, 1999, UPL provided written notice of termination effective April 7, 2002. The Company is in the process of negotiating for its expected power requirements beyond April 7, 2002. See Note 14 for a discussion of certain litigation involving Halotron. The Company and its subsidiaries are also involved in other lawsuits. The Company believes that these other lawsuits, individually or in the aggregate, will not have a material adverse effect on the Company or any of its subsidiaries. As discussed in Note 5, the Company entered into an agreement with Hughes Parkway pursuant to which the Company leases office space. The lease is for an initial term of 10 years expiring in March 2001, and is subject to escalation every three years based on changes in the consumer price index, and 52 provides for the Company to occupy 22,262 square feet of office space. Rental payments were approximately $0.6 million during the fiscal years ended September 30, 1999, 1998 and 1997. Future minimum rental payments under this lease for the years ending September 30, are as follows: 2000 $ 550,000 2001 275,000 ---------------------- Total $ 825,000 ======================
11. SHAREHOLDERS' EQUITY Preferred Stock and Purchase Rights ----------------------------------- The Company has authorized the issuance of 3,000,000 shares of preferred stock, of which 125,000 shares have been designated as Series A, 125,000 shares have been designated as Series B and 15,340 shares have been designated as Series C redeemable convertible preferred stock. No Series A or Series B preferred stock is issued or outstanding. The Series C redeemable convertible preferred stock was redeemed in December 1989, and is no longer authorized for issuance. On August 3, 1999, the Board of Directors of the Company adopted a Shareholder Rights Plan and declared a dividend of one preference share purchase right (a "Right") for each outstanding share of Common Stock, par value $ .10 per share (the "Common Shares"), of the Company. The dividend was paid to stockholders of record on August 16, 1999. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series D Participating Preference Stock, par value $1.00 per share of the Company at a price of $24.00 per one one-hundredth of a Preference Share subject to adjustment under certain circumstances. The description and terms of the Rights are set forth in a Rights Agreement dated as of August 3, 1999, between the Company and American Stock Transfer & Trust Company, as Rights Agent. The Rights may also, under certain conditions, entitle the holders (other than any Acquiring Person, as defined), to receive Common Stock of the Company, Common Stock of an entity acquiring the Company, or other consideration, each having a market value of two times the exercise price of each Right. Three hundred and fifty-thousand Preference Shares have been designated as Series D Preference Shares and are reserved for issuance under the Plan. The Rights are redeemable by the Company at a price of $.001 per Right under the conditions provided in the Plan. If not exercised or redeemed (or exchanged by the Company), the Rights expire on August 2, 2009. Stock Options and Warrants -------------------------- The Company has granted options and warrants to purchase shares of the Company's Common Stock at prices at or in excess of market value at the date of grant. The options and warrants were granted under various plans or by specific grants approved by the Company's Board of Directors. 53 Option and warrant transactions are summarized as follows:
--------------------------------------------------- Shares Under Options and Warrants Option Price --------------------------------------------------- October 1, 1996 3,295,050 $ 3.88 - $ 21.50 Granted 587,000 6.38 - 7.13 Exercised, expired or canceled (75,050) 3.88 - 12.63 --------------------------------------------------- September 30, 1997 3,807,000 3.88 - 21.50 Granted 116,000 7.00 - 7.19 Exercised, expired or canceled (169,000) 3.88 - 21.50 --------------------------------------------------- September 30, 1998 3,754,000 4.88 - 21.50 Granted 209,000 7.90 - 8.00 Exercised, expired or canceled (75,000) 5.63 - 21.50 --------------------------------------------------- September 30, 1999 3,888,000 $ 4.88 - $ 14.00 ---------------------------------------------------
In February 1992, the Company issued $40,000,000 in Azide Notes with Warrants. See Note 6 for a description of the Warrants. Shares under options and warrants at September 30, 1999 include approximately 2,857,000 Warrants at a price of $14 per Warrant. The following table summarizes information about stock options and warrants outstanding at September 30, 1999:
- --------------------------------------------------------------------------------------------------------------------------- Options and Warrants Outstanding Options Exercisable --------------------------------------------------------------------------------------------- Average Remaining Range of Number Contractual Weighted Average Weighted Average Exercise Price Outstanding Life (Years) Exercise Price Number Exercisable Exercise Price - --------------------------------------------------------------------------------------------------------------------------- $ 4.88 40,000 .50 $ 4.88 40,000 $ 4.88 6.38 - 8.00 991,000 3.20 7.16 841,500 7.07 14.00 2,857,000 4.25 14.00 2,857,000 14.00 ------------------------------------------------------------------------------------------------- 3,888,000 3.90 $12.94 3,738,500 $13.07 =================================================================================================
The Company has adopted the disclosures-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation". The Company applies Accounting Principles Board ("APB") Opinion No.25 and related interpretations in accounting for its stock options. Under APB No.25, no compensation cost has been recognized in the financial statements for stock options granted. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Had compensation costs for the stock option grants been determined based on the fair value at the date of grant for awards consistent with the provision of SAFS No. 123, the Company's diluted net income (loss) per common share would have changed to the pro forma amounts indicated below for the years ended September 30:
-------------------------------------------------------------- 1999 1998 1997 -------------------------------------------------------------- Net income (loss) - as reported $11,439,000 $(2,011,000) $(48,685,000) Net income (loss) - pro forma 10,941,000 (2,680,000) (49,791,000) Diluted net income (loss) per share - as reported $ 1.39 $ (.24) $ (6.01) Diluted net income (loss) per share - pro forma 1.33 (.32) (6.14) --------------------------------------------------------------
The fair value of each option granted was estimated using the following assumptions for the Black-Scholes options pricing model: (i) no dividends; (ii) expected volatility ranging from 50% to 55%, (iii) risk free interest rates averaging 5.8% in 1999, 5.5% in 1998 and 6.1% in 1997 and (iv) the expected average life of 3.3 years. The weighted average fair values of the options granted were $3.26, $2.71 and $2.97 in the fiscal years 1999, 1998 and 1997, respectively. Because the SFAS No. 123 method of 54 accounting has not been applied to options granted prior to October 1, 1996, the resulting pro forma net income may not be representative of that to be expected in future years. 12. SEGMENT INFORMATION The Company's three reportable operating segments are specialty chemicals, environmental protection equipment and real estate sales and development. These segments are based upon business units that offer distinct products and services, are operationally managed separately and produce products using different production methods. The Company evaluates the performance of each operating segment and allocates resources based upon operating income or loss before an allocation of interest expense and income taxes. The accounting policies of each reportable operating segment are the same as those of the Company. The Company's specialty chemicals segment manufacturers and sells perchlorate chemicals used principally in solid rocket propellants for the space shuttle and defense programs, sodium azide used principally in the inflation of certain automotive airbag systems and Halotron (TM) I, a clean gas fire suppression agent designed to replace Halon 1211. The specialty chemicals segment production facilities are located in Iron County, Utah. Perchlorate chemical sales comprised approximately 75%, 70% and 60% of specialty chemical segment sales during the fiscal years ended September 30, 1999, 1998 and 1997, respectively. The Company had three customers that accounted for 10% or more of both the Company's and the specialty chemical segment's sales during the last three fiscal years. Sales to these customers during the fiscal years ended September 30 were as follows:
------------------------------------------------------------------------- Customer Chemical 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- A Perchlorates $25,814,000 $20,421,000 $15,661,000 B Perchlorates 10,197,000 8,633,000 4,614,000 C Sodium Azide 12,406,000 9,884,000 11,715,000
During fiscal 1997, the Company recognized an impairment charge of approximately $52.6 million associated with the sodium azide operations of the specialty chemicals segment. (See Note 13). In fiscal 1998, the Company acquired certain intangible assets related to the production and sale of AP from Kerr-McGee and entered into long-term agreements with respect to the supply of AP to the two major domestic AP users. (See Note 7). The specialty chemicals operating segment is subject to various federal, state and local environmental and safety regulations. The Company has designed and implemented policies and procedures to minimize the risk of potential violations of these regulations, although such risks will likely always be present in the production and sale of the Company's specialty chemicals. (See Note 10). The Company's environmental protection equipment operating segment designs, manufactures and markets systems for the control of noxious odors, the disinfection of waste water streams and the treatment of seawater. These operations are also located in Iron County, Utah. At September 30, 1999, the Company's real estate operating segment had approximately 80 remaining acres of improved land in the Gibson Business Park near Las Vegas, Nevada, that is held for development and sale. Activity during the last three fiscal years has consisted of sales of land parcels. Although not included in operating activities, this segment also has an equity investment in a residential joint venture that is located across the street from the Gibson Business Park. (See Note 5). Additional information about the Company's operations in different segments for each of the last three fiscal years ended September 30, is provided below. 55
----------------------------------------------- 1999 1998 1997 ----------------------------------------------- Revenues: Specialty chemicals $ 64,497,000 $ 47,718,000 $ 37,976,000 Environmental protection 2,121,000 2,153,000 2,429,000 Real estate 6,216,000 2,468,000 3,645,000 ----------------------------------------------- Total revenues $ 72,834,000 $ 52,339,000 $ 44,050,000 =============================================== Gross profit (loss): Specialty chemicals $ 23,526,000 $ 14,273,000 $ 5,200,000 Environmental protection (247,000) 733,000 432,000 Real estate 4,096,000 1,559,000 2,016,000 ----------------------------------------------- Total segment gross profit $ 27,375,000 $ 16,565,000 $ 7,648,000 =============================================== Operating income (loss): Specialty chemicals $ 14,847,000 $ 6,422,000 $(55,227,000) Environmental protection (888,000) (2,000) (659,000) Real estate 3,485,000 1,082,000 1,624,000 ----------------------------------------------- Total segment operating income (loss) 17,444,000 7,502,000 (54,262,000) General corporate (468,000) (201,000) (3,838,000) Equity in earnings of real estate venture 300,000 200,000 Net interest (5,363,000) (4,440,000) (886,000) ----------------------------------------------- Income (loss) before income taxes and extraordinary losses $ 11,613,000 $ 3,161,000 $(58,786,000) =============================================== Depreciation and amortization: Specialty chemicals $ 6,905,000 $ 4,718,000 $ 6,749,000 All other segments and corporate 291,000 604,000 936,000 ----------------------------------------------- Total depreciation and amortization $ 7,196,000 $ 5,322,000 $ 7,685,000 =============================================== Capital Expenditures: Specialty chemicals $ 1,820,000 $ 2,284,000 $ 1,524,000 All other segments and corporate 280,000 482,000 33,000 ----------------------------------------------- Total capital expenditures $ 2,100,000 $ 2,766,000 $ 1,557,000 =============================================== Assets: Specialty chemicals $ 67,750,000 $ 76,265,000 $ 32,166,000 Environmental protection 1,954,000 1,345,000 1,667,000 Real estate 18,347,000 23,881,000 29,215,000 Corporate 44,831,000 29,268,000 27,033,000 ----------------------------------------------- Total assets $132,882,000 $130,759,000 $ 90,081,000 ===============================================
The Company's operations are located in the United States. Export sales, consisting almost entirely of environmental protection equipment sales to the Far and Middle East, have represented only approximately 2% to 3% of the Company's revenues during each of the last three fiscal years. 13. SODIUM AZIDE In July 1990, the Company entered into agreements (the "Azide Agreements") pursuant to which Dynamit Nobel licensed to the Company on an exclusive basis for the North American market its most advanced technology and know- how for the production of sodium azide, the principal component of the gas generant used in automotive airbag safety systems. In addition, Dynamit Nobel provided technical support for the design, construction and start-up of the facility. Under the Azide Agreements, Dynamit Nobel was to receive, for the use of its technology and know-how relating to its batch production process of manufacturing sodium azide, quarterly royalty payments of 5% of the quarterly net sales of sodium azide by AAC for a period of 15 years from the date the Company begins to produce sodium azide in commercial quantities. In July 1996, the Company and Dynamit Nobel agreed to suspend the royalty payment effective as of July 1, 1995. 56 In May 1997, the Company entered into a three-year agreement with Autoliv ASP, Inc. ("Autoliv") (formerly Morton International Automotive Safety Products). The agreement provides for the Company to supply sodium azide used by Autoliv in the manufacture of automotive airbags. Deliveries under the contract commenced in July 1997. The agreement has been extended an additional six months through December 31, 2000. The Company initially believed that demand for sodium azide in North America and the world would substantially exceed existing manufacturing capacity and announced expansions or new facilities (including the Company's plant) by the 1994 model year (which for sodium azide sales purposes is the period June 1993 through May 1994). Currently, demand for sodium azide is substantially less than supply on a worldwide basis. By reason of this industry capacity underutilization, and other factors discussed below, there exists considerable pressure on the price of sodium azide. The Company believes that the price erosion of sodium azide over the past few years has been due, in part, to unlawful pricing procedures of Japanese sodium azide producers. In response to such practices, in January 1996, the Company filed an antidumping petition with the International Trade Commission ("ITC") and the Department of Commerce ("Commerce"). In August 1996, Commerce issued a preliminary determination that Japanese imports of sodium azide have been sold in the United States at prices that are significantly below fair value. Commerce's preliminary dumping determination applied to all Japanese imports of sodium azide, regardless of end-use. Commerce's preliminary determination followed a March 1996 preliminary determination by ITC that dumped Japanese imports have caused material injury to the U.S. sodium azide industry. On January 7, 1997, the anti-dumping investigation initiated by Commerce, based upon the Company's petition, against the three Japanese producers of sodium azide was suspended by agreement. It is the Company's understanding that, by reason of the Suspension Agreement, two of the three Japanese sodium azide producers have ceased their exports of sodium azide to the United States for the time being. As to the third and largest Japanese sodium azide producer, which has not admitted any prior unlawful conduct, the Suspension Agreement requires that it make all necessary price revisions to eliminate all United States sales at below "Normal Value," and that it conform to the requirements of sections 732 and 733 of the Tariff Act of 1930, as amended, in connection with its future sales of sodium azide in the United States. The Suspension Agreement contemplates a cost-based determination of "Normal Value" and establishes reporting and verification procedures to assure compliance. Accordingly, the minimum pricing for sodium azide sold in the United States by the remaining Japanese producer will be based primarily on its actual costs, and may be affected by changes in the relevant exchange rates. Finally, the Suspension Agreement provides that it may be terminated by any party on 60 days' notice, in which event the anti-dumping proceeding would be re-instituted at the stage to which it had advanced at the time the Suspension Agreement became effective. The Company incurred significant operating losses in its sodium azide operation in the fiscal year 1997 and prior fiscal years. Such operating history was partially expected by the Company as a result of the generally lengthy process of qualification for use of new material in automotive safety equipment. Sodium azide performance improved in the fourth quarter of fiscal 1997, principally as a result of additional sodium azide deliveries under the Autoliv agreement referred to above, and the operations were cash flow positive during the year ended September 30, 1997. Capacity utilization rates increased from approximately 45% in the third quarter of fiscal 1997 to approximately 55% in the fourth quarter of 1997. However, even though performance improved, management's view of the economics of the sodium azide market changed significantly during the fourth quarter of fiscal 1997. During late August, 57 September, October and November of 1997 the following events or developments occurred that changed the Company's view of the economics of the sodium azide market: . The Company was unsuccessful in its attempts to sell sodium azide to major users other than Autoliv. With the procurement cycle for the automotive model year beginning in July or August, the Company previously believed it would be successful in achieving significant sales to other major users. . One major inflator manufacturer announced the acquisition of non-azide based inflator technology and that they intended to be in the market with this new technology by model year 1999. This announcement, coupled with the fact that other inflator manufacturers appear to be pursuing non- azide based inflator technology more aggressively than before, caused a reduction in the Company's estimates of annual sodium azide demand requirements and, possibly more importantly, the duration that such requirements would exist. . The effects of the antidumping petition appeared to have been fully incorporated into the sodium azide market by the end of fiscal 1997. At September 30, 1997, management believed that the antidumping related environment would remain unchanged as a result of the continued strength and outlook of the U.S. dollar relative to the Japanese yen (the home country currency of the Company's major competitor). As a result of these events and developments, the Company's view of the economics of the sodium azide market and the Company's future participation in such market degraded substantially by October 30, 1997 and management concluded that the cash flows associated with sodium azide operations would not be sufficient to recover the Company's investment in sodium azide related fixed assets. As quoted market prices were not available, the present value of estimated future cash flows was used to estimate the fair value of sodium azide fixed assets. Under the requirements of SFAS No. 121, and as a result of this valuation technique, an impairment charge of $52.6 million was recognized in the fourth quarter of fiscal 1997. This impairment charge was recorded as a reduction of the sodium azide building and equipment and related accumulated depreciation in the amounts of approximately $69.5 million and $16.9 million, respectively, to reduce the carrying value of these assets to $13.5 million, or the estimate of their fair value. The Company will continue to use the sodium azide assets in its operations as long as the cash flows generated from the use of such assets are positive. The Company estimates that cash flows will be negligible around calendar 2005 and as such the sodium azide assets are being depreciated over the lesser of their useful lives or through fiscal 2005. 14. HALOTRON(TM) In August 1991, the Company entered into an agreement (the "Halotron(TM) Agreement") granting the Company the option to acquire the exclusive worldwide rights to manufacture and sell Halotron I (a replacement for halon 1211). Halotron(TM) products are fire suppression systems, including a series of chemical compounds and application technologies, designed to replace halons, chemicals presently in wide use as a fire suppression agent in military, industrial, commercial and residential applications. The Halotron(TM) Agreement provides for disclosure to the Company of all confidential and proprietary information concerning Halotron(TM) I. In February 1992, the Company determined to acquire the rights provided for in the Halotron(TM) Agreement, gave notice to that effect to the inventors (the "Inventors"), and exercised its option. In 58 addition to the exclusive license to manufacture and sell Halotron(TM) I, the rights acquired by the Company include rights under all present and future patents relating to Halotron(TM) I throughout the world, rights to related and follow-on products and technologies and product and technology improvements, rights to reclaim, store and distribute halon and rights to utilize the productive capacity of the Inventors' Swedish manufacturing facility. Upon exercise of the option, the Company paid the sum of $0.7 million (the exercise price of $1.0 million, less advance payments previously made) and subsequently paid the further total sum of $1.5 million in monthly installments commencing in March 1992. A license agreement entered into between the Company and the Inventors provides for a royalty to the Inventors of 5% of the Company's net sales of Halotron(TM) I over a period of 15 years. In 1992, the Company sued the Inventors, claiming they had breached the agreements and contracts in which they had sold the rights to Halotron(TM). This initial litigation was settled when the Inventors promised to perform faithfully their duties and to honor the terms of the contracts that, among other things, gave the Company exclusive rights to the Halotron(TM) chemicals and delivery systems. Following the settlement of the initial litigation, however, the Inventors failed to perform the acts they had promised in order to secure dismissal of that litigation. As a result, the Company brought an action in the Utah state courts in March 1994, for the purpose of establishing the Company's exclusive rights to the Halotron(TM) chemicals and delivery systems. On August 15, 1994, the court entered a default judgment against the Inventors granting the injunctive relief requested by the Company and awarding damages in the amount of $42.2 million. The trial court further ordered the Inventors to execute documents required for patent registration of Halotron(TM) in various countries. When the Inventors ignored this court order, the Court directed the Clerk of the Court to execute these documents on behalf of the Inventors. Finally, the Court ordered that the Inventors' rights to any future royalties from sales of Halotron(TM) I were terminated. In 1996, the Company initiated arbitration proceedings by filing a notice of Arbitration with the American Arbitration Association against the Inventors to enforce, among other things, the Company's rights under the Halotron(TM) Agreement. In August 1999, the Arbitration Panel (the "Tribunal") issued a partial award that required the Inventors to refrain from using the trade- name and know-how associated with Halotron(TM), to produce all documents, information and test data relating to the Halotron(TM) products, to allow the Company to inspect the Inventors' business location to verify compliance with the partial award, to disclose all patent, trademark or tradename applications related to Halotron(TM) products and transfer ownership of such to the Company, and to provide all documents relating to the sale of Halotron(TM) products. The Tribunal reserved its decision on monetary damages to which the Company may be entitled and rejected the Inventors' counterclaims except that the Inventors may be entitled to royalties after the date of the partial award if the Inventors fully comply with the requirements of the partial award. Based on information available to the Company, the Inventors have not complied with any of the requirements of the partial award. The Company is in the process of preparing a motion to the Tribunal seeking a final award. 15. EMPLOYEE SEPARATION AND MANAGEMENT REORGANIZATION COSTS During the fourth quarter of fiscal 1997, the Company implemented a management reorganization plan. As a result, the former Chief Executive Officer, Executive Vice President and two other senior executives separated their employment with the Company and the Company vacated approximately one- half of its leased corporate office facilities space. In addition, activities associated with the Company's environmental protection equipment division were relocated to the Company's Utah facilities. The Company recognized a charge of $3.6 million to account for the costs associated with the employee separations and vacating leased space. The charge consisted principally of four years of salary and 59 benefits payable to the former Executive Vice President under the terms of an employment agreement, the accrued benefit liability relating to the former Chief Executive Officer under the terms of the Company's SERP and severance costs payable to the two other former senior executives. Relocation costs amounted to approximately $0.4 million and are classified in operating expenses in the accompanying consolidated statement of operations. 60 EX-10.3 2 CONSULTING AGREEMENT EXHIBIT 10.3 CONSULTING AGREEMENT (Fred D. Gibson, Jr.) This Consulting Agreement (the "Agreement") is made and entered into this 1st day of October, 1999, by and between American Pacific Corporation, a Delaware corporation having its principal place of business at 3770 Howard Hughes Parkway, Suite 300, Las Vegas, Nevada 89109 (the "Company"), and Fred D. Gibson, Jr., an individual residing in Clark County, Nevada (the 'Executive'). RECITALS: A. The Company, through its subsidiary corporations, is engaged in the manufacture of specialty chemicals, including Perchlorate chemicals, sodium azide and Halotron(TM) fire suppression agents, and is engaged in the design and manufacture of environmental protection products and real estate development. B. The Executive is currently serving as a director of the Company. C. The Executive is willing to agree to provide consulting services to the Company, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the promises and agreements herein contained, and intending to be legally bound, the Company and the Executive agree as follows: 1. Provision of Consulting, Services. The Company and the Executive --------------------------------- agree that, for a term commencing on the Commencement Date and continuing thereafter throughout the period or periods of time provided in this Agreement, the Company will retain the Executive as a consultant, and the Executive will provide consulting services to the Company. 2. Scope of Services. After the Commencement Date the Executive ----------------- shall provide from time to time such consulting services to the Company and its subsidiary corporations as the Company may request, and that the Executive shall be willing and able to provide. If, during the term of this Agreement the Executive is acting as a director of the Company, the Executive's service as a director shall additionally be governed by the bylaws from time to time in effect and by the laws of the state of incorporation of the Company. The Executive shall at all times perform his duties and discharge his responsibilities under this Agreement diligently and conscientiously, and to the best of his ability, and shall direct his best efforts to further and maximize the business and interests of the Company and its stockholders, in accordance with sound business practices and applicable laws and regulations. 3. Conflicts of Interest. The Executive agrees that, during the term --------------------- of this Agreement, he shall not act in any advisory or other capacity for any individual, firm, association or corporation other than the Company and its subsidiary corporations in matters in any way pertaining to any business or undertaking in any way similar to or competitive with the business or activities of the Company and its subsidiary corporations. 4. Commencement and Duration of Consulting Services. The Executive's ------------------------------------------------- service to the Company as a consultant shall commence on October 1, 1999. 5. Term and Termination of Agreement. This Agreement shall have a --------------------------------- term of one (1) year and the Executive's service as a consultant hereunder shall terminate on September 30, 2000, or earlier, upon the first to occur of the following events: (a) The death or total and permanent disability of the Executive; (b) The Company's election to terminate the Executive's service as a consultant due to the material breach by the Executive of any of the Executive's covenants under this Agreement, including, but not limited to, those covenants set forth in Sections 7 through 9 hereof; or (c) Notice from the Executive that the Executive elects to discontinue his service as a consultant to the Company. Upon the occurrence of any of the events set forth in this Section 5, the Executive shall be entitled to receive all compensation accrued hereunder to the date of the termination, but shall not be entitled to any additional compensation or benefits hereunder. 6. Compensation. ------------- (a) In consideration of the services to be provided by the Executive pursuant to this Agreement, the Company shall pay to the Executive, at monthly or more frequent intervals, an annual amount of $120,000.00 for which the Company shall receive no more than forty hours (40 hrs.) per month of the Executive's time. (b) All of the Company's obligations to the Executive hereunder, and the Executive's right to receive compensation from the Company hereunder, are hereby expressly made conditional upon the Executive's continued compliance with all of the Executive's obligations hereunder, including without imitation the provisions of Sections 2 and 7 through 9 hereof. Exhibit 10.3 Page 2 7. Noncompetition. --------------- (a) The Executive shall not at any time during the period of the Executive's service to the Company as a consultant or for a period of two years thereafter render any services, directly or indirectly for any Competitor. (b) The Executive shall not, at any time during the period of the Executive's service to the Company as a consultant or for a period of two years thereafter, influence or attempt to influence, either directly or indirectly, any employee of the Company or of any affiliated entity to leave or terminate such individual's employment with the Company or with an affiliate of the Company. (c) The Executive shall not, at any time during the period of the Executive's service to the Company as a consultant or for a period of two years thereafter, influence or attempt to influence, either directly or indirectly, any customer or client of the Company or of any affiliated entity to discontinue purchasing or using the products or services of, or to cancel or fail to renew a contract with, the Company or an affiliate of the Company. (d) For purposes of this Agreement, the term 'Competitor" shall mean any individual (including the Executive) or entity that at any time is directly or indirectly (for example, through an affiliated or controlled individual or entity) engaged in or about to engage in the manufacture of Perchlorate chemicals, sodium azide, fire suppression agents competitive with Halotron(TM) fire suppression agents, or environmental protection products competitive with those designed or manufactured by the Company and its subsidiaries. (e) The Executive agrees and acknowledges that the breach by the Executive of any of the provisions of this Section will cause Company irreparable damage, that the remedy at law for any such breach could be inadequate, and that the Company, in addition to any other relief available to it, shall be entitled to appropriate temporary and permanent injunctive relief restraining Executive from committing or continuing such breach, without the necessity of proving actual damages. The Executive agrees to pay all costs and attorneys' fees incurred by the Company in obtaining such injunctive or other relief. 8. Confidential Information. ------------------------ (a) The Executive shall never, either during the period of the Executive's service to the Company as a consultant or thereafter, use or employ for any purpose or disclose to any other individual or entity any Confidential Information. The Executive acknowledges and agrees that all Confidential Information is proprietary to the Company, is extremely important to the Company's business, and that the use by or disclosure of such Confidential Information to a Competitor could materially and adversely affect the Company, its business and its customers. (b) Upon any termination of the period of the Executive's service to the Company, the Executive shall leave with or return immediately to the Company any and all Exhibit 10.3 Page 3 records and any and all compositions, articles, devices and other similar or related items that disclose or contain any Confidential Information, including all copies or specimens thereof, whether in the Executive's possession or under the Executive's control, or whether prepared by the Executive or by others. (c) For purposes of this Agreement, the term 'Company" shall refer to the Company and each of its subsidiary corporations, and to any other corporation or entity that is owned or controlled, directly or indirectly, by Company or that is under common ownership or control with the Company. (d) For purposes of this Agreement, the term "Confidential Information' shall mean information in any form that is not generally known to the public that relates to the Company's past, present or future operations, processes, products or services, or to any research, development, manufacture, purchasing, accounting, engineering, marketing, merchandising, advertising, selling, leasing, financing or business methods or techniques (including without limitation customer lists, records of customer services, usages and requirements, sketches and diagrams of Company or customer facilities and like and similar information relating to actual or prospective customers) that is or may be related thereto. All information disclosed to the Executive or to which the Executive obtains access during any period of the Executive's service to the Company, whether pursuant to this Agreement or otherwise, or to which the Executive obtains access by reason of any such service to the Company, that the Executive has a reasonable basis to believe is or may be Confidential Information, shall be presumed for purposes of this Agreement to be Confidential Information. 9. Inventions. ---------- (a) Immediately upon its discovery or completion, the Executive shall promptly and fully disclose each Invention in writing to the Company. The Executive shall make this disclosure regardless of whether an Invention is discovered, conceived or completed by the Executive alone or jointly with others, and regardless of whether or not the Invention is discovered, conceived or completed in furtherance of the Executive's duties in the service of the Company, whether pursuant to this Agreement or otherwise, and regardless of whether or not the Invention was discovered, conceived or completed during normal working hours or on the premises of Company. (b) The Executive hereby assigns, and agrees to assign, to the Company all of the Executive's rights in and to all Inventions and in and to any and all letters patent or copyrights or applications therefor at any time granted or made, whether in the United States of America or in any foreign nation, upon or with respect to any Invention. (c) The Executive shall from time to time execute, acknowledge and deliver promptly to the Company (without charge to the Company but at the expense of the Company) such written instruments and documents, and shall take such other and further action with respect to any Invention, as may be necessary or desirable in order to enable the Company to Exhibit 10.3 Page 4 obtain and maintain patents and/or copyrights therein, or to vest the entire right title and interest thereto in the Company. (d) The Executive shall not assert any rights under any Inventions as having been made or acquired by the Executive prior to the commencement of the Executive's employment by or service to the Company. (e) For purposes of this Agreement, the term "Inventions" means discoveries, developments, improvements and ideas (whether or not shown or described in writing or reduced to practice) and works of authorship (including computer software), whether or not patentable or copyrightable, (i) that are or may be related to the manufacture of Perchlorate chemicals, sodium azide, fire suppression agents competitive with Halotron(TM) fire suppression agents, or environmental protection products competitive with those designed or manufactured by the Company and its subsidiaries, or to any research, development, manufacture, purchasing, accounting, engineering, marketing, merchandising, advertising, selling, leasing, financing or business methods or techniques or any improvements to any of the foregoing; (ii) that relate to the Company's actual or demonstrably anticipated research or development with respect to any of the foregoing; (iii) that result from any services at any time performed by the Executive for the Company, whether pursuant to this Agreement or otherwise; (iv) for which equipment, supplies, facilities or trade secret information of the Company is used; or (v) that are developed on any Company time with respect to any activity referred to above. 10. Survival. The Executive's obligations set forth in Sections 7 -------- through 9 hereof shall survive the expiration or other termination of this Agreement and the period of the Executive's service to the Company. 11. Notices, Any notice permitted or required to be given pursuant to ------- this Agreement shall deemed to have been given when appropriate notice thereof has been be validly given or served in writing and delivered personally or sent by registered or certified mail, postage prepaid, to the following address: If to the Company or to any: American Pacific Corporation subsidiary corporation 3770 Howard Hughes Parkway, Suite 300 Las Vegas, NV 89109 If to the Executive, to: The Executive's address as set forth on the signature page to this Agreement or to such other addresses as either party may hereafter designate to the other in writing. Exhibit 10.3 Page 5 12. Governing Law, This Agreement is made and entered into, and is ------------- executed and delivered, in Clark County, Nevada, and shall be construed and enforced in accordance with and shall be governed by the laws of the State of Nevada. 13. Entire Understanding, This Agreement constitutes the entire -------------------- understanding and agreement between the Company and the Executive with regard to all matters herein, and there are no other agreements, conditions, or representations, oral or written, expressed or implied, with regard thereto other than as referred to herein. This Agreement may be amended only in writing, signed by both parties hereto. 14. Severability, If any term or provision of this Agreement shall be ------------ held to be invalid or unenforceable for any reason, such term or provision shall be ineffective to the extent of such invalidity or unenforceability without invalidating the remaining terms and provisions hereof, and this Agreement shall be construed as if such invalid or unenforceable term or provision has not been contained herein. 15. Successors, This Agreement shall be binding upon and inure to the ---------- benefit of the parties hereto and their respective heirs, administrators, executors, and successors. Neither party may assign any of its rights hereunder, except that the Company and any subsidiary corporation may assign its rights and delegate its duties hereunder to any entity that succeeds (whether by merger, purchase or otherwise) to the assets or business of the Company or any subsidiary corporation. 16. Consent to Jurisdiction. The Executive agrees that any action or ----------------------- proceeding to enforce, or that arises out of, this Agreement may be commenced and maintained in the district courts of the State of Nevada, or in the United States District Court for the District of Nevada, and Executive hereby waives any objection to the jurisdiction of said courts in any litigation arising hereunder on the basis that such court is an inconvenient forum or otherwise. 17. Attorneys' Fees, In the event that this Agreement is breached by --------------- either party, the breaching party shall be liable for all costs and attorneys' fees incurred by the non-breaching party as a result of the breach or in enforcing the terms of this Agreement. Exhibit 10.3 Page 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "Company" AMERICAN PACIFIC CORPORATION, a Delaware corporation By /s/ John R. Gibson --------------------------------- Title CEO ----------------------------- "Executive" /s/ Fred D. Gibson, Jr. ------------------------------------ Fred D. Gibson, Jr. Address: 3204 Plaza de Rafael Las Vegas, NV 89102 Exhibit 10.3 Page 7 EX-10.4 3 AMENDED & RESTATED PENSION PLAN EXHIBIT 10.4 AMENDED AND RESTATED AMERICAN PACIFIC CORPORATION DEFINED BENEFIT PENSION PLAN As Amended and Restated Effective October 1, 1997 Table of Contents Introduction...................................................................................................1 I ......................................................................................................2 Definitions....................................................................................................2 1.01 Accrued Benefit.......................................................................................2 1.02 Active Participant....................................................................................2 1.03 Actuarial Equivalent..................................................................................2 1.04 Affiliated Group......................................................................................3 1.05 Annuity Starting Date.................................................................................3 1.06 Applicable Interest Rate..............................................................................3 1.07 Applicable Mortality Table............................................................................3 1.08 Beneficiary...........................................................................................3 1.09 Benefit...............................................................................................3 1.10 Board.................................................................................................3 1.11 Code..................................................................................................3 1.12 Company...............................................................................................3 1.13 Compensation..........................................................................................4 1.14 Covered Compensation..................................................................................6 1.15 Disability............................................................................................6 1.16 Disability Retirement Date............................................................................6 1.17 Early Retirement Age..................................................................................6 1.18 Early Retirement Date.................................................................................6 1.19 Effective Date........................................................................................6 1.20 Effective Date of this Restatement....................................................................7 1.21 Eligible Employee.....................................................................................7 1.22 Employee..............................................................................................7 1.23 Employer..............................................................................................7 1.24 Entry Date............................................................................................8 1.25 ERISA.................................................................................................8 1.26 Inactive Participant..................................................................................8 1.27 Late Retirement Date..................................................................................8 1.28 Normal Retirement Age.................................................................................8 1.29 Normal Retirement Date................................................................................8 1.30 Participant...........................................................................................8 1.31 Participating Employer................................................................................8 1.32 Plan..................................................................................................8 1.33 Plan Administrator....................................................................................8 1.34 Plan Year.............................................................................................8 1.35 Restatement...........................................................................................8 1.36 Retirement Benefit....................................................................................8 1.37 Social Security Retirement Age........................................................................9 1.38 Spouse................................................................................................9 1.39 Trust Agreement.......................................................................................9 1.40 Trust Fund............................................................................................9 1.41 Trustee...............................................................................................9
1.42 Year of Service.......................................................................................9 II .....................................................................................................12 Eligibility, Vesting and Benefit Service......................................................................12 2.01 Eligibility Requirements.............................................................................12 2.02 Participation upon Reemployment......................................................................12 2.03 Inactive Participants................................................................................13 2.04 Vesting Service......................................................................................13 2.05 Benefit Service......................................................................................13 2.06 Disregarded Service..................................................................................14 III .....................................................................................................15 Retirement Benefits...........................................................................................15 3.01 Normal Retirement Benefit............................................................................15 3.02 Early Retirement Benefit.............................................................................17 3.03 Late Retirement Benefit..............................................................................17 3.04 Disability Retirement Benefit........................................................................18 3.05 No Duplication of Benefits...........................................................................19 3.06 Maximum Excess Allowance.............................................................................19 IV .....................................................................................................22 Benefits upon Termination of Employment.......................................................................22 4.01 Deferred Normal Retirement Benefit...................................................................22 4.02 Deferred Early Retirement Benefit....................................................................22 4.03 Form of Payment......................................................................................23 V .....................................................................................................24 Form and Payment of Retirement Benefits.......................................................................24 5.01 Normal Form of Benefit...............................................................................24 5.02 Other Forms of Benefit...............................................................................24 5.03 Waiver of Qualified Joint and Survivor Annuity.......................................................25 5.04 Cash-out of Accrued Benefit..........................................................................27 5.05 Commencement of Benefits.............................................................................28 5.06 Methods of Distribution..............................................................................29 5.07 Suspension of Benefits...............................................................................30 5.08 Direct Rollover Distributions........................................................................32 VI .....................................................................................................34 Preretirement Death Benefits..................................................................................34 6.01 Eligibility for Death Benefit........................................................................34 6.02 Amount of Qualified Preretirement Survivor Annuity...................................................34 6.03 Alternative Death Benefit............................................................................35 6.04 Cash-out of Accrued Benefit..........................................................................36 6.05 Time of Payment......................................................................................36 VII .....................................................................................................37 Limitations on Benefits.......................................................................................37 7.01 Limitation on Annual Benefit.........................................................................37 7.02 Reduction for Less than 10 Years of Participation or Service.........................................38 7.03 Preservation of Current Accrued Benefit..............................................................38 VIII .....................................................................................................40 Top-Heavy Rules...............................................................................................40
8.01 Top-Heavy Determination..............................................................................40 8.02 Vesting..............................................................................................43 8.03 Minimum Benefits.....................................................................................44 8.04 Limitation on Benefits...............................................................................45 IX .....................................................................................................46 Plan Administration...........................................................................................46 9.01 Plan Administrator...................................................................................46 9.02 General Powers, Rights and Duties....................................................................46 9.03 Manner of Action.....................................................................................47 9.04 Interested Committee Member..........................................................................48 9.05 Resignation or Removal of Committee Members..........................................................48 9.06 Nondiscrimination....................................................................................48 9.07 Delegation and Reliance..............................................................................48 9.08 Claims Procedure.....................................................................................48 9.09 Plan Administrator's Decision Final..................................................................49 9.10 Standard of Review...................................................................................49 9.11 Information Required by Plan Administrator...........................................................50 9.12 Expenses of the Plan.................................................................................50 9.13 Freedom from Liability...............................................................................50 X .....................................................................................................51 Amendment or Termination......................................................................................51 10.01 Amendment or Modification of the Plan................................................................51 10.02 Termination of the Plan..............................................................................51 10.03 Distribution upon Termination of the Plan............................................................51 10.04 Residual Assets......................................................................................52 10.05 Restriction on Distribution of Benefits..............................................................52 10.06 Repayment of Restricted Amounts......................................................................53 XI .....................................................................................................54 Funding of the Plan...........................................................................................54 11.01 Establishment of Trust...............................................................................54 11.02 Employer Contributions...............................................................................54 11.03 Funding Standards....................................................................................54 11.04 Changes in Funding Medium or Method..................................................................54 11.05 Purchase of Annuities................................................................................55 11.06 No Diversion.........................................................................................55 11.07 Treatment of Forfeitures.............................................................................55 11.08 Return of Contributions..............................................................................55 11.09 Litigation by Participants or Beneficiaries..........................................................56 XII .....................................................................................................57 General Provisions............................................................................................57 12.01 Non-Alienation.......................................................................................57 12.02 Substitute Payee.....................................................................................58 12.03 Absence of Guarantee.................................................................................58 12.04 No Contract..........................................................................................58 12.05 Missing Persons......................................................................................58 12.06 Corporate Change.....................................................................................59
12.07 Merger...............................................................................................59 12.08 USERRA...............................................................................................61 XIII .....................................................................................................60 Adoption of the Plan by Other Entities........................................................................60 13.01 Adoption of Plan.....................................................................................60 13.02 Withdrawal from Plan.................................................................................60
Introduction The Amended and Restated American Pacific Corporation Defined Benefit Pension Plan (hereinafter the "Plan") was first established effective October 1, 1987 by American Pacific Corporation (the "Company") for the benefit of Eligible Employees. It has now been amended and restated effective October 1, 1997, except as otherwise provided herein. The rights and benefits of Participants who are Active Participants in the Plan on or after the Effective Date of this Restatement shall be determined as provided in this amended and restated Plan. The rights and benefits of any Participant who was not an Active Participant on or after the Effective Date of this Restatement, but who is entitled to benefits under the Plan, shall be determined in accordance with the applicable provisions of the Plan in effect at the time such Participant separated from service, except as required by applicable law or regulation or except as specifically provided or changed by subsequent amendments. The Plan has been amended and restated to comply with the Tax Reform Act of 1986 and certain other laws and regulations including, without limitation, the Unemployment Compensation Amendments of 1992, the Omnibus Budget Reconciliation Act of 1993, the Retirement Protection Act of 1994, the Small Business Jobs Protection Act of 1996, the Taxpayer Relief Act of 1997, and the Internal Revenue Service Restructuring and Reform Act of 1998, which have become effective since the Plan was last amended. It is intended that the Plan, together with the Trust Agreement, meet all the requirements of ERISA as amended and qualify under Sections 401(a) and 501(a) of the Code. Except as otherwise provided, the Plan and all matters relating thereto shall be governed, construed and administered in accordance with the applicable laws of the United States and the State of Nevada. Exhibit 10.4 Page 1 ARTICLE I Definitions The following terms used in the Plan have the meanings ascribed to them in Article I unless a different meaning is plainly required by the context. Some of the words and phrases used in the Plan are not defined in this Article I, but, for convenience, are defined as they are introduced into the text. Words in one gender should be deemed to include the other gender. Nouns and pronouns stated in the singular should be deemed to include the plural and the plural should be deemed to include the singular whenever appropriate. Any headings used herein are included for ease of reference only, and are not to be construed so as to alter any of the terms of the Plan. 1.01 Accrued Benefit means the amount of the monthly Retirement Benefit a --------------- Participant has earned as of the applicable determination date payable at Normal Retirement Date and shall be determined as provided in Section 3.01, using Final Average Compensation, Benefit Service and Covered Compensation as of the determination date. 1.02 Active Participant means any Participant who is employed by a ------------------ Participating Employer as an Eligible Employee on a determination date. 1.03 Actuarial Equivalent means a benefit that is of equal value at the date -------------------- of determination to the benefits for which they are to be substituted. For purposes of this Plan, the following conventions shall be used to calculate Actuarial Equivalence. (a) Except as provided in (c), for all purposes other than lump sum benefits, Actuarial Equivalence shall be based on an interest rate of seven percent (7%) and mortality rates from the 1984 Unisex Mortality Table. (b) Except as provided in (c), for lump sum benefits effective for distributions on and after September 27, 1995, Actuarial Equivalence shall be based on the Applicable Interest Rate and the Applicable Mortality Table. (c) For the purpose of Section 7.01, if the annual retirement benefit is payable in a form other than a life annuity payable for the life of the Participant or the joint lives of the Participant and Spouse, then effective October 1, 1995, Actuarial Equivalence shall be based on either the Plan's actuarial factors or five percent (5%) interest and the Applicable Mortality Table, whichever factors produce the higher life annuity. In the preceding sentence, the Applicable Interest Rate shall be substituted for five percent (5%) for benefit forms subject to Section 417(e)(3) of the Code. Exhibit 10.4 Page 2 1.04 Affiliated Group means the Company and all other entities required to be ---------------- aggregated with the Company under Sections 414(b), (c), (m), or (o) of the Code but only in the period during which such other entity is required to be so aggregated with the Company. 1.05 Annuity Starting Date means the first day of the first period for which --------------------- an amount is payable as an annuity, or in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitle the Participant to such a benefit. 1.06 Applicable Interest Rate means the annual rate of interest on 30-year ------------------------ Treasury securities, as specified by the Commissioner of Internal Revenue, for the month in which falls the Annuity Starting Date for the distribution. 1.07 Applicable Mortality Table means the table prescribed by the Secretary -------------------------- of the Treasury under Section 417(e)(3) of the Code. As of October 1, 1995, the Applicable Mortality Table is the 1983 Group Annuity Mortality Table converted to a unisex basis by assuming fifty percent (50%) males. 1.08 Beneficiary means a person or entity designated as such by a ----------- Participant, on a form provided by the Plan Administrator, to receive benefits payable as a result of the Participant's participation in the Plan upon the Participant's death. Notwithstanding the preceding sentence, the Beneficiary shall be the Participant's Spouse at the time of death, unless: (a) The Participant has no Spouse at the time of death, or (b) The Participant's Spouse consents in writing to the Participant's designation of an alternate Beneficiary in the manner prescribed in Article V and Article VI, or (c) The Participant's Spouse cannot be located. If the Participant has no Spouse at the time of death, or if no other person designated as Beneficiary survives the Participant, the Beneficiary shall be the Participant's estate. 1.09 Benefit means Retirement Benefit. ------- 1.10 Board means the Board of Directors of the Company. ----- 1.11 Code means the Internal Revenue Code of 1986 as amended from time to time. ---- All references to specific Code sections are deemed to be references to such sections as they may be amended or superseded. 1.12 Company means American Pacific Corporation. ------- Exhibit 10.4 Page 3 1.13 Compensation. ------------ (a) Compensation means the Participant's Section 415 Compensation during ------------ employment with the Employer for the Plan Year except as provided below. Compensation shall include any amount which is contributed by the Employer pursuant to a salary reduction agreement and which is not includible in the gross income of the Employee under Sections 125, 402(e)(3), 402(h) or 403(b) of the Code. Compensation of each Participant taken into account under the Plan for determining all benefits provided under the Plan for any determination period shall not exceed the limit on Compensation prescribed in Section 401(a)(17) of the Code (the "Section 401(a)(17) Limit"). For Plan Years beginning after December 31, 1988 and before January 1, 1994, this limitation shall be two hundred thousand dollars ($200,000), adjusted at the same time and in the same manner as under Section 415(d) of the Code, except that the first adjustment to the limit is effected on January 1, 1990. For Plan Years beginning on or after January 1, 1994, the limit is one hundred fifty thousand dollars ($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 on January 1 of any calendar year shall apply to any determination period beginning in such calendar year. For this purpose, the "determination period" is any period not exceeding twelve (12) months over which Compensation is determined. If a determination period consists of fewer than twelve (12) months, the Section 401(a)(17) 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 twelve (12). For Plan Years beginning before January 1, 1997, 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 descendant of the Participant who has not attained age nineteen (19) before the close of the year. If, as a result of the application of such rules, the adjusted Section 401(a)(17) Limit is exceeded, then (except for purposes of determining the portion of Compensation up to the integration level), the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of this limitation. This paragraph shall not apply for Plan Years beginning on and after January 1, 1997. If 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 the prior determination period is subject to the adjusted 401(a)(17) Limit in effect for that prior determination period. For this purpose, for benefits accruing in Plan Years beginning on or after January 1, 1989 and before January 1, 1994 with respect to determination periods beginning before January 1, 1990, the Section 401(a)(17) Limit is two hundred thousand dollars Exhibit 10.4 Page 4 ($200,000). Furthermore, for benefits accruing in Plan Years beginning on or after January 1, 1994 with respect to determination periods beginning before the first day of the first plan year beginning on or after January 1, 1994, the Section 401(a)(17) limit is one hundred and fifty thousand dollars ($150,000). Section 401(a)(17) Participants - 1994 Fresh Start. -------------------------------------------------- For the purpose of applying this subsection (a), the benefit formula in Section 3.01 shall be applied so that the Accrued Benefit of any Section 401(a)(17) Participant or Statutory Section 401(a)(17) Participant in any Plan Year beginning after December 31, 1993 will be equal to the greater of (1) or (2) where (1) means the sum of his Accrued Benefit on the last day of the last Plan Year beginning in 1993, frozen in accordance with Treasury Regulation Section 1.401(a)(4)-13, and his Accrued Benefit based on the benefit formula under the Plan as amended for Plan Years beginning after 1993, taking into account only Years of Benefit Service beginning after 1993 and (2) means his Accrued Benefit based on the benefit formula under the Plan as amended for Plan Years beginning after 1993, taking into account his total Years of Benefit Service. For the purpose of this subsection, a Statutory Section 401(a)(17) Participant means a Participant with an Accrued Benefit as of a date on or after the first day of the first Plan Year beginning on or after January 1, 1994 that was determined taking into account Compensation for a Plan Year beginning prior to 1989 in excess of two hundred thousand dollars ($200,000) for any year. Also for the purpose of this subsection (2), a Section 401(a)(17) Participant means a Participant with an Accrued Benefit as of a date on or after the first day of the first Plan Year beginning on or after January 1, 1994 that was determined taking into account Compensation for a Plan Year beginning prior to 1994 in excess of one hundred fifty thousand dollars ($150,000) for any year. (b) Final Average Compensation means the monthly average of a -------------------------- Participant's Compensation over any sixty (60) consecutive month period preceding the termination of employment or retirement which produces the highest average. If a Participant does not have the requisite amount of service described above, Final Average Compensation shall be determined on the basis of his entire period of employment as an Employee preceding the determination date. The provisions of this subsection (b) shall in no case reduce the Final Average Compensation of any individual who was employed by an Employer as an Employee on September 30, 1989, to an amount that is less than such individual's Final Average Compensation as of such date, computed in accordance with the terms of the Plan in effect on that date. Exhibit 10.4 Page 5 (c) Section 415 Compensation means the Participant's wages, within the ------------------------ meaning of Section 3401(a) of the Code and all other payments of compensation to the Participant by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Participant a written statement under Sections 6041(d), 6051(a)(3) and 6052 of the Code. Effective for Plan Years beginning on and after January 1, 1998, Section 415 Compensation shall include amounts not includible in gross income of the Employee under Sections 125, 402(e)(3), 402(h) or 403(b) of the Code. This definition may be modified to exclude amounts paid by the Employer as reimbursement for moving expenses incurred by the Employee to the extent that at the time of payment it is reasonable to believe that these amounts are deductible by the Employee under Section 217 of the Code. Section 415 Compensation must be determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed. 1.14 Covered Compensation means, for a Plan Year, a Participant's Compensation -------------------- (determined in accordance with definition of Compensation set forth in this Plan) that is not in excess of the applicable wage base determined in accordance with the 1988 Covered Compensation Table. 1.15 Disability means total and permanent disability. A Participant will be ---------- considered Disabled or under a Disability if he is qualified for Social Security disability benefits. From time to time, the Employer may similarly require proof of the continued Disability of the Participant. If the Plan Administrator determines from such evidence that the Disability of such Participant has ceased and that his Social Security disability benefits have terminated and he has not reached his Normal Retirement Date or returned to Employment, all his rights to any benefits payable thereafter under this Plan on account of such Disability shall cease. If such Participant refuses for a period of 12 consecutive months to furnish to the Plan Administrator reasonable information requested by the Plan Administrator for such determination, then all his rights to any benefit under this Plan on account of such Disability shall cease. 1.16 Disability Retirement Date means the first day of the month following -------------------------- Disability upon which the Participant would have been eligible to receive a Normal Retirement Benefit had his employment with the Employer continued. 1.17 Early Retirement Age means the date on which the Participant first -------------------- attains age fifty-five (55) and has completed at least ten (10) years of Vesting Service. 1.18 Early Retirement Date means the first day of the month coinciding with --------------------- or next following the date the Participant elects to receive his Retirement Benefits under the Plan where such date is after the Participant's attainment of his Early Retirement Age but is prior to the Participant's attainment of his Normal Retirement Age. 1.19 Effective Date means October 1, 1987. -------------- Exhibit 10.4 Page 6 1.20 Effective Date of this Restatement means October 1, 1997, except as ---------------------------------- otherwise provided herein. The Effective Date of this Restatement in respect of Employees of any Employer that had not adopted the Plan as of the Effective Date of the Restatement shall be the date of adoption of this Plan by such Employer. In respect of Employers of any entity, all or substantially all of the assets of which shall be acquired by, or that shall be merged into or consolidated with an Employer after the Effective Date of this Restatement, the term Effective Date of this Restatement shall mean the date of such acquisition, merger or consolidation. 1.21 Eligible Employee means an Employee employed by a Participating ----------------- Employer, provided such person is not included in a unit of employees covered by a collective bargaining agreement in the negotiation of which retirement benefits were the subject of good faith bargaining if two percent or fewer of the employees of the Employer covered by such collective bargaining agreement are "professionals," as such term is defined in proposed or final Treasury Regulations, and who was not a Participant in the Plan on the date before the Effective Date of this Restatement, unless coverage under the Plan was negotiated by a union and the Employer. 1.22 Employee means a person employed by an Employer, and shall not include -------- any individual who performs services for an Employer solely as an independent contractor. Employee also means a leased employee within the meaning of Section 414(n) of the Code to the extent required by law. The term "leased employee" means any person (other than an employee of the recipient) who pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined 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 performed under the primary direction and control of the recipient employer. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. A leased employee shall not be considered an employee of the recipient if: (i) such employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least ten percent (10%) of compensation, as defined in Section 415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludible from the employee's gross income under Sections 125, 402(e)(3), 402(h) or 403(b) of the Code, (2) immediate participation, and (3) full and immediate vesting; and (ii) leased employees do not constitute more than twenty percent (20%) of the recipient's nonhighly compensated workforce. 1.23 Employer means the Company and any other member of the Affiliated Group. -------- Exhibit 10.4 Page 7 1.24 Entry Date means the date an Eligible Employee may enter the Plan. The ---------- Entry Date shall be the date coinciding with or next following the date the Eligible Employee satisfies the eligibility requirements set out in Section 2.01 of the Plan. 1.25 ERISA means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time. 1.26 Inactive Participant means any Participant who: (a) was transferred to -------------------- an Employer which does not maintain this Plan for its employees; (b) was transferred to any group of employees not covered by the Plan; or (c) terminated service with the Employer (for as long as he is entitled to benefits under the Plan). 1.27 Late Retirement Date means the first day of the month coinciding with or -------------------- next following the date a Participant retires, where such date is after his Normal Retirement Date. 1.28 Normal Retirement Age means the later of the date the Participant --------------------- attains age sixty-five (65) or the fifth (5/th/) anniversary of the date the Participant commenced participation in the Plan. 1.29 Normal Retirement Date means the first day of the month coinciding with ---------------------- or next following the date the Participant attains his Normal Retirement Age. A Participant who is employed by an Employer on the date he attains his Normal Retirement Age shall be 100% vested in his Accrued Benefit. 1.30 Participant means any Eligible Employee who becomes eligible to ----------- participate in the Plan pursuant to Article II and who continues to be entitled to any benefits under the Plan. 1.31 Participating Employer means the Company and any member of the ---------------------- Affiliated Group which adopts this Plan as provided in Article XIII. 1.32 Plan means Amended And Restated American Pacific Corporation Defined ---- Benefit Pension Plan as it may from time to time be amended. The Plan shall be deemed to include the Trust. 1.33 Plan Administrator means the person or persons designated to oversee the ------------------ operation and administration of the Plan pursuant to Article IX. 1.34 Plan Year means the twelve (12) consecutive month period beginning on --------- October 1 and ending on the next following September 30. 1.35 Restatement means this Plan as amended and restated herein. ----------- 1.36 Retirement Benefit means the amount to which a Participant shall become ------------------ entitled, is entitled to or is receiving under this Plan. Exhibit 10.4 Page 8 1.37 Social Security Retirement Age means respectively: (a) age 65 for a ------------------------------ Participant born before January 1, 1938; (b) age 66 for a Participant born after December 31, 1937 but before January 1, 1955, and (c) age 67 for a Participant born after December 31, 1954. 1.38 Spouse means the person to whom the Participant is legally married on ------ his Annuity Starting Date or, if earlier, on his date of death. The status of an individual as a Spouse of a Participant shall be determined under the laws of the jurisdiction of the Participant's domicile as of the time such status is determined. 1.39 Trust Agreement means the trust agreement and any and all amendments and --------------- successor agreements entered into between the Company and the Trustee for the purpose of funding benefits under the Plan. The Trust Agreement shall be deemed to be part of this Plan as if all of the terms and provisions were fully set forth herein. 1.40 Trust Fund means all sums of money or other property held by the Trustee ---------- pursuant to the terms of the Trust Agreement. 1.41 Trustee means the Trustee or any successors thereto appointed to ------- administer the Trust Fund. 1.42 Year of Service and other service measurements under the Plan shall be --------------- determined utilizing the special definitions of this Section. Unless otherwise specified, Service shall be credited for employment with any member of the Affiliated Group. (a) A Year of Service means a Computation Period during which an Employee --------------- is credited with at least one thousand (1000) Hours of Service. (b) A one-year Break in Service means a Computation Period during which ---------------- an Employee fails to complete more than five hundred (500) Hours of Service. However, an unpaid leave of absence approved in writing by the Plan Administrator shall not constitute a Break in Service or a termination of employment for eligibility, participation or vesting purposes. An unpaid leave of absence approved in writing by the Company shall not constitute a Break in Service or a termination of employment for eligibility, participation or vesting purposes. (c) Computation Periods. ------------------- (1) The Eligibility Computation Period means the twelve (12) ------------------------------ consecutive month period beginning on the date the Employee first performs an Hour of Service for an Employer. Provided, however, that succeeding Eligibility Computation Periods shall be the twelve (12) consecutive month period beginning on the first day of the Plan Year, commencing with the Plan Year which begins on or immediately prior to the first anniversary of the date the Employee first performed an Hour of Service. Exhibit 10.4 Page 9 (2) The Vesting Computation Period means the twelve (12) consecutive -------------------------- month period beginning on the first day of the Plan Year. (3) Benefit Service Computation Period means the twelve (12) ---------------------------------- consecutive month period beginning on the first day of the Plan Year. (d) An Hour of Service means: --------------- (1) Each hour for which an Employee is paid or entitled to payment for the performance of duties with an Employer during the applicable Computation Period. (2) Each hour for which an Employee is paid, or entitled to payment, by an Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence, except that (A) Not more than five hundred one (501) Hours of Service shall be credited on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single Computation Period), and (B) Hours of Service shall not be credited where such payment is made or is due under a plan maintained solely for the purpose of complying with applicable worker's compensation, unemployment or disability insurance laws, or solely to reimburse an Employee for medical or medically-related expenses. (3) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. No more than five hundred one (501) Hours of Service shall be credited for payment of back pay on account of any single continuous period during which the Employee did not or would not have performed duties. Hours of Service shall be credited under this paragraph to the computation period to which the award or agreement pertains, rather than the computation period in which the agreement or the award or payment is made. The same Hours of Service shall not be credited under both (1) and (2) above and this subpart. (4) Each hour an Employee on leave from employment to serve in the Armed Forces of the United States would have been paid, directly or indirectly, or entitled to payment under (1) above assuming that but for such military service he would have been regularly engaged in the performance of his duties. Such hours shall be credited to the Computation Period in which he would have been regularly engaged in the performance of his duties but for such military service. Provided, however, that no Hours of Service Exhibit 10.4 Page 10 shall be credited under this Section unless the Employee returns to active employment with a member of the Affiliated Group within the period provided by law for the protection of his re- employment rights. Hours of Service for reasons other than the performance of duties shall be determined and credited in accordance with Department of Labor Regulation (S) 2530.200b-2(b) and (c), which is incorporated herein by reference. (e) Special Maternity/Paternity Rule. Solely for the purpose of -------------------------------- determining whether a Break in Service has occurred, an Employee who is absent from employment because of the Employee's pregnancy, the birth of the Employee's child, the placement of a child with the Employee in connection with the adoption of such child by the Employee, or the need to care for such child for a period beginning immediately following such birth or placement, shall be credited with: (1) The Hours of Service which otherwise would normally have been credited to such individual but for such absence, or (2) In any case in which the Plan Administrator is unable to determine the hours described above, eight (8) Hours of Service per day of such absence. The above rule shall apply only if the Employee furnishes to the Plan Administrator such timely information as it may require to establish that the absence was for the above reasons and to determine the number of days of such absence. Hours of Service shall be credited in the Computation Period in which the absence from work begins if such credit is necessary to prevent a Break in Service in that period. In any other case, such Hours of Service shall be credited in the immediately following Computation Period. In no event shall more than five hundred one (501) Hours of Service shall be credited because of such pregnancy or placement. (f) Family and Medical Leave. Solely to the extent required by law, an ------------------------ Employee who is absent from employment because of a leave of absence under the Family and Medical Leave Act of 1993 shall receive credit for Hours of Service during such absence. Provided, however, that the same Hours of Service shall not be credited under both this subsection and any other provision of this Section. Exhibit 10.4 Page 11 ARTICLE II Eligibility, Vesting and Benefit Service 2.01 Eligibility Requirements. ------------------------ (a) Each Eligible Employee who was a Participant in the Plan immediately prior to the Effective Date of this Restatement shall continue to be a Participant. Each Eligible Employee who had satisfied the eligibility requirements of the Plan immediately prior to the Effective Date of this Restatement but who had not yet become a Participant shall become a Participant in this Plan on the Effective Date of this Restatement. Each other Eligible Employee shall become a Participant in this Plan on the Entry Date coinciding with or next following attainment of age twenty-one (21) and the completion of one (1) Year of Service. (b) In the event that the Company shall at any time acquire all or substantially all of the assets of another operating business or entity, or all or substantially all of the assets of another operating business or entity located in a geographically distinct area, the employees of such other operating business or entity who are thereafter employed by the Employer and become Eligible Employees shall receive credit for periods of service in the employ of such other business or entity for purposes of this Section 2.01 to the extent provided in a resolution of the board of directors of the Company adopted at or near the time of such acquisition or in the written agreements pursuant to which such acquisition was made; but only if such Employees would have received credit for such service in the employ of such other business or entity under the terms of this Plan if such Employees had been employed by an Employer. The Plan Administrator shall see to it that the provisions of this subsection 2.01(b) are applied in a uniform and nondiscriminatory manner and in a manner consistent with the provisions of Section 9.06 hereof. No employee shall receive credit for service in the employ of another business or entity pursuant to this subsection 2.01(b) if the crediting of such service would cause the Plan to fail to comply with any of the requirements of Section 401(a) of the Code for treatment as a qualified plan. 2.02 Participation upon Reemployment. ------------------------------- (a) An Eligible Employee who separates from service after satisfying the eligibility requirements of Section 2.01 but before the next Entry Date shall become a Participant immediately upon reemployment as an Eligible Employee by a Participating Employer if he returns to employment after the next Entry Date but prior to incurring a one- year Break in Service. (b) A Participant who separates from service and is subsequently reemployed as an Eligible Employee by a Participating Employer after incurring a one-year Break Exhibit 10.4 Page 12 in Service shall again become an Active Participant in the Plan upon performance of an Hour of Service. 2.03 Inactive Participants. Subject to Section 2.06, an Inactive Participant --------------------- shall continue to be credited with Vesting Service, Benefit Service and Compensation as if he had continued to be an Active Participant until employment with the member of the Affiliated Group ceases. Subject to Section 2.06, an Inactive Participant shall again become an Active Participant upon return to employment with a Participating Employer or upon transfer to an employee group eligible to participate in the Plan. 2.04 Vesting Service. --------------- (a) Except as provided in Section 2.06, a Participant shall be credited with one year of Vesting Service for each Year of Service with an Employer. (b) An Employee's Vesting Service shall also include periods of employment with a predecessor employer's business prior to its acquisition (or prior to the acquisition of certain assets of such business) by the Company: (1) If and to the extent specified in a resolution of the Board of Directors of the Employee's Employer at the time such Employer adopts this Plan; or (2) The Company shall have continued a pension or profit sharing plan of the predecessor employer or, to the extent required under Section 414(a)(2) of the Code, if the Company shall have maintained a pension or a profit sharing plan that was not the plan maintained by a predecessor employer. (c) The provisions of this Section shall not operate to decrease any Participant's Vesting Service to a period that is shorter than the period of the Participant's Vesting Service as of October 1, 1989, under the terms of this Plan, as effective prior to October 1, 1989. 2.05 Benefit Service. --------------- (a) Except as provided in Section 2.06, a Participant shall be credited with one year of Benefit Service for each Benefit Service Computation Period during which he completes one thousand (1,000) Hours of Service with an Employer. Benefit Service is credited in full years only. (b) Participants who become eligible to participate in the Plan after the Effective Date of this Restatement as a consequence of the adoption of this Plan by an employing entity, as a consequence of the acquisition by the Company of the assets of an employing entity, or as a consequence of the merger of an employing entity into Exhibit 10.4 Page 13 the Company, shall receive Benefit Service to the extent and upon the terms and conditions specified in a resolution of the Board of Directors of the employing entity on the basis of the most recent period of employment with such employing entity prior to the date on which the employing entity adopts the Plan or prior to the date of the acquisition or merger. (c) Notwithstanding the foregoing provisions of this Section, in the event that the assets of another qualified pension plan shall be merged with and into this Plan, with respect to Participants who become Participants as a result of such consolidation, (1) Benefit Service may be granted in such manner and to such extent as shall be provided in connection with such consolidation, on the basis of accredited service (however designated) accrued under such other plan prior to the effective date of such consolidation, or (2) in lieu of the granting of Benefit Service, the benefits based upon accredited service (however designated) accrued under such other plan prior to the effective date of such consolidation may be preserved as a special retirement benefit, with respect to which all requirements for such accredited service shall be governed by the terms and provisions of such other private pension plan, as amended to the effective date of such consolidation. 2.06 Disregarded Service. The Service to be credited to an Employee under ------------------- this Article shall not include Service prior to a Break in Service if: (a) The Employee did not have a nonforfeitable right to an Accrued Benefit derived from Employer contributions at the time of the Break in Service, and (b) The number of consecutive one-year Breaks in Service equals or exceeds the greater of five (5) or the aggregate number of Years of Service credited to the Employee before such Break in Service. Exhibit 10.4 Page 14 ARTICLE III Retirement Benefits 3.01 Normal Retirement Benefit. A Participant who retires on his Normal ------------------------- Retirement Date shall be entitled to a monthly Retirement Benefit commencing on his Normal Retirement Date equal to two percent (2%) (base benefit percentage) of the Participant's Final Average Compensation up to Covered Compensation; plus two and sixty-five one hundredths percent (2.65%) (excess benefit percentage) of the Participant's Final Average Compensation in excess of his Covered Compensation, the sum multiplied by his years of Benefit Service up to but not exceeding twenty (20) such years. Notwithstanding the foregoing provisions of this Section 3.01, however, the monthly Normal Retirement Benefit shall in no case be less than fifty dollars ($50.00). Notwithstanding the foregoing, the benefit provided to a Participant shall not violate the cumulative permitted disparity limits set forth in Treas. Reg. (S)1.401(l)-5. In this regard, the number of years of Benefit Service taken into account above for any Participant will not exceed the Participant's cumulative disparity limit. The Participant's cumulative disparity limit is equal to thirty-five (35) minus the number of years during which the Participant earned a year of credited service under one or more qualified plans or simplified employee pensions ever maintained by the Employer, other than years for which a Participant earned a year of Benefit Service under this Plan. If the Participant's cumulative disparity limit is less than the period of years used to determine the Participant's benefit above, then for years after the Participant reaches the cumulative disparity limit and through the end of the period specified above, the Participant's benefit will be equal to the excess benefit percentage, or, if lesser, the highest percentage permitted under the 133 1/3 percent accrual rule of Section 411(b)(1)(B) of the Code (if applicable) times Final Average Compensation. If a Participant begins receiving benefits at an age other than Normal Retirement Age, the Participant's benefit will be determined in accordance with Section 3.06. For any Plan Year in which a Participant benefits under more than one plan of the Employer, the benefit provided above to a Participant shall not violate the overall permitted disparity limits set forth in Treas. Reg. (S)1.401(l)-5. In this regard, for any Plan Year this Plan benefits any Employee who benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes disparity), the benefit for each Participant under this Plan will be equal to the base benefit percentage times the Participant's Final Average Compensation. Exhibit 10.4 Page 15 If the preceding paragraph is applicable, the Fresh Start Date (within the meaning of Treas. Reg. (S)1.401(a)(4)-13) shall be the last day of the Plan Year preceding the Plan Year in which this paragraph is applicable. In addition, if in any subsequent Plan Year, this Plan no longer benefits any Employee who also has benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), the Fresh Start Date shall be the last day of the Plan Year preceding the Plan Year in which this paragraph is no longer applicable. (c) Fresh Start Rules - Change in Benefit Formula --------------------------------------------- (1) Fresh Start Definitions - For purposes of this subsection, the ----------------------- following terms shall be defined as follows: Fresh Start - A change in the Normal Retirement Benefit formula. ----------- Fresh Start Date - September 30, 1989, which is the day ---------------- immediately preceding the effective date of the Fresh Start. Pre-Fresh Start Plan Year - Any Plan Year ending on or before ------------------------- the Fresh Start Date. Post-Fresh Start Plan Year - Any Plan Year beginning after the -------------------------- Fresh Start Date. Fresh Start Date Accrued Benefit - The Participant's Accrued -------------------------------- Benefit as of the Fresh Start Date, calculated and adjusted as described in clause (3) of the subsection. (2) Calculation of Accrued Benefit After Fresh Start Date. With ----------------------------------------------------- respect to any Participant with an Accrued Benefit under the Plan (or any predecessor) as of the Fresh Start Date attributable to any Pre-Fresh Start Year, and who has at least one Hour of Service in a Post-Fresh Start Plan Year, the Participant's Accrued Benefit in any Post-Fresh Start Plan Year will be equal to the greater of his Fresh Start Date Accrued Benefit or his Accrued Benefit based on the benefit formula under the Plan as amended for Post-Fresh Start Date Plan Years, taking into account his total Years of Benefit Service both before and after the Fresh Start Date. (3) Calculation of Fresh Start Date Accrued Benefit. A Participant's ----------------------------------------------- Fresh Start Date Accrued Benefit is an amount equal to his Accrued Benefit determined as of (and as if the Participant had terminated employment with the Affiliated Group on) the Fresh Start Date, based upon the Plan provisions in effect on the Fresh Start Date without regard to any amendment adopted after the Fresh Start Date (unless the amendment is Exhibit 10.4 Page 16 recognized as retroactively effective before the Fresh Start Date under Section 401(b) of the Code or Treas. Regs. 1.401(a)(4)-11(g)). However, the Fresh Start Date Accrued Benefit as so determined is subject to adjustment as follows: (A) The Fresh Start Date Accrued Benefit shall be subject to increases based on adjustments under Section 415(d)(1) of the Code in the maximum benefit permitted under Section 415(b)(1) of the Code. (B) The Fresh Start Date Accrued Benefit shall be adjusted to increase the benefits of former employees who were employed on the Fresh Start Date. (C) The Fresh Start Date Accrued Benefit shall be increased, if it includes top heavy minimum benefits, to the extent necessary to comply with the requirement of Section 416(c)(1)(D)(i) of the Code that top heavy minimum benefits be based on the Participant's Compensation averaged over the highest five or fewer years. (D) The Fresh Start Date Accrued Benefit shall be adjusted so that the Fresh Start Date Accrued Benefit is not less than it would have been if the formula's base benefit percentage had been 50% of the formula's excess benefit percentage. The Fresh Start Date Accrued Benefit is not less than if the offset had been limited to 50% of the benefit determined without application of the offset. 3.02 Early Retirement Benefit. In lieu of his Normal Retirement Benefit, a ------------------------ Participant who has attained his Early Retirement Age may elect to receive a monthly benefit commencing on his Early Retirement Date equal to his Accrued Benefit as of such date, reduced by twenty-five one-hundredths percent (.25%) for each calendar month or portion thereof that the Participant's Early Retirement Date precedes his Normal Retirement Date. The election to receive an Early Retirement Benefit shall be made by filing a written election with the Plan Administrator prior to the first day of the month coinciding with or next following the date of the applying Participant's separation from the service of the Employer. The Plan Administrator may, in its sole discretion, accept a late filed application if petitioned to do so by the Participant for good cause shown. The election to receive an Early Retirement Benefit shall be irrevocable after commencement of any Benefit payments. 3.03 Late Retirement Benefit. A Participant who retires on his Late ----------------------- Retirement Date shall receive a monthly Retirement Benefit equal to the greater of: Exhibit 10.4 Page 17 (a) the benefit to which he would have been entitled pursuant to Section 3.01 if he had retired at his Normal Retirement Date, but adjusted by including any additional years of Benefit Service which have accrued since his Normal Retirement Date up to the maximum number, if any, of years of Benefit Service described in Section 3.01 and by taking into account any increases in Compensation earned since his Normal Retirement Date, or (b) the Actuarial Equivalent of the unadjusted benefit to which he would have been entitled pursuant to Section 3.01 if he had retired at his Normal Retirement Date or in the case of a Participant who retires during any Plan Year following the Plan Year in which his Normal Retirement Date occurs, the Actuarial Equivalent of the benefit to which he would have been entitled pursuant to this Section 3.03 if he had retired at the close of the prior Plan Year. However, the number of payments certain described in Section 5.01 shall be reduced to the extent necessary to conform to a period permitted by Section 5.06, in which case each monthly payment shall be increased so that the benefit is the Actuarial Equivalent of what it would have been without the reduction in period certain. 3.04 Disability Retirement Benefit. A Participant who retires due to ------------------------------ Disability shall be entitled to receive a monthly Disability Retirement Benefit commencing on his Disability Retirement Date equal to his vested Accrued Benefit calculated: (a) As if the Participant had continued to earn Benefit Service from the date he was first absent from work due to his Disability until his Normal Retirement Date and (b) As if his Compensation had remained constant from the date he was first absent from work due to his Disability until his Normal Retirement Date. A Participant who has been determined to be disabled but who is not currently receiving a Disability Retirement Benefit shall be considered to be actively employed by the Employer for purposes of Article VI. A Participant whose Disability has ended and who returns to employment with the Employer shall be credited with Benefit Service for the period during which he was disabled. A Participant who does not return to employment with the Employer after his Disability has ended shall cease to be credited with Benefit Service upon his recovery and shall be entitled to benefits under the Plan only to the extent provided in Article IV of the Plan. Not withstanding the above, a Participant whose Disability precedes his completion of ten (10) Years of Vesting Service (for the purpose of Article IV) shall not be entitled to a Disability Retirement Benefit or continued accrual of Benefit Service during Disability under this Plan. Exhibit 10.4 Page 18 3.05 No Duplication of Benefits. Any benefit payable under this Plan shall be -------------------------- reduced by any benefit paid to a Participant under the terms of any other defined benefit plan qualified under Section 401(a) of the Code to which the Employer contributes, directly or indirectly, other than by payment of taxes, to the extent that such benefit is based on a period of employment with the Employer for which a Participant receives credit for benefits under the Plan. 3.06 Maximum Excess Allowance. ------------------------ (a) The Maximum Excess Allowance at any retirement age shall be the lesser of (i) the base benefit percentage or (ii) the percentage specified in the table below for the Plan's normal form of benefit specified in Section 5.01(a).
- ------------------------------------------------------------------------------------------------ Normal Form of Benefit (%) - ------------------------------------------------------------------------------------------------ Life Annuity + Life Annuity + Life Annuity + Life Annuity 5 Year Certain 10 Year Certain 15 Year Certain - ------------------------------------------------------------------------------------------------ Adjustment 1.00 0.97 0.91 0.84 - ------------------------------------------------------------------------------------------------ Age At Which Benefits Commence 70 1.048 1.017 0.954 0.880 69 0.950 0.922 0.865 0.798 68 0.863 0.837 0.785 0.725 67 0.784 0.760 0.713 0.659 66 0.714 0.693 0.650 0.600 65 0.650 0.631 0.592 0.546 64 0.607 0.589 0.552 0.510 63 0.563 0.546 0.512 0.473 62 0.520 0.504 0.473 0.437 61 0.477 0.463 0.434 0.401 60 0.433 0.420 0.394 0.364 59 0.412 0.400 0.375 0.346 58 0.390 0.378 0.355 0.328 57 0.368 0.357 0.335 0.309 56 0.347 0.337 0.316 0.291 55 0.325 0.315 0.296 0.273 - ------------------------------------------------------------------------------------------------
(b) If a Benefit is distributed in a form other than the normal form (as specified in Section 5.01) or at an age other than Normal Retirement Age, the Benefit shall be adjusted as provided in this subsection. Exhibit 10.4 Page 19 (1) If Benefit payments commence to a Participant at a time other than Normal Retirement Age, the Participant's Accrued Benefit, before the adjustments provided for early or late retirement, shall be multiplied by a fraction, the numerator of which is the Annual Factor that corresponds to the age at which benefits commence to the Participant in the Plan's normal form of benefit, and the denominator of which is the Annual Factor that corresponds to the Normal Retirement Age under the Plan in the normal form of benefit. (2) If Benefit payments commence to the Participant in a form other than the normal form of benefit, the product in the preceding paragraph will be actuarially adjusted in accordance with the provisions of Section 1.03. (3) The Annual Factor is the factor derived from the table in (a) based on the Normal Retirement Age (determined without regard to the years of participation requirement, if any), and the Plan's normal form of benefit. (4) If Benefit payments commence in a month other than the month in which the Participant attains the age specified in the foregoing table, the Annual Factor will be determined by straight line interpolation. (5) Notwithstanding (4) above, for a benefit commencement date preceding the first day of the month in which the Participant attains age fifty-five (55), the Applicable Factor shall be the Actuarial Equivalent of the age fifty-five (55) Annual Factor determined in (a). For a benefit commencement date following the first day of the month in which the Participant attains age seventy (70), the Applicable Factor shall be the Actuarial Equivalent of the age seventy (70) Annual Factor determined in (a). (6) A Disability Retirement Benefit other than a qualified Disability Retirement Benefit, commencing before a Participant's Normal Retirement Age will be treated as a Benefit subject to the limitations of this Section. A Disability Retirement Benefit, will be treated as a qualified Disability Retirement Benefit only if the benefit: (i) is payable under the Plan solely on account of a Participant's Disability, as determined by the Social Security Administration; (ii) terminates no later than the Participant's Normal Retirement Age; (iii) is not in excess of the amount of the benefit that would be payable if the Participant had separated from service at Normal Retirement Age, and (iv) upon attainment of Early or Normal Retirement Age, the Participant receives a benefit that satisfies the accrual and vesting rules of Section 411 of the Code (and the regulations thereunder) without taking into account the Disability Retirement Benefits made up to that age. Exhibit 10.4 Page 20 (7) If this Plan has had a Fresh Start, the limitations in this subsections (1) and (2) will be applied only to the Participant's accruals for years for which the Plan provides for the disparity permitted under Section 401(l) of the Code. All Benefit accruals for years for which the Plan does not provide for the disparity permitted under Section 401(l) of the Code will be actuarially adjusted in accordance with the provisions of Section 1.03. Exhibit 10.4 Page 21 ARTICLE IV Benefits upon Termination of Employment 4.01 Deferred Normal Retirement Benefit. A Participant who separates from ---------------------------------- service before his Normal Retirement Date shall receive, on his Normal Retirement Date after submitting a written application on a form prescribed for that purpose by the Plan Administrator, the vested portion of his Accrued Benefit determined as of the date he separated from service. The Committee may, in its sole discretion, accept a late filed application if petitioned to do so by the Participant for good cause shown. A Participant shall become vested in his Accrued Benefit attributable to Employer contributions according to the following schedule: Years of Vesting Service Vested Percentage ------------------------ ----------------- less than 3 0% 3 but less than 4 20% 4 but less than 5 40% 5 but less than 6 60% 6 but less than 7 80% 7 or more 100% Accrued Benefits forfeited pursuant to this Section shall not be used to increase the Accrued Benefit of any other Participant. 4.02 Deferred Early Retirement Benefit. A Participant entitled to the --------------------------------- Deferred Normal Retirement Benefit described above who separated from service prior to attaining his Early Retirement Age may elect to receive the Benefit commencing on his Early Retirement Date. The amount of such Benefit shall be reduced for early commencement as provided in Section 3.02. Furthermore, a Participant entitled to the Deferred Normal Retirement Benefit described above who separated from service prior to attaining his Early Retirement Age may elect to receive his or her vested Benefit in either a single sum as described in Section 5.02(g) or in the Normal Form described in Section 5.01, commencing as soon as practicable after the Participant terminates employment with the Employer, provided the Actuarial Equivalent of the Participant's vested monthly Accrued Benefit does not exceed ten thousand dollars ($10,000) and not less than the amount specified in Section 5.04 for involuntary cashout. The vested Accrued Benefit shall be reduced so that the benefit commencing at such date is the Actuarial Equivalent of his vested Benefit payable at his Normal Retirement Date. Exhibit 10.4 Page 22 The election to receive a Deferred Early Retirement Benefit shall be made by filing a written election with the Plan Administrator. Such election shall be irrevocable after commencement of any Benefit payments. 4.03 Form of Payment. The benefits described in this Article IV shall be --------------- payable in the forms set out in Article V. Exhibit 10.4 Page 23 ARTICLE V Form and Payment of Retirement Benefits 5.01 Normal Form of Benefit. Unless a Participant elects an optional form ---------------------- of payment, the Benefits described in Article III and Article IV shall be payable in the form of an immediate Life Annuity as described in Section 5.02(a) or, in the case of a Participant who is married on his Annuity Starting Date, in the form of an immediate Qualified Joint and Survivor Annuity as described in Section 5.02(b). 5.02 Other Forms of Benefit. Provided the requirements of Section 5.03 are ---------------------- met, a Participant may waive the normal form of benefit under the Plan and elect to receive Benefits in one of the forms set out below. Benefits payable in a form other than that described in (a) below shall be the Actuarial Equivalent thereof: (a) Life Annuity -- Under this form of benefit (also referred to as a ------------ straight-life annuity), payment of monthly installments will commence as provided in Article III or IV and will continue for the lifetime of the Participant and will cease upon his death. (b) Qualified Joint and Survivor Annuity -- Under this form of benefit, ------------------------------------ payment of monthly installments will commence as provided in Article III or IV and will be made for the lifetime of the Participant. If the Participant predeceases his Spouse, payment in an amount equal to 50% (or 75% or 100%, if elected by the Participant) of the Participant's Benefit will continue to the Spouse for life. (c) Five Years Certain and Life Annuity -- Under this form of benefit, ----------------------------------- payment of monthly installments will commence as provided in Article III or IV and will continue for the Participant's lifetime. If the Participant dies before sixty (60) monthly installments have been paid, such benefit will be payable to the Participant's Beneficiary until a total of sixty (60) monthly installments have been paid. If, upon the Participant's death, there is no living designated Beneficiary or, if a Beneficiary receiving a benefit after the Participant's death dies before a total of sixty (60) monthly installments have been paid to the Participant and the Beneficiary, the commuted value of the unpaid installments shall be paid to the Participant's estate. (d) Ten Years Certain and Life Annuity -- Under this form of benefit, ---------------------------------- payment of monthly installments will commence as provided in Article III or IV and will continue for the Participant's lifetime. If the Participant dies before one hundred twenty (120) monthly installments have been paid, such Benefit will be payable to the Participant's Beneficiary until a total of one hundred twenty (120) monthly installments have been paid. If, upon the Participant's death, there is no living designated Beneficiary or, if a Beneficiary receiving a benefit after the Exhibit 10.4 Page 24 Participant's death dies before a total of one hundred twenty (120) monthly installments have been paid to the Participant and the Beneficiary, the commuted value of the unpaid installments shall be paid to the Participant's estate. (e) Fifteen Years Certain and Life Annuity -- Under this form of benefit, -------------------------------------- payment of monthly installments will commence as provided in Article III or IV and will continue for the Participant's lifetime. If the Participant dies before one hundred eighty (180) monthly installments have been paid, such benefit will be payable to the Participant's Beneficiary until a total of one hundred eighty (180) monthly installments have been paid. If, upon the Participant's death, there is no living designated Beneficiary or, if a Beneficiary receiving a benefit after the Participant's death dies before a total of one hundred eighty (180) monthly installments have been paid to the Participant and the Beneficiary, the commuted value of the unpaid installments shall be paid to the Participant's estate. (f) Joint and Survivor Annuity -- Under this form of benefit, monthly -------------------------- payments will commence as provided in Article III or IV and will be made for the life of the Participant. If the Participant predeceases his Beneficiary, payments in an amount equal to 50%, 75% or 100% of the Participant's monthly Benefit shall continue to such Beneficiary for life. (g) Single Sum Distribution -- Under this form of benefit, a single sum ----------------------- payment will be made to the Participant that is the Actuarial Equivalent of the monthly Benefit payable under subsection (a) within a reasonable time after the end of the Plan Year in which the Participant's employment with the Company terminates, and in any event before the end of the second Plan Year following the Plan Year in which the Participant separates from the service of the Company. This option is available only for Participants for whom the Actuarial Equivalent of the monthly Benefit is not more than $10,000 and not less than the amount specified in Section 5.04 for involuntary cashout or who, under the terms of the Plan in effect on the day before the Effective Date of this Restatement, was entitled to elect a single sum distribution of his or her Accrued Benefit (but only with respect to the portion of Accrued Benefit earned before the amendment eliminating the right to such single sum distribution was executed). The election of a form of benefit under this Section may not be revoked or changed after a Participant's Annuity Starting Date. 5.03 Waiver of Qualified Joint and Survivor Annuity. ---------------------------------------------- (a) For the purposes of this Section, the term "Qualified Joint and Survivor Annuity" means not only the form of benefit described in Section 5.02(b) but also the normal form of benefit described in Section 5.01 payable to a Participant who is not married on his Annuity Starting Date. Exhibit 10.4 Page 25 (b) No less than thirty (30) days and no more than ninety (90) days before the Annuity Starting Date, the Plan Administrator shall provide a Participant with a written explanation in nontechnical language, of the terms and conditions of: (1) the Qualified Joint and Survivor Annuity, (2) his right to elect to waive the benefit and the effect of such election, (3) the rights of the Participant's Spouse with respect to such election, (4) the right to make and effect of, a revocation of a previous election, and (5) the relative values of the various forms of benefit under the Plan. (c) A Participant may elect to waive the Qualified Joint and Survivor Annuity and to receive payment under another payment form only if the following conditions are met: (1) The waiver is made within the ninety (90) day period ending on the Participant's Annuity Starting Date. (2) The Participant's Spouse consents in writing to such waiver and to the designation of the beneficiary or the form of benefit elected. Such consent must be witnessed by a notary public or plan representative, must be filed with the Plan Administrator and must acknowledge the effect of such wavier. No consent is required if it is established to the satisfaction of the Plan Administrator that the Participant does not have a Spouse or that the Spouse cannot be located. The election to waive the Qualified Joint and Survivor Annuity may be revoked by the Participant at any time prior to his Annuity Starting Date. However, effective October 1, 1999, if the Participant, after having received the written explanation described above, affirmatively elects a form of distribution and the spouse consents to that form of distribution (if necessary), the Annuity Starting Date may be less than thirty (30) days after the written explanation was provided to the Participant, provided that the following requirements are met: (1) The Plan Administrator provides information to the Participant clearly indicating that the Participant has a right to at least thirty (30) days to consider whether to waive the Qualified Joint and Survivor Annuity and consent to another form of distribution; (2) The Participant is permitted to revoke an affirmative distribution election until the later of the Annuity Starting Date or the eighth day following the date the foregoing explanation is provided to the Participant; (3) The Annuity Starting Date is after the date the foregoing explanation is provided to the Participant. The Annuity Starting Date may be before the affirmative distribution election is made and before distribution commences; and Exhibit 10.4 Page 26 (4) Distribution in accordance with the affirmative election does not commence before the eighth day after the foregoing explanation is provided to the Participant. (d) Notwithstanding any other provision in the Plan, no benefit payment will be made prior to the time the notice requirements of subsection (b) have been satisfied. Any benefit payment which is delayed by operation of this subsection shall be paid to the Participant once the benefit amount is calculated. 5.04 Cash-out of Accrued Benefit. Notwithstanding any other provision of the --------------------------- Plan, a Participant who separates from service or retires with a vested Accrued Benefit shall be paid the Actuarial Equivalent of such benefit in a single sum, provided that such Actuarial Equivalent has not, at the time of this or any prior distribution, exceeded the amount (five thousand dollars ($5,000) effective October 1, 1999, three thousand five hundred dollars ($3,500) prior to October 1, 1999) permitted to be cashed out without consent by Section 417(e) of the Code. Any such payment shall be in lieu of the benefits otherwise payable hereunder. For purposes of this Section, if the present value of the Participant's vested Accrued Benefit is zero, the Participant shall be deemed to have received a distribution of such vested benefit on the date his employment with the Employer ends. If a Participant who has received a single sum payment under this Section or Section 5.02(i) resumes employment covered under the Plan, such Participant's later Accrued Benefit hereunder shall not include Benefit Service attributable to his prior period of employment unless such Participant repays to the Plan the full amount of the previous distribution plus interest at the rate determined for purposes of Section 411(c)(2)(C) of the Code (assessed from the date of the previous distribution), before the earlier of: i) five (5) years after the first date on which the Participant subsequently resumes employment covered by the Plan, or ii) the close of the first period of five (5) consecutive one-year Breaks in Service commencing after distribution. The Plan Administrator shall prescribe such procedures as it deems necessary or appropriate to facilitate such a repayment to the Plan by a person who resumes employment covered under the Plan. A Participant who resumes employment covered under the Plan shall be given the opportunity to repay to the Plan the amount described above only if such Participant received a distribution of the Actuarial Equivalent of his vested Benefit and the amount thereof was less than the Actuarial Equivalent of his Accrued Benefit (expressed in the form of an annual benefit commencing at Normal Retirement Age). Notwithstanding the above, no single sum payment may be made to the recipient of a Qualified Joint and Survivor Annuity after the Annuity Starting Date, unless the Participant and his Spouse (or where the Participant has died, the surviving Spouse) consent in writing to such distribution. Exhibit 10.4 Page 27 5.05 Commencement of Benefits. ------------------------ (a) Unless the Participant elects otherwise in writing pursuant to a provision of this Plan, the payment of Benefits under the Plan to a Participant shall commence no later than the sixtieth (60th) day after the close of the Plan Year in which the last of the following occurs: (1) The Participant attains Normal Retirement Age; (2) The tenth (10th) anniversary of the Participant's initial participation in the Plan; or (3) The Participant terminates service with all Employers. A Participant who wishes to defer the commencement of benefit payments beyond the latest date specified above may elect to do so by filing with the Plan Administrator a written statement signed by the Participant that describes the Benefit and the date on which the payment of the Benefit is to commence. No election may be made that would defer the first payment date beyond the Required Beginning Date (defined in subsection (b)). Once filed, an election may be changed only with the consent of the Plan Administrator. (b) Notwithstanding the above, for a Participant who reaches age seventy and one-half (70 1/2) prior to January 1, 2000 distribution of benefits must commence not later than the April 1 of the calendar year following the calendar year in which the Participant attains age seventy and one half (70 1/2). Provided, however, that in the case of an active Participant who has attained age seventy and one half (70 1/2) prior to January 1, 1988 and who is not a five percent (5%) owner (as defined in Section 416 of the Code), distribution of benefits need not commence until the April 1 of the calendar year following the calendar year in which the Participant retires. Provided further, that in the case of an active Participant who attained age seventy and one half (70 1/2) during 1988 and who is not a five percent (5%) owner (as defined in Section 416 of the Code), distribution of benefits need not commence until April 1, 1990. Effective for Participants who reach age seventy and one-half (70 1/2) on or after January 1, 2000, with respect to a five percent (5%) owner, distribution of benefits shall commence not later than April 1 of the calendar year following the calendar year in which the Participant attains age seventy and one-half (70 1/2). A Participant who reaches age seventy and one-half (70 1/2) on or after January 1, 2000 and who is not a five percent (5%) owner shall commence receipt of benefits not later than April 1 of the calendar year following the calendar year in which the Participant reaches age seventy and one- half or retires, if later. If the provisions of this Section 5.05(b) and Section 5.06 require the payment of benefits to a Participant who has not yet terminated employment, the Participant's additional Accrued Benefit earned during each subsequent accrual period and Exhibit 10.4 Page 28 determined as of the end of such period shall be actuarially reduced to reflect distributions made during the period to which the additional Accrued Benefit relates. 5.06 Methods of Distribution. ----------------------- (a) Except as otherwise provided in Section 5.02(b), with respect to the Qualified Joint and Survivor Annuity requirements, the provisions of this Section will apply to any distribution of a Participant's interest and will take precedence over any inconsistent provisions of this Plan. (b) All distributions required under this Section shall be determined and made in accordance with Section 401(a)(9) of the Code, as in effect on the Effective Date of this Restatement or as hereafter amended, and the regulations thereunder, including the minimum distribution death incidental benefit requirement of Proposed Treasury Regulation Section 1.401(a)(9)-2. (c) Distribution of benefits, if not made in a single sum, shall be made over one of the following periods (or a combination thereof): 1) the life of such Participant; 2) the lives of such Participant and a designated Beneficiary; 3) a period not extending beyond the life expectancy of such Participant or 4) a period not extending beyond the life expectancy of such Participant and a designated Beneficiary. (d) If the distribution of the Participant's interest has begun in accordance with the preceding paragraph and the Participant dies before his entire interest has been distributed to him, the remaining portion of such interest shall be distributed at least as rapidly as under the method of distribution used as of his date of death. (e) If the Participant dies before distribution commences, his or her entire interest will be distributed no later than December 31 of the calendar year containing the fifth anniversary of the Participant's death except to the extent an election is made to receive distributions in accordance with (1) and (2) below; (1) Payments of any portion of such interest to or for the benefit of a Beneficiary may be made over the life or life expectancy of such Beneficiary commencing no later than December 31 of the calendar year containing the first anniversary of the Participant's death; and (2) Payments of any portion of such interest to the Participant's surviving Spouse are not required to begin earlier than December 31 of the calendar year in which the Participant would have attained age seventy and one half (70 1/2) or, if later, December 31 of the calendar year in which the Participant dies. Exhibit 10.4 Page 29 If the Spouse dies before payments begin, subsequent distributions are required under this subsection (except for subsection (e)(2)) as if the surviving Spouse was the Participant. Such election must be made by the Participant (or his Beneficiary, if the Participant dies without having made such an election) on or before the earlier of the date by which distribution must commence absent such election and the date distribution must commence assuming such election has been made. (f) For the purpose of this Section, distribution of a Participant's interest is considered to begin on the Participant's Required Beginning Date (or, if the next to last sentence of subsection (e) applies, the date distribution is required to begin to the surviving Spouse pursuant to subsection (e)). If distribution in the form of an annuity irrevocably commences to the Participant before the Required Beginning Date, distribution is considered to commence on the date it actually commences. (g) Any amount paid to a child of the Participant will be treated as if it had been paid to the surviving Spouse if such benefit becomes payable to the surviving Spouse when the child reaches the age of majority. (h) For purpose of this Section, any distribution required under the incidental death benefit requirements of Section 401(a) of the Code shall be treated as a distribution required under Section 401(a)(9) of the Code. (i) If a Participant elects an optional form of benefit that provides a survivor benefit to a person other than a surviving spouse, the survivor benefit shall be limited so that the value of the annuity payable during the Participant's lifetime shall be not less than fifty-one percent (51%) of the value of the Participant's Accrued Benefit calculated at his actual Retirement Date. 5.07 Suspension of Benefits. ---------------------- (a) Retirement Benefits in pay status will be suspended for each calendar month following the Annuity Starting Date after a Participant is reemployed on a full-time permanent basis. Notwithstanding the foregoing, distributions shall continue for any Participant who does not complete at least forty (40) Hours of Service with the Employer, or if the Plan has not determined the actual number of Hours of Service, such Participant does not perform an Hour of Service on each of eight (8) or more days (or separate work shifts). (b) Benefits suspended in accordance with this Section shall resume no later than the first day of the third calendar month following the calendar month when the Participant is no longer employed on a full- time permanent basis or fails to complete at least forty (40) Hours of Service with the Employer or to perform an Hour of Service on each of eight (8) or more days (or separate work shifts). The Exhibit 10.4 Page 30 initial payment upon resumption shall include the payment scheduled to occur in the calendar month when payments resume and any amounts withheld during the period between the cessation of employment and the resumption of payments, less any amounts which are subject to offset. (c) Normal Retirement Benefits shall not be withheld by the Plan pursuant to this Section unless the Plan Administrator notifies the Participant by personal delivery or first class mail during the first calendar month or payroll period in which the Plan withholds payments that the payment of his Retirement Benefit is suspended. Such notification shall contain a description of the specific reasons why the Participant's Benefit is suspended, a description of the Plan provisions relating to the suspension of Benefits, a copy of such Plan provisions, and a statement to the effect that applicable Department of Labor regulations may be found in Section 2530.203-3 of the Code of Federal Regulations. In addition, the notice shall contain a statement indicating that the Participant may seek a review of the suspension of his Retirement Benefits through the Plan's claim procedure. (d) The amount of the Participant's monthly Benefit which may be suspended shall be as follows: (1) Life Annuity. In the case of benefits payable periodically on a ------------ monthly basis for as long as a life (or lives) continues, such as a straight life annuity or a Qualified Joint and Survivor Annuity, an amount equal to the portion of a monthly benefit payment derived from Employer contributions; (2) Other Forms. In the case of a benefit payable in a form other ----------- than a Life Annuity, an amount of the Employer-derived portion of benefit payments for a calendar month in which the Participant performs service as described in subsection (a), which does not exceed the lesser of: (i) the amount of benefits which would have been payable to the Participant if he had been receiving monthly benefits under the Plan since actual retirement based on a single life annuity commencing at actual retirement age or (ii) the actual amount paid or scheduled to be paid to the Participant for such month. (e) The Plan Administrator shall establish procedures which are consistent with Department of Labor Regulation Section 2530.203-3, including, but not limited to, procedures for the resumption of benefits and the offsetting of benefit overpayments, if any. (f) This Section does not apply to the minimum benefits payable to a Non- Key Employee under Article VIII. (g) Upon termination of any such Participant's reemployment, whether or not the distributions were suspended during such reemployment, such Participant's pension distributions shall be computed pursuant to the applicable provisions of Exhibit 10.4 Page 31 the Plan based on his Benefit Service and Final Average Compensation prior to the date of his previous retirement as well as his Benefit Service and Final Average Compensation during the period of his reemployment if such Participant accrued an additional Plan benefit as a result of service completed during his period of reemployment, but the amount thereof shall be reduced by an amount that is the Actuarial Equivalent of the accumulated value of the pension distributions, if any, such Participant received prior to termination of his reemployment and prior to his attaining age 65. The resulting Benefit shall not be less than the monthly Benefit in effect prior to reemployment. 5.08 Direct Rollover Distributions. ----------------------------- (a) Direct Rollover Election. Notwithstanding any provision of the Plan ------------------------ to the contrary that would otherwise limit a Distributee's election under this Section, a Distributee may elect at the time and in the manner prescribed by the Plan Administrator, to have all or any portion of an Eligible Rollover Distribution to which he is otherwise entitled, paid directly to any one Eligible Retirement Plan specified by the Distributee in a Direct Rollover. (b) Definitions. ----------- (1) Eligible Rollover Distribution means 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 (10) years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; any hardship distribution described in Code Section 401(k)(2)(B)(i)(IV); 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). (2) Eligible Retirement Plan means an individual retirement account ------------------------ described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving Spouse, an Eligible Retirement Plan includes only an individual retirement account or individual retirement annuity. (3) Distributee means an Employee or former Employee. In addition, ----------- the Employee's or former Employee's surviving Spouse and the Employee's or Exhibit 10.4 Page 32 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. (4) Direct Rollover means a payment by the Plan to the Eligible --------------- Retirement Plan specified by the Distributee. Exhibit 10.4 Page 33 ARTICLE VI Preretirement Death Benefits 6.01 Eligibility for Death Benefit. The surviving Spouse of a Participant ----------------------------- who: (a) Had a Benefit under the Plan; (b) Had at least one Hour of Service on or after August 23, 1984; (c) Died before his Annuity Starting Date; and (d) Was married to such Spouse on his date of death, shall be entitled to receive a Qualified Preretirement Survivor Annuity determined under Section 6.02 below. A Participant who is entitled to a Qualified Preretirement Survivor Annuity pursuant to this Section and who is employed by an Employer on the date of his death shall be 100% vested in his Accrued Benefit on the date of his death. 6.02 Amount of Qualified Preretirement Survivor Annuity. -------------------------------------------------- (a) If a Participant described in Section 6.01 dies after attaining his Earliest Retirement Age as described in subsection (c) below, the Qualified Preretirement Survivor Annuity payable to his surviving Spouse shall be a survivor annuity for life equal to the annuity that would have been payable to such Spouse if the Participant had retired on the date preceding his death with his Benefit payable in the form of a Qualified Joint and Survivor Annuity, as described in Section 5.02(b) reduced in accordance with Section 3.02. (b) If a Participant described in Section 6.01 dies prior to attaining his Earliest Retirement Age, the Qualified Preretirement Survivor Annuity payable to his surviving Spouse shall be a survivor annuity for life equal to the annuity which would have been payable to such Spouse if such Participant had: (1) Separated from service on his or her date of death (or date of actual separation from service, if earlier); (2) Survived to the date he would have first been eligible to retire under the Plan; (3) Retired with a Qualified Joint and Survivor Annuity at such date or retirement eligibility; and Exhibit 10.4 Page 34 (4) Died on the next day. (c) Notwithstanding subsections (a) and (b), if the Participant is married at the time of his death, has not waived his benefit under this Section, and dies while actively employed with an Employer, the surviving Spouse's death benefit payable shall be the greater of the benefit described in Section 6.03 payable as if the Participant had designated his surviving Spouse as his Beneficiary under that Section, expressed as an Actuarially Equivalent monthly benefit payable for the surviving Spouse's life, or the amount described in subsection (a) or (b) above, as applicable. (d) Notwithstanding the foregoing, the Spouse of a Participant in respect of whom the death benefit under this paragraph (b) is payable shall be entitled to elect any optional form of payment pursuant to Section 5.02, provided such election is made ninety days prior to the date the lifetime benefit would otherwise commence, and provided further that the Company shall furnish to the Spouse within a reasonable amount of time after the Spouse's election, a written explanation in non-technical language of the lifetime benefit and any alternatives, stating the financial effect (in terms of dollars) of each form of payment. (e) For purposes of this Article, "Earliest Retirement Age" means the earliest date on which the Participant could separate from service and receive a voluntary distribution from the Plan. 6.03 Alternative Death Benefit. If the Participant dies while employed by an ------------------------- Employer and (i) the Participant is not married at the time of his death, or (ii) the Participant waives the benefit under Section 6.02, then (a) In the event of the Participant's death before the earlier of his Early Retirement Date or his Normal Retirement Date, the Participant's Beneficiary shall receive a monthly benefit payable for the life of the Beneficiary that is the Actuarial Equivalent of one hundred percent (100%) of the Actuarial Equivalent of the Participant's Accrued Benefit calculated as of the Participant's death. (b) In the event the Participant's death occurs after the earlier of his Early Retirement Date or his Normal Retirement Date, the death benefit shall be equal to the greater of sixty percent (60%) of the Participant's Normal Retirement Benefit calculated as of the date of the Participant's death but calculated as though the Participant had continued his service and earnings until age sixty-five (65), or, one hundred percent (100%) of the amount determined in (a) above, and payable monthly, beginning at age sixty-five (65), for the life of the Participant's Beneficiary. (c) Notwithstanding the foregoing, the Beneficiary may elect to receive this benefit in any Actuarially Equivalent optional form of payment pursuant to Section 5.02. Exhibit 10.4 Page 35 6.04 Cash-out of Accrued Benefit. Notwithstanding any other provision of the --------------------------- Plan, in the event the Actuarial Equivalent of the Qualified Preretirement Survivor Annuity has not, at the time of this or any prior distribution, exceeded the amount (five thousand dollars ($5,000) effective October 1, 1999, three thousand five hundred dollars ($3,500) effective prior to October 1, 1999) permitted to be cashed out without consent under Section 417(e) of the Code, payment of such benefit shall be in the form of a single sum. In the event the Actuarial Equivalent of the Qualified Preretirement Survivor Annuity exceeds the amount permitted to be cashed out without consent under Section 417(e) of the Code but does not exceed ten thousand dollars ($10,000), at the option of the surviving Spouse, payment of such benefit may be in the form of a single sum. Any such one- sum payment shall be in lieu of the benefits otherwise payable hereunder. 6.05 Time of Payment. Payments to the surviving Spouse of the Qualified --------------- Preretirement Survivor Annuity described in Section 6.02 shall commence on the first day of the month in which the Participant would have attained his Earliest Retirement Age under the Plan. Provided, however, that at the election of the surviving Spouse, commencement of payments may be postponed to a date which is no later than the first day of the month in which the Participant would have attained his Normal Retirement Age under the Plan. If payment to the surviving Spouse of a Qualified Preretirement Survivor Annuity begins at a date later than the first day of the month in which the Participant would have attained earliest Retirement Age under the Plan, such payment shall be determined as if the Participant separated from service on his or her date of death (or date of actual separation from service, if earlier); survived to the date the surviving spouse benefit is to commence; retired with a Qualified Joint and Survivor Annually at such date; and died the next day. Exhibit 10.4 Page 36 ARTICLE VII Limitations on Benefits 7.01 Limitation on Annual Benefit. ---------------------------- (a) Notwithstanding any provision of the Plan to the contrary the maximum annual Retirement Benefit payable to a Participant under the Plan shall be subject to the limitations set forth in Section 415 of the Code. (b) If the Retirement Benefit begins before the Participant reaches Social Security Retirement Age and on or after reaching age sixty-two (62), the dollar limitation described in Section 415(b)(1)(A) of the Code shall be reduced by five-ninths percent (5/9%) for each of the first thirty-six (36) months and by five-twelfths percent (5/12 %) for each of the additional months by which benefits commence before the month in which the Participant attains his Social Security Retirement Age. (c) If the Retirement Benefit begins before the Participant reaches age sixty-two (62), the dollar limitation described in Section 415(b)(1)(A) of the Code shall be the Actuarial Equivalent of the maximum benefit payable at age sixty-two (62). (d) If the Retirement Benefit begins after the Participant's Social Security Retirement Age, such dollar limitation shall be the Actuarial Equivalent of the maximum benefit payable at the Participant's Social Security Retirement Age. (e) If the Retirement Benefit is payable neither as a life annuity nor as a qualified joint and survivor annuity with the Participant's spouse as beneficiary, the maximum limitation shall be of Actuarial Equivalent to the maximum limitation otherwise applicable. (f) Effective October 1, 1995, Actuarial Equivalent for purposes of this Section shall be determined in accordance with Section 415(b) of the Code and using the Plan's early retirement, late retirement, or optional benefit factors as appropriate, or, factors calculated from the IRS Mortality Table, if applicable, and five percent (5%), whichever factors result in the lowest dollar limitation. (g) For limitation years commencing prior to January 1, 2000, if a Participant is a participant in any qualified defined contribution plan required to be taken into account for purposes of applying the combined plan limitations contained in Section 415(e) of the Code, then for any year the sum of the defined benefit plan fraction and the defined contribution plan fraction, as such terms are defined in said Section 415(e), shall not exceed 1.0. If for any year the foregoing combined plan limitation Exhibit 10.4 Page 37 would be exceeded, the benefit provided under this Plan shall be reduced to the extent necessary to meet that limitation. (h) Limitation Year generally means the Plan Year, unless the Company --------------- elects a different twelve (12) consecutive month period as provided by Treasury Regulation Section 1.415-2(b). 7.02 Reduction for Less Than 10 Years of Participation or Service. ------------------------------------------------------------ (a) Dollar Limitation. If a Participant is credited with fewer than ten ----------------- (10) years of Plan participation, the dollar limitation of Section 7.01(a), as it may be adjusted in accordance with Section 7.02, shall be reduced by multiplying such amount by a fraction not to exceed one (1.0), the numerator of which is the Participant's number of years of participation (or part thereof) and the denominator of which is ten (10). (b) Limitation on Compensation and Benefits. If a Participant is credited --------------------------------------- with fewer than ten (10) Years of Service with the Employer or with any other member of the Affiliated Group, the limitation under Section 7.01(b) and the ten thousand dollar ($10,000) minimum annual Benefit described in Section 7.01 shall be reduced by multiplying such amounts by a fraction not to exceed one (1.0), the numerator of which is the Participant's number of Years of Service and the denominator of which is ten (10). (c) Change in Benefit Structure. To the extent provided in regulations, --------------------------- the limitations set out in subsection (a) shall be applied separately with respect to each change in the benefit structure of the Plan. In no event shall the reductions set out in (a) and (b) above result in a limitation or amount which is less than one-tenth (1/10) of such limitation or amount determined without regard to this Section 7.04. 7.03 Preservation of Current Accrued Benefit. If the Accrued Benefit of an --------------------------------------- individual who was a Participant as of the first day of the Limitation Year beginning in 1987 exceeds the benefit limitations under Section 7.01, as modified by Section 7.03 and Section 7.04, then, for purposes of those Sections and Section 7.06, the Dollar Limitation shall be equal to such Current Accrued Benefit. For purposes of this Section, Current Accrued Benefit means the Participant's accrued benefit under the Plan, determined as if the Participant had separated from service as of the close of the last Limitation Year beginning before January 1, 1987, when expressed as a benefit payable annually in the form of a straight life annuity (with no ancillary benefits) under a plan to which employees do not contribute and under which no rollover contributions (as defined in Sections 402(c), 403(a)(4) and 408(d)(3) of the Code) are made. Any change in the terms and conditions of the Plan or any cost of living Exhibit 10.4 Page 38 adjustment occurring after May 5, 1986 shall be disregarded in determining the amount of the Participant's Current Accrued Benefit. With respect to any individual who was a Participant prior to January 1, 1989, the maximum annual benefit of such Participant shall not be less than such Participant's accrued benefit under the Plan determined as of the close of the last Limitation Year beginning before January 1, 1989 (without taking into account any changes in the Plan or cost-of-living adjustments subsequent to January 1, 1989). Exhibit 10.4 Page 39 ARTICLE VIII Top-Heavy Rules 8.01 Top-Heavy Determination. ----------------------- (a) The provisions of this Article shall apply solely in the event that this Plan ever becomes Top-Heavy, as defined herein. (b) For the purposes of this Article, the following definitions shall be used: (1) Aggregation Group means ----------------- (A) Each plan of the Employer in which a Key Employee is a Participant (in the Plan Year containing the Determination Date or in any of the four preceding Plan Years), and (B) Each other plan of the Employer which enables any plan described in subsection (A) during the applicable period to meet the requirements of Sections 401(a)(4) or 410 of the Code. The Employer may treat any plan not described above as being part of such aggregation group if such group would continue to meet the requirements of Sections 401(a)(4) and 410 of the Code with such plan being taken into account. (2) Determination Date means, with respect to any Plan Year, the ------------------ last day of the preceding Plan Year, or in the case of the first Plan Year, the last day of such Plan Year. (3) Key Employee means an Employee, a former Employee or the ------------ Beneficiary of a former Employee, if, in the Plan Year containing the Determination Date or in any of the four preceding Plan Years, such Employee or former Employee is or was (A) An officer of the Employer whose annual Compensation for any such Plan Year exceeds fifty percent (50%) of the amount in effect under Section 415(b)(1)(A) of the Code; provided however, that no more than fifty (50) Employees (or, if less, the greater of three (3) Employees or ten percent (10%) of the Employees) shall be treated as officers. For purposes of determining the number of officers taken into account, employees described in Section 414(q)(8) of the Code shall be excluded; Exhibit 10.4 Page 40 (B) One (1) of the ten (10) Employees owning (or considered as owning within the meaning of Section 318 of the Code) both the largest interest in the Employer and more than a one- half of one percent (0.5%) interest therein and whose annual Compensation for any such Plan Year equals or exceeds the amount in effect under Section 415(c)(1)(A) of the Code; provided, however, if two Employees have the same interest in the Employer, the Employee with the greater annual Compensation for such Plan Year shall be treated as having the larger interest; or (C) A five percent (5%) owner of the Employer, or a one percent (1%) owner (within the meaning of Sections 416(i)(1)(B) and (C) of the Code) of the Employer whose annual Compensation from the Employer for such Plan Year exceeds $150,000. (4) Non-Key Employee means any Employee who is not a Key Employee. ---------------- (5) Top-Heavy means that with respect to any Plan Year, the sum of --------- the present value of the cumulative Accrued Benefits (under this Plan and such other plans as provided in subsection (b)(1) above) for Key Employees as of any Determination Date exceeds sixty percent (60%) of the sum of the present value of the cumulative Accrued Benefits for all Employees. In making this calculation as of a Determination Date, (A) The present value of an Accrued Benefit shall be determined as of the most recent valuation date (which for purposes hereof shall be the same date as is used for computing Plan costs for minimum funding) occurring within the Plan Year which includes the Determination Date, (B) The present value of the Accrued Benefit of any Employee or former Employee shall be increased by the aggregate distribution made during the five (5) year period ending on the Determination Date with respect to such Employee or former Employee, (C) The present value of the Accrued Benefit of (i) Any Non-Key Employee who was a Key Employee for any prior Plan Year, and (ii) Any former Employee who performed no service for the employer maintaining the Plan during the five (5) year period ending on the Determination Date shall be ignored. Exhibit 10.4 Page 41 (D) If the present value of any Accrued Benefit under the Plan includes any amount attributable to any rollovers to or from the Plan, such value shall be adjusted, as required by Section 416(g)(4)(A) of the Code. (E) A Participant's Accrued Benefit in a defined benefit plan will be determined under a uniform accrual method which applies in all defined benefit plans maintained by the Employer or, where there is no such method, as if such benefit accrued not more rapidly than the slowest rate of accrual permitted under the fractional rule of Section 411(b)(1)(c) of the Code. Notwithstanding the foregoing, this Plan shall be Top-Heavy if, as of any Determination Date, it is required by Section 416(g) of the Code to be included in an Aggregation Group which is determined to be a Top-Heavy Group. If an Aggregation Group includes two or more defined benefit plans, the actuarial assumptions set forth in this Section must be used with respect to all such plans and must be specified in such plans. (6) Top-Heavy Group means any Aggregation Group if, as of the --------------- Determination Date, the sum of (A) The present value of the cumulative accrued benefits for all Key Employees under all defined benefit plans in such Aggregation Group, and (B) The aggregate of the accounts of all Key Employees under all defined contribution plans in such Aggregation Group exceeds sixty percent (60%) of a similar sum determined for all Key Employees and Non-Key Employees. (7) Compensation means compensation within the meaning of Section ------------ 415 Compensation and, except for the purpose of Section 8.03, shall also include any amount which is contributed by the Employer pursuant to a salary reduction agreement and which is not includible in the gross income of the Employee under Section 125, 402(e)(3), 402(h) or 403(b) of the Code. Compensation of each Participant for the purposes of this Section for any determination period shall not exceed the limit on Compensation prescribed in Section 401(a)(17) of the Code (the "Section 401(a)(17) Limit"). For Plan Years beginning after December 31, 1988 and before January 1, 1994, this limitation shall be two hundred thousand dollars ($200,000), adjusted at the same time and in the same manner as under Section 415(d) of the Code, except that the first adjustment to the limit is Exhibit 10.4 Page 42 effected on January 1, 1990. For Plan Years beginning on or after January 1, 1994, the limit is one hundred fifty thousand dollars ($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 on January 1 of any calendar year shall apply to any determination period beginning in such calendar year. For this purpose, the "determination period" is any period not exceeding twelve (12) months over which Compensation is determined. If a determination period consists of fewer than twelve (12) months, the Section 401(a)(17) 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 twelve (12). For Plan Years beginning before January 1, 1997 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 descendant of the Participant who has not attained age nineteen (19) before the close of the year. If, as a result of the application of such rules, the adjusted Section 401(a)(17) Limit is exceeded, then (except for purposes of determining the portion of Compensation up to the integration level), the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of this limitation. This paragraph shall not apply for Plan Years beginning on and after January 1, 1997. If 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 the prior determination period is subject to the adjusted 401(a)(17) Limit in effect for that prior determination period. For this purpose, for benefits accruing in Plan Years beginning on or after January 1, 1989 and before January 1, 1994 with respect to determination periods beginning before January 1, 1990, the Section 401(a)(17) Limit is two hundred thousand dollars ($200,000). Furthermore, for benefits accruing in Plan Years beginning on or after January 1, 1994 with respect to determination periods beginning before the first day of the first plan year beginning on or after January 1, 1994, the Section 401(a)(17) limit is one hundred and fifty thousand dollars ($150,000). 8.02 Vesting. ------- (a) For any Plan Year in which the Plan is Top-Heavy, the Vested Percentage applicable to the Accrued Benefit of an Employee who has at least one (1) Hour of Service after the Plan became Top-Heavy shall not be less than the percentage shown on the following table: Exhibit 10.4 Page 43 Years of Vested Vesting Service Percentage --------------- ---------- less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100% (b) In the event the Plan ceases to be Top-Heavy for a Plan Year, the vesting schedule in effect immediately prior to the Plan Year in which the Plan became Top-Heavy shall again become applicable as an amendment to the Plan. (c) In the event that the Plan becomes or ceases to be Top-Heavy, the Vested Percentage of a Participant's Accrued Benefit shall not be less than the Vested Percentage determined as of the last day of the last Plan Year prior to the change from Top-Heavy to not Top-Heavy or vice versa. Furthermore, each Participant who has completed at least three (3) Years of Vesting Service may elect to continue to have his Vested Percentage computed in accordance with the vesting schedule in effect for that Participant prior to the change. 8.03 Minimum Benefits. ---------------- (a) For any Plan Year in which the Plan is Top-Heavy and in which a Participant also participates in another qualified plan maintained by the Employer, the Top-Heavy minimum benefit required under this Plan will be provided under such other plan. For Employees who participate only in this Plan, the Accrued Benefit for a year in which the Plan is Top-Heavy, expressed as a life annuity (with no ancillary benefits) commencing at his Normal Retirement Date, shall be an amount which is not less than the product of (1) Two percent (2%), (2) The number of Plan Years beginning on or after January 1, 1984 during which the Plan was Top-Heavy and with respect to which the Participant accrued a year of Vesting Service, and (3) The Participant's average annual Compensation for the period of five (5) consecutive Plan Years in each of which the Participant was an Active Participant and for which the Participant's aggregate annual Compensation was the greatest. If the Participant did not receive Compensation in five (5) such Plan Years, his annual Compensation shall be averaged over his longest continuous period of participation. In making the computations under this subparagraph, annual Compensation for Plan Years which are Exhibit 10.4 Page 44 not included in the Plan Years taken into account under subsection (2) above shall be ignored. (b) A Participant's minimum Benefit payable under this Section shall not exceed twenty percent (20%) of the amount described in subsection (a)(3). (c) Only Non-Key Employees who have completed one thousand (1,000) Hours of Service shall receive the benefits described in this Section. (d) Notwithstanding subsection (a), and to the extent permitted by applicable law and regulations, no benefit shall be accrued pursuant to this Section for a Plan Year with respect to Participant who is a participant in a defined contribution plan sponsored by an Employer if such Participant receives under such defined contribution plan (for the plan year ending with or within the Plan Year of this Plan) a contribution that is equal to or greater than five percent (5%) of such Participant's Section 415 Compensation for such Plan Year. If such contribution is less than five percent (5%) of the Participant's Section 415 Compensation for the Plan Year, the minimum Benefit provided in subsection (a) shall be offered by any Employer contribution provided under the defined contribution plan expressed as an actuarially equivalent annual benefit in accordance with regulations interpreting Section 416(f) of the Code. 8.04 Limitation on Benefits. This Section shall apply for ---------------------- limitation years beginning before January 1, 2000. In the event that the Plan is Top-Heavy, the limitations on the maximum benefit set out in Section 415(e) of the Code shall be modified as follows: (a) The denominator of both the Defined Benefit Plan Fraction and the Defined Contribution Plan Fraction set forth in Sections 7.06(a)(1) and (b), respectively, shall be adjusted by substituting "one hundred percent (100%)" for "one hundred twenty-five percent (125%)" wherever it appears, and (b) The numerator of the "transition fraction" described in Section 415(e)(6)(B)(i) of the Code shall be calculated by substituting $41,500 for $51,875, to the extent required by Section 416(h) of the Code. Exhibit 10.4 Page 45 ARTICLE IX Plan Administration 9.01 Plan Administrator. The Board shall appoint a Plan Committee ------------------ ("Committee") which shall be the named fiduciary having the authority to control and manage the operation and administration of the Plan. The Committee shall consist of not less than three (3) persons. If the Board does not appoint a Committee, the Board shall act as the Committee. 9.02 General Powers, Rights and Duties. Except as otherwise specifically --------------------------------- provided and in addition to the powers, rights and duties specifically given to the Plan Administrator elsewhere in the Plan and the Trust Agreement or by direct, written delegation from the Company, the Plan Administrator shall have the power and the duty to take all action and to make all decisions necessary or proper to carry out the Plan. The powers and duties of the Plan Administrator shall include the following: (a) To, in its discretion, interpret all Plan provisions and to determine all questions arising under the Plan, including the power to determine the eligibility of Employees, Participants and all other persons to participate in the Plan or to receive benefits under the Plan and to determine the amount of benefits payable under the Plan to any person and to remedy ambiguities, inconsistencies or omissions; (b) To adopt such rules of procedure and regulations and prescribe the use of such forms as in its opinion may be necessary for the proper and efficient administration of the Plan and as are consistent with the Plan and Trust Agreement; (c) To enforce the Plan in accordance with the terms of the Plan and the Trust Agreement and the rules and regulations adopted pursuant to (b) above; (d) To direct the Trustee in writing to make payments from the Trust Fund to Participants who qualify for such payments hereunder. Such written notice shall include such information as may be required for payment of benefits; (e) To furnish the Participating Employers with such information as may be required by them for tax or other purposes in connection with the Plan; (f) To employ agents, attorneys, accountants, actuaries or other persons (who also may be employed by an Employer) and to allocate or delegate to them such powers, rights and duties as the Plan Administrator has and may consider necessary or advisable to properly carry out administration of the Plan or compliance with the requirements of ERISA, provided that such allocation or Exhibit 10.4 Page 46 delegation and the acceptance thereof by such agents, attorneys or other persons shall be in writing; (g) To exercise such authority as it deems appropriate in order to comply with the reporting and disclosure requirements of ERISA and regulations issued thereunder; (h) To provide a full and fair review to any Participant whose claim for benefits has been denied in whole or in part; and (i) To establish and carry out a funding policy and method consistent with the objectives of the Plan and ERISA, pursuant to which the Company shall determine the Plan's liquidity and financial needs and communicate them to the Trustees or other fiduciaries who are charged with determining investment policy. 9.03 Manner of Action. During a period in which two (2) or more Committee ---------------- members are acting, the following provisions apply where the context admits: (a) The Committee shall select a Chairman and may select a Secretary (who may, but need not, be a member of the Committee). (b) A Committee member may delegate any or all of his rights, powers, and duties to any other member provided such delegation is in writing and is consented to by such other Committee member. (c) The Committee members may act by meeting and may execute any document by signing one document or concurrent documents. (d) A majority of the members of the Committee at the time in office shall constitute a quorum for the transaction of business at any meeting. Any determination or action of a Committee may be made or taken by a majority of the members present at any meeting or without a meeting by a resolution or written memorandum concurred in by a majority of the members then in office. (e) If there is an even division of opinion among the Committee members as to a matter, a disinterested party selected by the Committee shall decide the matter and his decision shall control. (f) Except as otherwise provided by law, no member of the Committee shall be liable or responsible for an act or omission of the other Committee members in which the former has not concurred. (g) The certificate of the secretary of the Committee or of a majority of the Committee members that the Committee has taken or authorized any action shall be conclusive in favor of any person relying on the certificate. Exhibit 10.4 Page 47 9.04 Interested Committee Member. A member of the Committee who is also a --------------------------- Participant in the Plan may not decide or determine any issue concerning the amount of his benefit or its distribution to him unless such decision or determination could be made by him under the Plan if he were not serving on the Committee. 9.05 Resignation or Removal of Committee Members. A member of the Committee ------------------------------------------- may be removed by the Board at any time by thirty (30) days prior written notice to him and the other members of the Committee. A member of the Committee may resign at any time by giving thirty (30) days written notice to the Board and the other members of the Committee. The Board may fill any vacancy in the membership of the Committee; provided, however, that if a vacancy reduces the membership of the Committee to less than three (3), such vacancy shall be filled as soon as practicable. The Board shall give prompt written notice thereof to the members of the Committee. Until any such vacancy is filled, the remaining members may exercise all of the powers, rights and duties conferred on the Committee. 9.06 Nondiscrimination. The Plan Administrator shall not take action nor ----------------- direct the Trustee to take any action with respect to any of the benefits provided hereunder which would discriminate in favor of highly compensated employees or which would benefit certain Participants at the expense of others. There shall similarly be no discrimination between similarly- situated Participants. This provision shall not limit the power of the Employer to act in its capacity as settlor with respect to the Plan. 9.07 Delegation and Reliance. To the extent permitted by law, the Plan ----------------------- Administrator and any person to whom it may delegate any duty or power in connection with administering the Plan, the Employer, and the officers and directors thereof, shall be entitled to rely conclusively upon, and shall be fully protected in any action taken in good faith in the reliance upon any actuary, counsel, accountant or other person selected by the Plan Administrator. Further, to the extent permitted by law, neither the Plan Administrator, nor any members thereof, nor any Employer, nor the officers or directors thereof, shall be liable for any neglect, omission or wrongdoing of a Trustee, insurance company, investment manager, or any other person or fiduciary. 9.08 Claims Procedure. The claims procedure hereunder shall be as provided ---------------- herein: (a) Claim. A Participant or Beneficiary or other person who believes ----- that he is being denied a benefit to which he is entitled (hereinafter referred to as "Claimant") may file a written request for such benefit with the Plan Administrator setting forth his claim. (b) Response to Claim. The Plan Administrator shall respond within ninety ----------------- (90) days of receipt of the claim. However, upon written notification to the Claimant, the response period may be extended for an additional ninety (90) days for reasonable cause. If the claim is denied in whole or in part, the Claimant shall be provided with a written opinion using nontechnical language setting forth: Exhibit 10.4 Page 48 (1) The specific reason or reasons for denial; (2) The specific references to pertinent Plan provisions on which the denial is based; (3) A description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or such information is necessary; (4) Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (5) The time limits for requesting a review. (c) Request for Review. Within sixty (60) days after the receipt by the ------------------ Claimant of the written opinion described above, the Claimant may request in writing that the Plan Administrator review the determination. The Claimant or his duly authorized representative may review the pertinent documents and submit issues and comments in writing for consideration by the Plan Administrator. If the Claimant does not request a review of the determination within such sixty (60) day period, he shall be barred from challenging the determination. (d) Review and Decision. The Plan Administrator shall review the ------------------- determination within sixty (60) days after receipt of a Claimant's request for review; provided, however, that for reasonable cause such period may be extended to no more than one hundred twenty (120) days. After considering all materials presented by the Claimant, the Plan Administrator will render a written opinion, written in a manner calculated to be understood by the Claimant setting forth the specific reasons for the decision and containing specific references to the pertinent Plan provisions on which the decision is based. 9.09 Plan Administrator's Decision Final. Subject to applicable law, any ----------------------------------- interpretation of the provisions of the Plan and any decision on any matter within the discretion of the Plan Administrator made by the Plan Administrator in good faith shall be binding on all persons. Any misstatement or other mistake of fact shall be corrected when it becomes known and the Plan Administrator shall make such adjustment on account thereof as it considers equitable and practicable. 9.10 Standard of Review. The Plan Administrator shall perform its duties as ------------------ the Plan Administrator and in its sole discretion shall determine appropriate courses of action in light of the reason and purpose for which this Plan is established and maintained. In particular, the Plan Administrator shall interpret all Plan provisions, and make all determinations as to whether any Participant or Beneficiary is entitled to receive any benefit under the terms of this Plan which interpretation shall be made by the Plan Exhibit 10.4 Page 49 Administrator in its sole discretion. Any construction of the terms of the Plan that is adopted by the Plan Administrator and for which there is a rational basis shall be final and legally binding on all parties. Any interpretation of the Plan or other action of the Plan Administrator shall be subject to review only if such interpretation or other action is without rational basis. Any review of a final decision or action of the Plan Administrator shall be based only on such evidence presented to or considered by the Plan Administrator at the time it made the decision that is the subject of review. If any Participating Employer and/or any Eligible Employee who performs services for a Participating Employer that is or may be compensated for in part by benefits payable pursuant to this Plan, such an individual shall be treated as agreeing with and consenting to any decision that the Plan Administrator makes in its sole discretion and further agrees to the limited standard of review described by this Section 9.10 by the acceptance of such benefits. 9.11 Information Required by Plan Administrator. Each person entitled to ------------------------------------------ benefits under the Plan must file his most recent post office address with the Plan Administrator. Any communication, statement or notice addressed to any such person at the last post office address filed with the Plan Administrator will be binding upon such person for all purposes of the Plan. Each person entitled to benefits under the Plan also shall furnish the Plan Administrator with such documents or information as the Plan Administrator considers necessary or desirable for the purpose of administering the Plan. The Employer shall furnish the Plan Administrator with such data and information as the Plan Administrator may deem necessary or desirable in order to administer the Plan. The records of any Employer with respect to periods of employment, termination of employment and the reason therefor, leave of absence, re-employment and earnings will be conclusive on all persons unless determined by the Plan Administrator to be incorrect. 9.12 Expenses of the Plan. Administrative expenses of the Plan, such as -------------------- actuarial, consulting and legal services, shall be paid directly by the Trust Fund to the extent such payments are permitted by law. Such expenses may, in the discretion of the Employer, be paid directly by the Employer. 9.13 Freedom from Liability. The Plan Administrator shall be entitled to ---------------------- rely upon information furnished by the Company and upon tables, valuation, certificates, opinions and reports furnished by any trustee, accountant, actuary, insurer or legal counsel in connection with any action or determination. To the extent permitted by law, the Company shall indemnify, hold harmless and defend the Plan Administrator against any liability or loss (including any sum paid in settlement of a claim) sustained as a result of any act or omission in their administrative capacities, if such act or omission does not involve willful misconduct. Such indemnification shall include attorneys' fees and other costs and expenses reasonably incurred in defense of any action brought against the Plan Administrator and shall apply to any persons who are or were directors, officers or Employees of any Employer who may be subjected to liability by reason of an act or omission occurring in good faith in the operation and administration of the Plan or Trust or in the investment of the assets of the Trust. Exhibit 10.4 Page 50 ARTICLE X Amendment or Termination 10.01 Amendment or Modification of the Plan. Except as provided herein, the ------------------------------------- Board reserves the right to amend or terminate this Plan at any time and in any manner. The Board may delegate this authority to any officer(s) of the Company. Any action by the Board shall be evidenced by a valid resolution. Any action by any officer(s) shall be evidenced by a valid officer's certificate. The resolutions and officer's certificates shall be attached to this Plan and considered a part hereof. No modification or amendment shall: (a) Cause or permit any portion of the funds or assets of the Plan to become the property of the Employer prior to the satisfaction of all liabilities of the Plan; (b) Increase the duties or responsibilities of the Trustee without its written consent; (c) Be effective to the extent that it may decrease the Accrued Benefit (as provided in Code Section 411(d)(6)) of any Participant, except as permitted pursuant to Section 412(c)(8) of the Code; or (d) Become effective until set forth in a revised participation agreement executed by the Company if such amendment is made by any other Employer. If the Plan's vesting schedule is changed as a result of an amendment, each Participant who has completed at least three (3) Years of Service may elect to continue to have his vested percentage computed in accordance with the vesting schedule in effect for that Participant prior to the amendment. This election may be made no earlier than the date the amendment is adopted and no later than the latest of the date that is sixty (60) days after the date: (i) the amendment is adopted; (ii) the amendment becomes effective; or (iii) the Participant is issued a written notice of the amendment by the Employer or Plan Administrator. 10.02 Termination of the Plan. Although the Company intends to continue the Plan ----------------------- as a permanent retirement program for the benefit of its Participants, the making of contributions and the continuation of the Plan are not assumed by the Employer as a contractual obligation. The Employer expressly does not guarantee the payment of any benefit or amount which may become due under the Plan to any Participant or Beneficiary. The Employer reserves the right at any time to discontinue its contributions or to terminate the Plan. The Plan may also be terminated as a result of a determination by the Pension Benefit Guaranty Corporation (PBGC), or by a decree by an appropriate court of law. 10.03 Distribution upon Termination of the Plan. Upon termination or partial ----------------------------------------- termination of the Plan by an Employer, each Participant's Accrued Benefit, to the extent funded, shall be Exhibit 10.4 Page 51 nonforfeitable, and the plan assets held by the Trustee and/or insurance company or companies for that Employer (or in the case of partial termination, for that particular group of Participants) shall be allocated in accordance with Section 4044 of ERISA in order to provide pensions for the affected Participants and Beneficiaries. 10.04 Residual Assets. To the extent permitted by law, any residual assets of --------------- the Plan shall be distributed to the Employer if all liabilities of the Plan to Participants and Beneficiaries have been satisfied. Such assets shall be allocated among Participating Employers in such proportions as the Company shall determine. If this Section of the Plan is amended and the Plan previously did not contain a provision for the reversion of residual assets to the Employer upon Plan termination, this Section shall first become effective at the end of the fifth (5th) calendar year following the date of the adoption of this Restatement. 10.05 Restriction on Distribution of Benefits. --------------------------------------- (a) The provisions of Treasury Regulation Section 1.401(a)(4)-5(b) shall apply. In addition, annual payments to an employee who is among the twenty-five (25) highly compensated employees or highly compensated former employees with the greatest Compensation in the current or any prior year shall not exceed an amount equal to the payments that would be made on behalf of the employee under: (1) A straight life annuity that is the actuarial equivalent of the employee's Accrued Benefit and the other benefits to which the employee is entitled under the Plan (other than any Social Security Supplement); and (2) The amount of the payments that the employee is entitled to receive under any Social Security supplement. (b) The restrictions of Subsection (a) do not apply if any one of the following is satisfied: (1) After payment to such employee of all benefits (as described in Treasury Regulation Section 1.401(a)(4)-5(b)(3)(iii)), the value of Plan assets equals or exceeds one hundred ten percent (110%) of the value of current liabilities, as defined in Section 412(l)(7); (2) The value of the benefits (as described in Treasury Regulation Section 1.401(a)(4)-5(b)(3)(iii)) for such employee is less than one percent (1%) of the value of current liabilities before distribution; or (3) The value of the benefits (as described in Treasury Regulation Section 1.401(a)(4)-5(b)(3)(iii)) for such employee does not exceed the amount described in Section 411(a)(11)(A) of the Code; or (4) The Plan terminates and the benefit received by each Participant is nondiscriminatory under Section 401(a)(4) of the Code. Exhibit 10.4 Page 52 The above provisions shall apply only to the extent required by Section 401(a)(4) of the Code and the regulations thereunder. 10.06 Repayment of Restricted Amounts. Notwithstanding the above, the Plan ------------------------------- Administrator, to the extent permitted by law and this Plan, may authorize payment of a Participant's entire Benefit in the form of a lump sum, provided that: (a) The Participant enters into an agreement with the Trustee providing for repayment of the amount which would be restricted under Section 10.05 in the event there is a termination of the Plan during the applicable period, and (b) The Participant guarantees such repayment by depositing in escrow with an acceptable depository either: (1) Property having a fair market value equal to one hundred twenty- five percent (125%) of the amount which would have to be repaid if the Plan had terminated on the date the lump sum was paid, or (2) A bond equal to at least one hundred percent (100%) of such amount, which bond must be issued by an insurance company, bonding company or other surety approved by the U.S. Treasury Department as an acceptable surety for federal bonds, or (3) A bank letter of credit in an amount equal to at least one hundred percent (100%) of such amount. The Participant must further agree that if the fair market value of deposited property (pursuant to (A) above) declines to less than one hundred ten percent (110%) of the amount to be repaid, he or she shall deliver additional property to the depository such that the total value of all property so deposited is increased to one hundred twenty- five percent (125%) of the amount to be repaid. Property or assets shall be held in the depository until the Plan Administrator certifies to the depository, surety or bank that no obligation of repayment exists. Provided, however, that property in the escrow account may be withdrawn by the Participant to the extent it exceeds one hundred twenty-five percent (125%) of the amount to be repaid. Likewise, a bond or letter of credit may be reduced to the extent it exceeds one hundred percent (100%) of such amount. The Participant may withdraw earnings on the property in escrow provided the value of the property in escrow does not fall below the required level. The amount to be repaid may be adjusted to take into account the decrease in the restriction as the applicable ten (10) year period elapses. Exhibit 10.4 Page 53 ARTICLE XI Funding of the Plan 11.01 Establishment of Trust. For the purpose of funding the Benefits provided ---------------------- for herein, the Company has established a Trust Fund. The Employer shall contribute funds into the Trust Fund for the purpose of distributing to Participants and their Beneficiaries the corpus and income of the fund accumulated by the Trust in accordance with the Plan. The Trustee shall receive, hold in trust and disburse the assets of the Trust Fund in accordance with the provisions of the Plan and Trust. The Plan Administrator shall direct the Trustee in writing to make payments to or on behalf of Participants entitled to Benefits in accordance with this Plan and the Trust Agreement. 11.02 Employer Contributions. The Employer shall make such contributions to the ---------------------- Trust Fund as are required to keep the Plan qualified under Section 401 of the Code and any other relevant section of the Code or any successors thereto, subject to its right to amend or discontinue the Plan and discontinue contributions. All Benefits will be paid from the Trust and neither the Employer nor the Trustee shall be liable to Participants or their Beneficiaries if the Trust corpus shall be insufficient to provide for the payment of Benefits. Except as provided by ERISA, the Employer shall have no liability with respect to the administration of the Trust or of the funds, securities or other assets paid over to the Trustee, and each Participant or other Beneficiary shall look solely to the Trust Fund or the Pension Benefit Guaranty Corporation (PBGC) for any payments of Benefits under the Plan. One Employer that has adopted this Plan for the benefit of its employees may make contributions hereto for the benefit of the employees of another Employer that has adopted this Plan, to the extent that the Employer making such contribution would be entitled to claim a federal income tax deduction for such contribution. 11.03 Funding Standards. The Employer intends to contribute, but does not ----------------- guarantee to do so, funds hereunder in amounts no less than the minimum required by the funding standards of ERISA. The Employer may from time to time contribute amounts greater than such minimum. A funding standard account shall be established and maintained so that it may be determined if the Employer has complied with minimum funding standards. 11.04 Changes in Funding Medium or Method. The Company reserves the right to ----------------------------------- change the medium and method of funding at any time at its discretion and without the consent of any person or organization, subject to any applicable requirements of ERISA. Subject to the specific provisions of the Trust Agreement, the Company reserves the right to amend the Trust Agreement and to remove the current Trustee and appoint a successor Trustee as it may deem appropriate. Exhibit 10.4 Page 54 11.05 Purchase of Annuities. If pursuant to the Trust Agreement the Trustee is --------------------- directed by the Plan Administrator to purchase restricted non-transferable annuities from an insurance company to provide the benefits of the Participants, any dividends or other credits generated under any such annuity contract shall be applied to reduce the amount of future contributions by the Employer. 11.06 No Diversion. No part of the corpus or income of the Trust Fund shall be ------------ used for, or diverted to, purposes other than for the exclusive benefit of Participants or their Beneficiaries, at any time prior to the satisfaction of all liabilities with respect to Participants and their Beneficiaries under the Plan and Trust. The Company intends that the Plan shall meet the requirements of the Code pertaining to the qualification of employee pension plans. Under no circumstances shall the Employer have any vested right, title or interest in any assets in the Trust Fund nor shall any such assets revert to the Employer or inure to its benefit in any way prior to satisfaction of all liabilities of the Plan. Any Participant with a vested Benefit hereunder shall only be entitled to Benefits to the extent funded, except as provided by ERISA. 11.07 Treatment of Forfeitures. Any forfeitures arising hereunder shall be used ------------------------ to reduce future Employer contributions. Such forfeitures shall not be applied to increase the Benefits any Participant would otherwise receive under the Plan. 11.08 Return of Contributions. All Employer contributions are made conditioned ----------------------- upon their deductibility for federal income tax purposes under Section 404 of the Code and upon continuing qualification of the Plan under Section 401 of the Code. Amounts contributed by the Employer shall be returned to the Employer under the following conditions: (a) If a contribution was made by an Employer by a mistake of fact, the excess of the amount of such contribution over the amount that would have been contributed had there been no mistake of fact shall be returned to the Employer within one year after the payment of the contribution. (b) If an Employer makes a contribution which is not deductible under Section 404 of the Code, such contribution (but only to the extent disallowed) shall be returned to the Employer within one year after the disallowance of the deduction, or in the case of de minimis nondeductible contribution as described in Rev. Proc. 90-49, returned within one year from the date of actuarial certification. (c) If an Employer makes a contribution which is conditioned on initial qualification of the Plan under the Code and if the Plan does not so qualify, then such contribution shall be returned to the Employer within one year after the date of denial of qualification of the Plan provided that an application for determination is 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. Exhibit 10.4 Page 55 11.09 Litigation by Participants or Beneficiaries. If a Participant or other ------------------------------------------- person brings a legal action against the Trustee, one or more Employers, and/or the Committee (or any member or members thereof), and such action 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 costs borne by the Trustee, the Employers, the Committee (or any member or members thereof) in defending the action will be charged, to the extent permitted by law, to the amounts involved in the action or which were payable to the Participant or other person concerned. Exhibit 10.4 Page 56 ARTICLE XII General Provisions 12.01 Non-Alienation. -------------- (a) None of the Benefits under the Plan are subject to the claims of creditors of Participants or Beneficiaries, and will not be subject to attachment, garnishment or any other legal process. Neither a Participant nor a Beneficiary may assign, sell, borrow on, or otherwise encumber any of his beneficial interest in the Plan and Trust Fund, nor shall any such Benefits be in any manner liable for or subject to the deeds, contracts, liabilities, engagements or torts of any Participant or Beneficiary. If a Participant or Beneficiary becomes bankrupt or attempts to anticipate, sell, alienate, transfer, pledge, assign, encumber or change any Benefit specifically provided for herein, or if a court of competent jurisdiction enters an order purporting to subject such interest to the claim of any creditor, then the Trustee shall hold or apply such Benefit to or for the benefit of such Participant or Beneficiary in such manner as the Employer may deem proper. The foregoing shall not apply to judgments, orders and decrees issued after, and settlement agreements entered into on or after, August 5, 1997 to the extent permitted by Code Section 401(a)(13)(C) and (D). (b) The restrictions set out in the preceding subsection shall also apply to the creation, assignment, or recognition of a right under a domestic relations order, unless such order is determined to be a qualified domestic relations order as defined in Section 414(p) of the Code (and those other domestic relations orders permitted to be so treated as a qualified domestic relations order under the provisions of the Retirement Equity Act of 1984). A domestic relations order entered before January 1, 1985 will be treated as a qualified domestic relations order if payment of Benefits pursuant to the order has commenced as of such date, or if benefits had not commenced by such date, may be treated as a qualified domestic relations order pursuant to written procedures promulgated by the Plan Administrator. The Plan Administrator shall develop written procedures to determine whether a domestic relations court order meets the requirements of a qualified domestic relations court order as defined in Section 414(p) of the Code and to determine the method of distributing benefits in compliance with the order. Upon receiving a domestic relations court order, the Administrator shall notify all affected participants and any alternate payees that the order has been received. The Plan Administrator shall also notify the affected Participants and alternate payees of its procedure for determining whether the domestic relations order is qualified under Section 414(p) of the Code. While the Plan Administrator is determining the qualified status of the order, the Plan Administrator shall segregate in a separate account the amount (if any) that Exhibit 10.4 Page 57 will be payable to an alternate payee under this order (if it were a qualified domestic relations order) during this period. If the Plan Administrator determines the order is a qualified domestic relations order under Section 414(p) of the Code, during the 18 month period commencing on the date the first payment would be required under the qualified domestic relations order, then the alternate payee shall receive payment from the separate account. If the Administrator cannot make a determination of the order's qualified status during the 18 month period (or determines the order is not a qualified domestic relations order), then the trustee shall return the amounts in the separate account to the account of the affected Participants as if no court order had been received. 12.02 Substitute Payee. In the event a distribution is to be made to a minor or ---------------- to any Participant or other Beneficiary who, in the opinion of the Plan Administrator, is incapable of properly using, expending, investing or otherwise disposing of such distribution, the Plan Administrator may, based on objective criteria, order the Trustee to make such distribution to a legal or natural guardian or other relative of such minor or to the court appointed guardian of any incompetent, or to any adult with whom such person temporarily or permanently resides. Such distribution shall fully discharge the Trustee, Employer and Plan from further liability. 12.03 Absence of Guarantee. Neither the Plan Administrator nor any Employer -------------------- in any way guarantees the Trust Fund from loss or depreciation. Except as required by applicable law, the Employers do not guarantee any payment to any person. The liability of the Trustee or the Plan Administrator to make any payment under the Plan will be limited to the assets held by the Trustee which are available for that purpose. 12.04 No Contract. This Plan shall not be deemed to constitute a contract ----------- between the Employer and any Participant or to be a consideration or an inducement for the employment of any Participant or Employee. Nothing contained in this Plan shall be deemed to give any Participant or Employee the right to be retained in the service of the Employer or to interfere with the right of the Employer to discharge any Participant or Employee at any time regardless of the effect which such discharge shall have upon such individual as a Participant in the Plan. 12.05 Missing Persons. If after making reasonable efforts (including mailing a --------------- notice to the last known address of the Participant or other payee under the Plan), the Trustee or insurance company is unable to locate a Participant or to ascertain the identity of, or to locate any other person to whom payment is due under the Plan, such payment and all subsequent payments otherwise due shall be forfeited twenty-four (24) months after the date such payment first became due or, upon termination, such payment and all subsequent payments shall be forfeited pursuant to the applicable law of escheat. Provided, however, that any payment forfeited under this Section other than by reason of escheat shall be reinstated retroactively no later than sixty (60) days after the date on which the Participant or other payee is located or identified. Exhibit 10.4 Page 58 12.06 Corporate Change. If the Employer is merged or consolidated with another ---------------- organization, or another organization acquires all or substantially all of the Employer's assets, such organization may become the Employer hereunder by action of its Board of Directors and by action of the Board of Directors of the prior Employer, if still in existence. Such change in companies shall not be deemed a termination of the Plan by either the predecessor or successor company. 12.07 Merger. If this Plan is merged or consolidated with any other plan, or if ------ the assets or liabilities of this Plan is transferred to any other plan, and such plan is then terminated, each Participant hereunder will receive a Benefit immediately after the merger, consolidation or transfer which is equal to or greater than the Benefit to which he would have received if this Plan had terminated immediately before such merger, consolidation or transfer. 12.08 USERRA. Effective December 12, 1994, notwithstanding any provision of ------ this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Internal Revenue Code. Exhibit 10.4 Page 59 ARTICLE XIII Adoption of the Plan by Other Entities 13.01 Adoption of Plan. Any member of the Affiliated Group may adopt this Plan ---------------- for all or a portion of its employees, provided that the Board approves such participation and the basis of such participation is set forth in a participation agreement by and between such Participating Employer and the Board. The Plan and all participation agreements shall constitute a single plan collectively adopted by all Participating Employers. Such participation agreement may modify any of the terms of the Plan as applied to employees of such entity. The administrative powers and control of the Company as provided in the Plan shall not be deemed diminished under the Plan by reason of the participation of other Employers in the Plan. Each Participating Employer shall have the obligation to pay the contributions for its own employees and no other Employer shall have such obligation. 13.02 Withdrawal from Plan. A Participating Employer may withdraw at any time -------------------- from the Plan without affecting the other Participating Employers by complying with the appropriate provisions of the Plan and Trust Agreement. The Board may, at its discretion, terminate a Participating Employer's participation in the Plan at any time, when in its judgment, such Participating Employer fails or refuses to discharge its obligations under the Plan, or if amendments to the Plan applicable to such Participating Employer are not deemed to be in the best interests of the Plan as a whole. IN WITNESS WHEREOF, this amended and restated Plan is hereby executed on the 23 day of November , 1999. ----- --------- -- AMERICAN PACIFIC CORPORATION ATTEST: (SEAL) By Linda G. Ferguson ------------------- Exhibit 10.4 Page 60 EX-10.5 4 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10.5 AMERICAN PACIFIC CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Article I --------- ESTABLISHMENT & PURPOSE ----------------------- 1.1 Establishment. Effective as of January 1, 1999, American Pacific ------------- Corporation (the "Company"), has amended and restated this supplemental executive retirement plan known as the American Pacific Corporation Supplemental Executive Retirement Plan (the "Plan") for the benefit of a select group of highly compensated employees and their Beneficiaries. The rights and benefits of Participants who are active Participants in the Plan on or after the Effective Date of this restated Plan shall be as provided herein, except as specifically provided or changed by subsequent amendment. 1.2 Purpose. The purpose of the Plan is to provide retirement income and ------- supplemental death and disability benefits for eligible Participants to supplement benefits payable under the American Pacific Corporation Defined Benefit Pension Plan and to enable the Company to attract and retain certain key executives. Article II ---------- DEFINITIONS ----------- Definitions. As used herein, the following words and phrases have the meanings - ----------- ascribed to them in Article II unless a different meaning is plainly required by the context. Some of the words and phrases used in the Plan are not defined in this Article II, but, for convenience, are defined as they are introduced into the text. Words in the masculine gender shall be deemed to include the feminine gender and words in the feminine gender shall be deemed to include the masculine gender. Any headings used herein are included for ease of reference only, and are not to be construed so as to alter any of the terms of the Plan. 2.1 "Accrued Benefit" as of a specified date with respect to a Participant --------------- means a monthly benefit equal to (a) minus (b) below (but not less than zero) where (a) means an annual benefit equal to sixty percent (60%) of Final Average Compensation. Notwithstanding the above, for the sole Participant who was a Participant before the Effective Date of this restated Plan, (a) means an annual benefit equal to three percent (3%) of Final Average Compensation multiplied by his years of Credited Service (not to exceed 15) plus one and one-half percent (1.5%) of Final Average Compensation times his years of Credited Service (exceeding 15, but not to exceed 35). Except as follows, the benefit described in this subsection (a) shall be expressed as a Life Annuity commencing at the Participant's Normal Retirement Date. If the Participant's Annuity Starting Date precedes his Normal Retirement Date, such benefit shall be expressed as a Life Annuity commencing at his Annuity Starting Date Exhibit 10.5 Page 1 and shall be reduced as provided in Section 4.1 of the Plan. If the Participant's Annuity Starting Date is later than his Normal Retirement Date, such benefit shall be expressed as a Life Annuity commencing at his Annuity Starting Date and shall be increased as provided in Section 3.03 of the Qualified Plan. (b) means the vested benefit payable to the Participant under the Qualified Plan. Except as follows, the amount described in this subsection shall be expressed as a Life Annuity commencing on the Participant's Normal Retirement Date. If the Participant's Annuity Starting Date precedes his Normal Retirement Date, the benefit described in this subsection shall be expressed as a Life Annuity commencing at his Annuity Starting Date and shall be reduced as provided in Section 3.02 or 4.02 (as applicable) of the Qualified Plan. If the Participant's Annuity Starting Date is later than his Normal Retirement Date, such benefit shall be expressed as a Life Annuity commencing at his Annuity Starting Date and shall be increased as provided in Section 3.03 of the Qualified Plan. 2.2 "Actuarial Equivalent" shall mean a benefit or benefits which are of equal -------------------- value at the date of determination to the benefits for which they are to be substituted. Actuarial Equivalence shall be based on the interest and mortality tables used to determine actuarial equivalence under Section 1.03 of the Qualified Plan. 2.3 "Affiliated Group" shall mean the Company and all other entities aggregated ---------------- with the Company under Sections 414(b), (c), (m), or (o) of the Code but only in the period during which such other entity is so aggregated with the Company. 2.4 "Annuity Starting Date" shall mean the first day of the first period for --------------------- which an amount is payable as an annuity, or in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitle the Participant to such a benefit. 2.5 "Beneficiary" shall have the same meaning as set forth in Section 1.08 of ----------- the Qualified Plan. 2.6 "Board of Directors" shall mean the Board of Directors of American Pacific ------------------ Corporation. 2.7 "Change of Control" shall mean ----------------- (i) a merger or consolidation of the Company with or into any other entity unless after such event at least a majority of the voting power of the surviving or resulting entity is beneficially owned by persons who beneficially own a majority of the voting power of the Company immediately prior to such event, or (ii) the sale of fifty percent (50%) or more of the voting stock of the Company, or (iii) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of this clause, such person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time) Exhibit 10.5 Page 2 directly or indirectly, of more than 35% of the total voting power of the voting stock of the Company, or (iv) the sale of all or substantially all the assets of the Company, or (v) the dissolution of the Company, or (vi) a change in the identity of a majority of the members of the Company's board of directors within any twelve-month period, which change or changes are not recommended by the incumbent directors determined immediately prior to any such change or changes. 2.8 "Code" shall mean the Internal Revenue Code of 1986, as amended. Reference ---- to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. 2.9 "Company" shall mean American Pacific Corporation. ------- 2.10 "Compensation" shall mean the Participant's total wages and salary. ------------ Bonuses are included in the year earned (even though payment might not occur until the following calendar year) and are prorated over the months worked during that year. Earnings after Normal Retirement Age are not included. 2.11 "Credited Service" shall mean the sum of all "Benefit Service" earned under ---------------- the Qualified Plan determined as set forth in Section 2.05 of the Qualified Plan, including full and partial years. A partial year is calculated in terms of completed calendar months. 2.12 "Early Retirement Date" shall mean the first day of the month next --------------------- following the date the participant elects to receive his Retirement Benefit under the Plan where such date is after the Participant has both reached age fifty-five (55) and completed at least ten (10) years of Vesting Service but is prior to the Participant's attainment of his Normal Retirement Age. 2.13 "Effective Date" shall mean January 1, 1999. -------------- 2.14 "Employer" shall mean American Pacific Corporation and any member of the -------- Affiliated Group which adopts this Plan. 2.15 "Final Average Compensation" shall mean the average annualized Compensation -------------------------- earned during the Participant's thirty-six (36) consecutive months of employment with the Company that produces the highest average. 2.16 "Hour of Service" shall have the same meaning as set forth in Section --------------- 1.42(d) of the Qualified Plan. 2.17 "Late Retirement Date" shall mean the first day of the month coinciding -------------------- with or next following the date a Participant terminates employment, where such date is after his Normal Retirement Date. Exhibit 10.5 Page 3 2.18 "Life Annuity" shall mean a series of monthly installments which will ------------ continue for the lifetime of the Participant and will cease upon his death. 2.19 "Normal Retirement Date" shall have the same meaning as set forth in ---------------------- Section 1.29 of the Qualified Plan. 2.20 "Participant" shall mean any employee of an Employer who becomes eligible ----------- to participate in the Plan pursuant to Article III and who continues to be entitled to any benefits under the Plan. 2.21 "Plan" shall mean the American Pacific Corporation Supplemental Executive ---- Retirement Plan. 2.22 "Plan Year" shall mean the twelve (12) consecutive month period beginning --------- on January 1 and ending on the next following December 31. 2.23 "Qualified Plan" shall mean the American Pacific Corporation Defined -------------- Benefit Pension Plan. In the event that the Qualified Plan is subsequently amended, reference to a Section of the Qualified Plan shall be deemed to refer to the operational successor of such Section. 2.24 "Rabbi Trust" shall mean a trust described in Code Section 671, which shall ----------- be established in connection with this Plan. 2.25 "Retirement" shall mean termination of employment with all Employers at a ---------- time when the Participant is eligible for an Early, Normal, Late, or Disability Retirement Benefit. 2.26 "Retirement Date" shall mean the Participant's Normal, Early, or Late --------------- Retirement Date. 2.27 "Spouse" shall mean the person to whom the Participant is legally married ------ on his Annuity Starting Date, or, if earlier on his date of death. 2.28 "Vesting Service" shall have the same meaning as set forth in Section 2.04 --------------- of the Qualified Plan. Article III ----------- PLAN PARTICIPATION ------------------ 3.1 Eligibility to Participate in the Plan. Each individual (and only such -------------------------------------- individuals) designated in Appendix A shall be eligible to participate in the Plan. 3.2 Participation. A Participant shall remain a Participant so long as he is ------------- entitled to current or contingent benefits under the Plan, but shall cease to be a Participant if he terminates employment with all Employers prior to the date he becomes eligible for a vested benefit under Article IV of the Plan. If a Participant ceases to be an employee after becoming eligible for a vested benefit, he shall continue to be a Participant only with respect to his vested Accrued Benefit determined at his termination of employment. If he is subsequently reemployed, he shall only accrue an additional benefit or earn additional Vesting Service if he is again designated in Appendix A. Should a Participant cease to be an employee before Exhibit 10.5 Page 4 earning a vested benefit, but later become re-employed by an Employer, he shall again become a Participant only if he is again designated in Appendix A. 3.3 Select Group of Employees. The Plan is intended to qualify as a plan ------------------------- maintained by the Employers primarily for the purpose of providing deferred compensation for a select group of highly compensated employees, and, as such, to be exempt from certain provisions of the Employee Retirement Income Security Act of 1974, as amended. If the Company determines based on subsequent authority or if an agency or court of competent jurisdiction determines that the Plan benefits any person other than a member of the select group of highly compensated employees, the participation of each employee who is determined not to be included in such group shall be terminated immediately and such employee shall cease to accrue any benefit under the Plan. Provided, that in the case of a determination by an agency or court, the employee's participation shall terminate only after the period for appeal of such determination has elapsed. As soon as practicable after such determination, each such employee shall receive a single sum distribution equal to the Actuarial Equivalent of the benefit he would receive at his Normal Retirement Date if his employment terminated on the date his participation terminates. Article IV ---------- BENEFITS -------- 4.1 Retirement Benefits. Except as otherwise provided herein, retirement ------------------- benefits will be computed and paid as follows: (a) Normal Retirement Benefit shall be equal to the Participant's Accrued ------------------------- Benefit determined at the Participant's Normal Retirement Date and commencing on such date. (b) Early Retirement Benefit shall be equal to the Participant's Accrued ------------------------ Benefit determined at the Participant's Early Retirement Date and commencing on such date, reduced as follows: (i) with respect to the sole Participant who was a Participant prior to the Effective Date of this restated Plan, the early Retirement benefit shall be reduced five percent (5%) for each year that payments begin before age sixty-two (62) (prorated for fractional years) and (ii) with respect to all other participants, the Early Retirement Benefit shall be reduced as provided in Section 3.02 or 4.02 (as applicable) of the Qualified Plan. (c) Late Retirement Benefit shall be equal to the Participant's Accrued ----------------------- Benefit (after any applicable increase under Section 2.1 of the Plan) determined at the Participant's Late Retirement Date and commencing on such date. (d) Change of Control Retirement Benefit shall be equal to the ------------------------------------ Participant's Accrued Benefit determined at the Change of Control and commencing on the first day of the next month reduced as provided in Section 3.02 of the Qualified Plan. If the Change Exhibit 10.5 Page 5 of Control occurs before the Participant reaches his Early Retirement Date, the Change of Control Retirement Benefit shall be the Actuarial Equivalent of the Benefit the Participant could receive under this Section if the Change of Control had occurred at his Early Retirement Date. 4.2 Termination of Service. A Participant shall be entitled to his monthly ---------------------- retirement benefit if he terminates before he is eligible to receive a Retirement Benefit, provided that the Participant meets the vesting requirements of Article V. The Participant's benefit on his termination of employment shall be the Participant's vested Accrued Benefit determined at the date of termination of employment, commencing as provided in Section 4.5. 4.3 Form of Retirement Benefit. Except as provided below, the Accrued Benefit -------------------------- under Section 4.1 or 4.2 of this Plan shall be paid in the form elected by the Participant for payment of his benefit under the Qualified Plan. Benefits payable under this section other than as a Life Annuity shall be the Actuarial Equivalent of the benefit payable in the form of a Life Annuity. However, for the sole Participant who was a Participant prior to the Effective Date of this restated Plan, the Accrued Benefit under Section 4.1 of this Plan shall be paid in the form of an annuity for the life of the Participant. Notwithstanding the above, a Participant who separates from service or retires with a vested Accrued Benefit shall be paid the Actuarial Equivalent of such benefit in a single sum if such Actuarial Equivalent does not exceed $5,000. If the Participant subsequently resumes participation in the Plan, such Participant's benefit at his later date of termination shall be reduced by his prior Accrued Benefit determined as of the date of his previous retirement or termination. Upon a Change of Control, each Participant or Beneficiary will have the option to receive a single sum distribution, in the form of either cash or an Actuarially Equivalent annuity with an acceptable third party, in an amount equal to the benefits determined under Section 4.1(d). Upon a Change of Control, the Trustee will provide written notice to each Participant or Beneficiary of his or her rights under such option. Such option will expire one year following a Change in Control. 4.4 Death Benefit. If death occurs before the Participant's Annuity Starting ------------- Date but after having satisfied the requirements for vested benefit under Section 5.1 of this Plan, and the Participant has a surviving spouse, a monthly benefit for life equal to 50% of the vested benefit the Participant would have received had he retired immediately before his death, without any reduction for early payment, shall be paid to the surviving spouse. If the surviving spouse is more than five (5) years younger than the Participant, benefits will be reduced two percent (2%) for each full year that the age difference exceeds five (5) years. 4.5 Time of Payment. Payment of a Participant's benefit under this Plan shall --------------- commence on the same day that the Participant's (or his Beneficiary's) benefit commences under the Qualified Plan. 4.6 Reemployment Following Retirement or Termination of Employment. If a -------------------------------------------------------------- Participant begins to receive a benefit following termination of employment or retirement and is subsequently reemployed on a full-time basis by the Employer, benefit payments shall cease during the period of reemployment. If a Participant begins to receive a benefit Exhibit 10.5 Page 6 following retirement pursuant to Section 4.1 or 4.2, and is subsequently reemployed by the Employer on a part-time basis, as defined by personnel practices as uniformly and consistently applied, he shall continue receiving benefit payments. Upon the resumption of employment with the Employer, benefits shall continue to accrue in accordance with the terms of the Plan but only if the Participant is again designated in Appendix A. Future benefits paid to such Participant shall be adjusted on an Actuarial Equivalent basis to reflect the value of any benefits previously paid. Article V --------- VESTING ------- 5.1 Vesting. A Participant shall be vested in his Accrued Benefit in ------- accordance with the schedule below that provides the lower Vested Percentage.
Schedule A Schedule B ---------- ---------- Vesting Service Service Vested Percentage Vested Percentage Age + Vesting 5 50% 50 50% 6 60% 51 60% 7 70% 52 70% 8 80% 53 80% 9 90% 54 90% 10 100% 55 100%
In addition, following a Change of Control, Vesting Service will include years and partial years, if any, required to be credited in the event of a Change of Control pursuant to the terms of any employment agreement between the Company and the Participants. Article VI ---------- PLAN ADMINISTRATION ------------------- 6.1 Administration of the Plan. The Plan shall be administered by a Plan -------------------------- Administrator, which shall be appointed by the Board of Directors, subject, however, to any action taken by the Board of Directors in respect to the Plan. The Plan Administrator shall be responsible for the administration of the Plan and shall have all of the powers and duties allocated to the Plan Administrator set forth in Article VII of the Qualified Plan including, without limitation, the discretionary power to determine eligibility for participation in the Plan and to construe the terms of the Plan. The Plan Administrator shall file with the Department of Labor and distribute to the Participants any reports and other information required by applicable law and shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by it with respect to the Plan. Article VII ----------- AMENDMENT AND TERMINATION ------------------------- Exhibit 10.5 Page 7 7.1 Amendment and Termination of the Plan. The Board of Directors may amend or ------------------------------------- terminate the Plan at any time. However, no such amendment or termination shall deprive any Participant or Beneficiary of any portion of any Retirement or Death Benefit which has become vested prior to the effective date of such amendment or termination or which would be payable if the Participant terminated for any reason, including death, on such effective date. Article VIII ------------ GENERAL PROVISIONS ------------------ 8.1 Nature of Company's Obligation. Benefits under this Plan shall be paid ------------------------------ solely from the general assets of the Company. The Company's obligation under this Plan shall be limited to an unfunded and unsecured promise to pay. The rights of a Participant and his or her spouse or Beneficiary with respect to benefits under this Plan are the same of those of an unsecured creditor of the Company, and neither the Participant nor his or her spouse or Beneficiary shall have a secured interest in any assets that may be designated by the Company to pay such benefits. 8.2 Rabbi Trust. The Company shall establish a trust described in Code Section ----------- 671 with respect to which the Company is the grantor (the "Rabbi Trust") to hold assets in connection with this Plan. However, the Company shall not be obligated (except as otherwise provided below) to make contributions to the Rabbi Trust or otherwise fund its financial obligations under the Plan. Upon a Change of Control, the Company shall, as soon as possible, but in no event longer than 30 days following the Change of Control, as defined herein, make an irrevocable contribution to the Trust in an amount that is sufficient to pay each Plan Participant or Beneficiary the benefits to which Plan Participants or Beneficiaries would be entitled pursuant to the terms of the Plan as of the date on which the Change of Control occurred. 8.3 Nonalienation of Benefits under this Plan. Except for claims of ----------------------------------------- indebtedness owing to an Employer, the interests of Participants and their Beneficiaries are not subject to claims, indebtedness, attachment, execution, garnishment, or other legal or equitable process and such interests may not be voluntarily or involuntarily sold, transferred or assigned. Any attempt by a Participant or his Beneficiary or any other person to sell, transfer, alienate, assign, pledge, anticipate, encumber, charge, or otherwise dispose of any right to benefits payable hereunder shall be void. The restrictions set out in the preceding subsection shall not apply to an order determined to be qualified domestic relations order as defined in Section 414(p) of the Code. 8.4 Plan not a Contract of Employment. This Plan shall not be deemed to --------------------------------- constitute a contract between any Employer and any Participant or to be a consideration or an inducement for the employment of any Participant or Employee. Nothing contained in this Plan shall be deemed to give any Participant or Employee the right to be retained in the service of any Employer or to interfere with the right of any Employer to discharge any Participant or employee at any time regardless of the effect which such discharge shall have upon such individual as a Participant in the Plan. Exhibit 10.5 Page 8 8.5 Required Notification to Plan Administrator. Each Participant entitled to ------------------------------------------- benefits hereunder shall file with the Plan Administrator from time to time in writing his post office address and each change of post office address, and any check representing payment hereunder and any communication addressed to a Participant or a former Participant hereunder at his last address filed with the Plan Administrator, or if no such address has been filed, then at his last address as indicated on the records of the Company shall be binding on such person for all purposes of the Plan, and neither the Plan Administrator nor the Company or other payor shall be obliged to search for or ascertain the location of any such person. If the Plan Administrator for any reason is in doubt as to the address of any Participant or former Participant entitled to benefits hereunder or as to whether benefit payments are being received by the person entitled thereto, it shall, by registered mail addressed to the person concerned at his address last known to the Plan Administrator, notify such person that: (a) All unmailed and future retirement income payments shall be henceforth withheld until he provides the Plan Administrator with evidence of his continued life and his proper mailing address; and (b) His right to any retirement income whatsoever shall, at the option of the Plan Administrator, be canceled forever, if, at the expiration of two (2) years from the date of such mailing, he shall not have provided the Plan Administrator with evidence of his continued life and his proper mailing address. 8.6 Successors. The provisions of this Plan shall be binding upon each ---------- Employer, and their successors and assigns and upon each Participant and his heirs, spouses, estates, and legal representatives. 8.7 Facility of Payment. Whenever and as often as any person entitled to ------------------- payments hereunder shall be under a legal disability, or in the sole judgment of the Plan Administrator shall otherwise be unable to apply such payments to his own best interest and advantage, the Plan Administrator, in the exercise of its discretion, may direct all or any portion of such payments to be made to any person receiving benefits on behalf of the Participant or other Beneficiary under Section 12.02 of the Qualified Plan. 8.8 Required Information to Plan Administrator. Each Participant will furnish ------------------------------------------ to the Plan Administrator such information as the Plan Administrator considers necessary or desirable for purposes of administering the Plan, and the provisions of the Plan respecting any payments thereunder are conditional upon the Participant's furnishing promptly such true, full and complete information as the Plan Administrator may request. Each Participant will submit proof of his age to the Plan Administrator at such time as required by the Plan Administrator. The Plan Administrator will, if such proof of age is not submitted as required, use as conclusive evidence thereof such information as is deemed by it to be reliable, regardless of the lack of proof, or the misstatement of the age of persons entitled to benefits hereunder, by the Participant or otherwise, will be in such manner as the Plan Administrator deems equitable. Any notice or information which, according to the terms of the Plan or the rules of the Plan Administrator, must be filed with the Plan Administrator, shall be deemed so filed if addressed and either delivered in person or mailed to and received by the Plan Administrator, in care of the Company at: Exhibit 10.5 Page 9 American Pacific Corporation Suite 300 3770 Howard Hughes Parkway Las Vegas, NV 89109 8.9 Claims Procedure. In the event that any claim for benefits, which must ---------------- initially be submitted in writing to the Plan Administrator, is denied (in whole or in part) hereunder, the claimant shall receive from the Company notice in writing, written in a manner calculated to be understood by the claimant, setting forth the specific reasons for denial, with specific reference to pertinent provisions of this Agreement. Such notice shall be provided within 90 days of the Participant's claim for benefits. Any disagreements about such interpretations and construction may be appealed within 90 days to the Board of Directors. The Board shall respond to such appeal within 60 days with a notice in writing fully disclosing its decision and the reasons therefore. No member of the Board of Directors shall be liable to any person for any action taken hereunder except those actions undertaken with lack of good faith. 8.10 Controlling State Law. To the extent not superseded by the laws of the --------------------- United States, the Plan will be construed and enforced according to the laws of the State of Delaware. 8.11 Severability. In case any provision of this Plan shall be held illegal or ------------ invalid for any reason, 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 and invalid provisions had never been set forth. 8.12 Adoption of Plan. Any Employer may adopt this Plan for all or a portion ---------------- of its employees, provided that the Board of Directors of the Company approves such participation. The administrative powers and control of the Company as provided in the Plan shall not be deemed diminished under the Plan by reason of the participation of other companies in the Plan. IN WITNESS WHEREOF, American Pacific Corporation has adopted this plan on this 23 day of November, 1999. - -- ---------- ATTEST (SEAL): AMERICAN PACIFIC CORPORATION By /s/ Linda G. Ferguson ------------------------ Exhibit 10.5 Page 10 APPENDIX A ---------- PLAN PARTICIPANTS ----------------- Participant Social Security Number - ----------- ---------------------- Fred D. Gibson, Jr. ###-##-#### (sole Participant prior to January 1, 1999) John R. Gibson ###-##-#### David Keys ###-##-#### Exhibit 10.5 Page 11 EX-10.6 5 TRUST AGREEMENT-RETIREMENT PLAN EXHIBIT 10.6 TRUST AGREEMENT FOR AMERICAN PACIFIC CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN This Agreement made this 23/rd/ day of November, 1999 , by and ------ ------------------------ between American Pacific Corporation (the "Company") and John R. Gibson and David N. Keys (collectively the "Trustee"). WHEREAS, the Company has adopted the American Pacific Corporation Supplemental Executive Retirement Plan; WHEREAS, the Company has incurred or expects to incur liability under the terms of such Plan with respect to the individuals participating in such Plan; WHEREAS, the Company wishes to establish a trust (the "Trust") and, at its discretion, or pursuant to the terms of the Plan, to contribute to the Trust assets that shall be held therein, subject to the claims of the Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plan; WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly-compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; WHEREAS, it is the intention of the Company to make contributions to the Trust to provide itself with a source of funds to assist it in the meeting of its liabilities under the Plan; NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: Exhibit 10.6 Page 1 SECTION 1. Establishment of Trust. ---------------------- (a) The Company hereby deposits with the Trustee in trust $ 1.6 million , which shall become the principal of the Trust to ---------------- be held, administered and disposed of by the Trustee as provided in this Trust Agreement. (b) The Trust hereby established shall be irrevocable. (c) The Trust is intended to be a grantor trust, of which the Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plan and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against the Company. Any assets held by the Trust will be subject to the claims of the Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) The Company may at any time, or from time to time, make additional deposits of cash or other property in trust with the Trustee to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Prior to a Change of Control neither the Trustee nor any Plan participant or beneficiary shall have any right to compel such additional deposits. Exhibit 10.6 Page 2 (f) Upon a Change of Control, the Company shall, as soon as possible, but in no event longer than 30 days following the Change of Control, as defined herein, make an irrevocable contribution to the Trust in an amount that is sufficient to pay each Plan participant or beneficiary the benefits to which Plan participants or their beneficiaries would be entitled pursuant to the terms of the Plan as of the date on which the Change of Control occurred. SECTION 2. Payments to the Plan Participants and Their Beneficiaries. --------------------------------------------------------- (a) The Company shall deliver to the Trustee a schedule (the "Payment Schedule") that indicates the amounts payable in respect of each Plan participant (and his or her beneficiaries), provides a formula or other instructions acceptable to the Trustee for determining the amounts so payable, specifies the form in which such amounts are to be paid (as provided for or available under the Plan), and specifies the time of commencement for payment of such amounts. Except as otherwise provided herein, the Trustee shall make payments to the Plan participants and their beneficiaries in accordance with such Payment Schedule. The Trustee shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Company. (b) The entitlement of a Plan participant or his or her beneficiaries to benefits under a Plan shall be determined by the Company or such party as it shall designate under the Plan, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Plan. (c) The Company may make payment of benefits directly to Plan participants or their beneficiaries as they become due under the terms of the Plan. The Company shall notify the Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to participants or their Exhibit 10.6 Page 3 beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Plan, the Company shall make the balance of each such payment as it falls due. The Trustee shall notify the Company where principal and earnings are not sufficient. SECTION 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When ------------------------------------------------------------------- the Company is Insolvent. ------------------------ (a) The Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing of the Company's Insolvency. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. (2) Unless the Trustee has actual knowledge of the Company's Insolvency, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a Exhibit 10.6 Page 4 reasonable basis for making a determination concerning the Company's solvency. (3) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of the Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under a Plan or otherwise. (4) The Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan for the period of such discontinuance, less the aggregate amount of any payments made to Plan participants or their beneficiaries by the Company in lieu of the payments provided for hereunder during any such period of discontinuance. SECTION 4. Payments to the Company. ----------------------- Except as provided in Section 3 hereof, after the Trust has become irrevocable, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plan. SECTION 5. Investment Authority. -------------------- Exhibit 10.6 Page 5 The Trustee may invest in securities (including stock or rights to acquire stock) or obligations issued by the Company. All rights associated with assets of the Trust shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable by or rest with Plan participants. The Company shall have the right at anytime, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercisable by the Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. SECTION 6. Disposition of Income. --------------------- During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. SECTION 7. Accounting by Trustee. --------------------- The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee. Within 60 days following the close of each calendar year and within 60 days after the removal or resignation of the Trustee, the Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. SECTION 8. Responsibility of Trustee. ------------------------- Exhibit 10.6 Page 6 (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity with, the terms of a Plan or this Trust and is given in writing by the Company. In the event of a dispute between the Company and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute. (b) If the Trustee undertakes or defends any litigation arising in connection with this Trust, the Company agrees to indemnify the Trustee against the Trustee's costs, expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. (c) The Trustee may consult with legal counsel (who may also be counsel for the Company generally) with respect to any of its duties or obligations hereunder. (d) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder. (e) The Trustee shall have, without exclusion, all powers conferred on the Trustees by applicable law, unless expressly provided otherwise herein, provided, however, that if an insurance policy is held as an asset of the Trust, the Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor the Trustee, or to loan to any person the proceeds of any borrowing against such policy. Exhibit 10.6 Page 7 (f) However, notwithstanding the provisions of Section 8(e) above, the Trustee may loan to the Company the proceeds of any borrowing against an insurance policy held as an asset of the Trust. (g) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. SECTION 9. Compensation and Expenses of Trustee. ------------------------------------ The Company shall pay all administrative and Trustee's fees and expenses. If not so paid, the fees and expenses shall be paid from the Trust. SECTION 10. Resignation and Removal of Trustee. ---------------------------------- (a) Prior to a Change of Control, the Trustee may resign at anytime by written notice to the Company, which shall be effective 30 days after receipt of such notice unless the Company and the Trustee agree otherwise. Following a Change of Control, the Trustee may resign only after the appointment of a successor Trustee. (b) The Trustee may be removed by the Company on 30 days notice or upon shorter notice accepted by the Trustee. The Trustee may not be removed by the Company for one year following the Change of Control unless such removal is with the consent of a majority of the participants and such removal shall be effective only after a successor Trustee has been appointed pursuant to Section 11. (c) Upon resignation or removal of and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer Exhibit 10.6 Page 8 shall be completed within 90 days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. SECTION 11. Appointment of Successor. ------------------------ (a) If the Trustee resigns (or is removed) prior to a Change of Control, the Company shall appoint a third party, such as a bank trust department or other party that has been granted corporate trustee powers under state law, as a successor to replace the Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the Company or the successor Trustee to evidence the transfer. If no such appointment has been made, the Trustee shall apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. (b) If the Trustee resigns (or is removed) coincident with or after a Change of Control, the Trustee shall appoint a third party, such as a bank trust department or other party that has been granted corporate trustee powers under state law, as a successor to replace the Trustee upon resignation or removal. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by the successor Trustee to evidence the transfer. If no such appointment has been made, a majority of the participants may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Exhibit 10.6 Page 9 (c) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Section 7 and 8 hereof. The successor Trustee shall not be responsible for and the Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes a successor Trustee. SECTION 12. Amendment or Termination. ------------------------ (a) This Trust Agreement may be amended by a written instrument executed by the Trustee and the Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Plan or make the Trust revocable. (b) The Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan. Upon termination of the Trust any assets remaining in the Trust shall be returned to the Company. (c) Upon written approval of all participants or, in the case of a deceased participant, his beneficiaries, entitled to payment of benefits pursuant to the terms of a Plan, the Company may terminate this Trust prior to the time all benefit payments under the Plan have been made. All assets in the Trust at termination shall be returned to the Company. (d) This Trust shall not be amended by the Company for one year following a Change of Control as defined herein without the written consent of a majority of the participants. SECTION 13. Miscellaneous. -------------- Exhibit 10.6 Page 10 (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (c) This Trust Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, to the extent not superseded by Federal law. (d) For the purposes of this Trust, Change of Control shall mean (i) a merger or consolidation of the Company with or into any other entity unless after such event at least a majority of the voting power of the surviving or resulting entity is beneficially owned by persons who beneficially own a majority of the voting power of the Company immediately prior to such event, or (ii) the sale of fifty percent (50%) or more of the voting stock of the Company, or (iii) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of this clause, such person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time) directly or indirectly, of more than 35% of the total voting power of the voting stock of the Company, or Exhibit 10.6 Page 11 (iv) the sale of all or substantially all the assets of the Company, or (v) the dissolution of the Company, or (vi) a change in the identity of a majority of the members of the Company's board of directors within any twelve-month period, which change or changes are not recommended by the incumbent directors determined immediately prior to any such change or changes. SECTION 14. Effective Date. -------------- The effective date of this Trust Agreement shall be January 1, 1999. --------------------- Exhibit 10.6 Page 12 IN WITNESS WHEREOF, American Pacific Corporation and the Trustee have executed this Agreement as of the date first above written. AMERICAN PACIFIC CORPORATION By: /s/ Linda G. Ferguson ------------------------------------- Its: Vice President - Administration Attest (Trustee) _______________________ By: /s/ David N. Keys ------------------- By: /s/ John R. Gibson -------------------- Exhibit 10.6 Page 13 EX-21 6 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
Location of Incorporation Percent Subsidiaries of the Registrant or Organization Ownership - ------------------------------ ------------------------- ---------- American Azide Corporation Nevada 100% American Pacific Corporation Nevada 100% AMPAC Farms, Inc. Nevada 100%
EX-23 7 INDEPENDENT AUDITORS CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333- 53449 on Form S-8, Amendment No. 2 to Registration Statement No. 33-52196 on Form S-3 and Registration Statement No. 333-49883 on Form S-4 of American Pacific Corporation of our report dated November 19, 1999 appearing in this Annual Report on Form 10-K of American Pacific Corporation for the year ended September 30, 1999. /s/ Deloitte & Touche LLP Las Vegas, Nevada December 6, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS SEP-30-1999 OCT-01-1998 SEP-30-1999 40,434 0 0 8,859 9,577 61,192 26,340 9,086 132,882 8,104 67,000 0 0 847 51,357 132,882 72,834 72,834 45,834 55,858 0 0 5,363 11,613 0 11,613 0 174 0 11,439 1.41 1.39
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