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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.
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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.
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PART I
Item 1. Business
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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.
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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.
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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.
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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,
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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).
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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.
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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.
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Item 2. Properties
- ------------------
The following table sets forth certain information regarding the Company's
properties at September 30, 1999.
<TABLE>
<CAPTION>
Approximate
Area or Approximate
Location Principal Use Floor Space Status Annual Rent
-------- ------------- ----------- ------ -----------
<S> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
Item 6. Selected Financial Data
- --------------------------------
FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA FOR THE YEARS ENDED
- -----------------------------------------------------------------------------
SEPTEMBER 30,
- ------------
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-----------------------------------------------------------
......(in thousands except per share amounts).....
<S> <C> <C> <C> <C> <C>
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
</TABLE>
19
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
----------------------------------------------------
1999 1998
----------------------------------------------------
<S> <C> <C>
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
====================================================
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
--------------------------------------------------
1998 1997
--------------------------------------------------
<S> <C> <C>
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)
==================================================
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
Financial statements called for hereunder are included herein on the
following pages:
<TABLE>
<CAPTION>
Page(s)
------
<S> <C>
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
</TABLE>
28
<PAGE>
SUMMARIZED QUARTERLY FINANCIAL DATA
(unaudited)
(amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
------------------------------------------------
Quarters For Fiscal Year 1999
1st 2nd 3rd 4th Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(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
</TABLE>
(1) Net income includes an extraordinary loss on debt extinguishment of
approximately $0.2 million in the third quarter.
<TABLE>
<CAPTION>
------------------------------------------------
Quarters For Fiscal Year 1998
1st 2nd 3rd 4th Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(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)
</TABLE>
/(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
/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
<PAGE>
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
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------------------------------
<S> <C> <C>
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
=================================
</TABLE>
See Notes to Consolidated Financial Statements.
38
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
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
-----------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
39
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
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
=============================================
</TABLE>
See Notes to Consolidated Financial Statements.
40
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
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
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
==================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------
<S> <C> <C>
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
==================================================
</TABLE>
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
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1999 and 1998 are summarized
as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------
<S> <C> <C>
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
=======================================================
</TABLE>
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:
<TABLE>
<CAPTION>
----------------------------------------------------------
September 30, December 31, December 31,
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
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:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------
<S> <C> <C>
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
========================================
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
----------------------------
For the Years Ending
September 30,
----------------------------
<S> <C>
2000 $ 1,195,000
2005 67,000,000
--------------------
Total $ 68,195,000
====================
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
===================================================
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Current $ $ $
Deferred (federal and state) (10,101,000)
---------------------------------------------------
Credit for income taxes $ $ $(10,101,000)
===================================================
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
NOL Deduction Tax Rate NOL Asset
-------------------------------------------------------------------------
Expiration of net operating losses
<S> <C> <C> <C>
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
=========================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
=====================================================================
1999 % 1998 % 1997 %
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)%
=====================================================================
</TABLE>
The components of net deferred taxes at September 30, 1999, 1998 and 1997
consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
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 $ $ $
================================================
</TABLE>
50
<PAGE>
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:
<TABLE>
<CAPTION>
---------------------------------------------------------------
1999 1998
---------------------------------------------------------------
<S> <C> <C>
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)
===============================================================
</TABLE>
<TABLE>
<CAPTION>
=========================================
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
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%
=========================================
</TABLE>
51
<PAGE>
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
<PAGE>
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:
<TABLE>
<S> <C>
2000 $ 550,000
2001 275,000
----------------------
Total $ 825,000
======================
</TABLE>
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
<PAGE>
Option and warrant transactions are summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
Shares Under Options and
Warrants Option Price
---------------------------------------------------
<S> <C> <C>
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
---------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 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
=================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
--------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
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)
--------------------------------------------------------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Customer Chemical 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
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
===============================================
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
EXHIBIT 10.4
AMENDED AND RESTATED AMERICAN PACIFIC CORPORATION
DEFINED BENEFIT PENSION PLAN
As Amended and Restated Effective October 1, 1997
<PAGE>
Table of Contents
<TABLE>
<S> <C>
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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
($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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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).
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------
</TABLE>
(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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Schedule A Schedule B
---------- ----------
Vesting Service
Service Vested Percentage Vested Percentage Age + Vesting
<S> <C> <C> <C>
5 50% 50 50%
6 60% 51 60%
7 70% 52 70%
8 80% 53 80%
9 90% 54 90%
10 100% 55 100%
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Location of Incorporation Percent
Subsidiaries of the Registrant or Organization Ownership
- ------------------------------ ------------------------- ----------
<S> <C> <C>
American Azide Corporation Nevada 100%
American Pacific Corporation Nevada 100%
AMPAC Farms, Inc. Nevada 100%
</TABLE>
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 40,434
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 8,859
<INVENTORY> 9,577
<CURRENT-ASSETS> 61,192
<PP&E> 26,340
<DEPRECIATION> 9,086
<TOTAL-ASSETS> 132,882
<CURRENT-LIABILITIES> 8,104
<BONDS> 67,000
0
0
<COMMON> 847
<OTHER-SE> 51,357
<TOTAL-LIABILITY-AND-EQUITY> 132,882
<SALES> 72,834
<TOTAL-REVENUES> 72,834
<CGS> 45,834
<TOTAL-COSTS> 55,858
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,363
<INCOME-PRETAX> 11,613
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,613
<DISCONTINUED> 0
<EXTRAORDINARY> 174
<CHANGES> 0
<NET-INCOME> 11,439
<EPS-BASIC> 1.41
<EPS-DILUTED> 1.39
</TABLE>
