-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UQJDzkNxEeXkJUwjqIOB7PGvzW8QWcbXq8a+dRQ3mAhdVxoEP7KRVgkaQJ10aqhx rQVWwRRZyMFHtypOoYHokg== 0000898430-95-002702.txt : 19960122 0000898430-95-002702.hdr.sgml : 19960122 ACCESSION NUMBER: 0000898430-95-002702 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951221 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PACIFIC CORP CENTRAL INDEX KEY: 0000350832 STANDARD INDUSTRIAL CLASSIFICATION: 2810 IRS NUMBER: 566490478 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-21046 FILM NUMBER: 95603585 BUSINESS ADDRESS: STREET 1: 3770 HOWARD HUGHES PKWY STE 300 CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027352200 MAIL ADDRESS: STREET 1: 3770 HOWARD HUGHES PKWY STE 300 STREET 2: 3770 HOWARD HUGHES PKWY STE 300 CITY: LAS VEGAS STATE: NV ZIP: 89109 10-K405 1 FORM 10-K FOR FISCAL YEAR END 09/30/95 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, 1995 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) (Zip Code) (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 par 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 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. (X) The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 1, 1995, was approximately $40,733,000. 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, 1995 was 8,103,991. DOCUMENTS INCORPORATED BY REFERENCE Definitive Proxy Statement for 1996 Annual Meeting of Stockholders to be filed not later than January 29, 1996 (Part III hereof). S-14 Registration Statement (2-70830); S-8 Registration Statement (33- 30321); Definitive Proxy Statement dated January 27, 1989; Annual Reports on Forms 10-K for the years ended September 30, 1994, 1993, 1990, 1989 and 1988; S-2 Registration Statement (33-36664); Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1994 and December 31, 1990; S-8 Registration Statement (33-52898); S-3 Registration Statement (33-52196) and Current Report on Form 8-K dated February 28, 1992; (all incorporated by reference in Part IV hereof). 2 PART 1 Item 1. Business - - ---------------- The Company, through its indirect subsidiary, Western Electrochemical Company ("WECCO"), is engaged in the production of a specialty chemical, ammonium perchlorate ("AP"), for the aerospace and national defense industries. The Company is one of two domestic manufacturers of AP, which is used primarily as an oxidizing agent in composite solid propellants for rockets, booster motors and missiles. The Company's customers for AP are primarily contractors in programs of the National Aeronautics and Space Administration ("NASA") and the Department of Defense ("DOD"), and companies providing commercial satellite launch services. These NASA and DOD contractors are engaged in space exploration projects such as the Space Shuttle Program and in the production of defense systems. Other customers for the Company's AP include aerospace and defense agencies of foreign countries. In May 1994, the Company and its principal customer, Thiokol Corporation ("Thiokol"), executed an amendment ("the Amendment") to the 1989 Advance Agreement. The 1989 Advance Agreement represents one of certain agreements (collectively the "NASA/Thiokol Agreements") related to the sale of AP, which agreements are described herein. The Company and Thiokol previously had a dispute over the interpretation of these agreements. See Item 3. Legal Proceedings and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. As a result of a significant change in the demand for AP, during the fiscal year ended September 30, 1994, the Company recognized an impairment charge of $39,401,000 related to WECCO's fixed assets. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 13 of Notes to Consolidated Financial Statements. 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 the 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 has provided the technical support for the design, construction and start-up of the Company's sodium azide facility. Funding for the facility was partially provided by means of the sale of $40,000,000 principal amount of noncallable subordinated secured notes (the "Azide Notes") to a major state public employee retirement fund and a leading investment management company. The Company commenced commercial sales of sodium azide in fiscal 1994. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. In February 1992, the Company acquired (by exercise of an option previously granted to it) the worldwide rights to Halotron, 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 has applications as a fire suppression agent for military, commercial and industrial uses. The Company has completed the construction of a plant for the production of certain Halotron products. The Company expects to become a qualified supplier for military, commercial and industrial applications for Halotron products, although there can be no assurance in that regard. As of the date hereof, the Company's sales of Halotron products have not been significant. 3 The Company is also engaged in the development of real estate and in the production of environmental protection and waste water treatment equipment. On May 4, 1988, the manufacturing and office facilities of the Company and its subsidiaries were destroyed by a series of massive explosions and associated fires (the "May 1988 Incident"). The May 1988 Incident resulted in the institution of litigation against the Company and others alleging responsibility for property damage and physical injury. In September 1992, the Company settled all claims arising out of the May 1988 Incident. The total contribution to the global settlement by the Company and its liability insurer was approximately $15,600,000. The liability insurer, with whom the Company had previously been involved in a dispute as to the extent of coverage, paid the sum of $7,500,000 toward the settlement, and the Company paid approximately $8,100,000 in cash. As a result of the cash settlement, the Company recognized a one-time pre-tax charge to earnings in the amount of approximately $8,100,000 in its fourth quarter ended September 30, 1992. Three shareholder lawsuits, purporting to be class actions, were filed in the United States District Court for the District of Nevada against the Company and certain of its directors and officers. The complaints, which have since been consolidated, allege that the Company's public statements violated federal securities laws by inadequately disclosing information concerning certain agreements with Thiokol and by inadequately disclosing information concerning the Company's operations. Management of the Company believes that the allegations of the complaints are without merit and the Company and the other defendants are vigorously defending the lawsuit. See Note 11 of Notes to Consolidated Financial Statements. See Note 15 of Notes to Consolidated Financial Statements (pages 60 through 61 herein) for information concerning revenues, operating profits and identifiable assets of the Company's industry segments and for financial information about domestic operations and export sales. The Company's perchlorate chemical operations accounted for approximately 75%, 86% and 94% of revenues during the years ended September 30, 1995, 1994 and 1993, respectively. There were no significant sales of Halotron during these periods. The term "Company" used herein includes, where the context requires, one or more of the direct and indirect subsidiaries of American Pacific Corporation. Specialty Chemicals Strategy The Company's strategy is to maintain its status as one of two producers of AP and to apply the technology and expertise gained over 30 years in the production of AP to other activities, such as sodium azide and Halotron, perchlorate chemicals other than AP, and additional specialty chemical business opportunities, and to its environmental protection equipment business. In view of the decline in demand for AP as a consequence of declining national defense needs and related budgetary constraints (see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations), the Company's strategy has been to use proven technologies and target growing markets to produce and sell specialty chemicals for which there is perceived demand. Where feasible, the Company may endeavor to gain access to such technologies and markets by cooperative arrangements with others to which it can contribute its operating and management expertise. The Company regularly evaluates business opportunities that are presented to it. 4 Ammonium Perchlorate 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. Substantially all existing and most planned launch vehicles providing access to space for communications, observation, intelligence and scientific exploration are propelled by solid fuel rockets and thus depend upon AP. A significant number 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 exploration programs for nearly 30 years, beginning with the Titan program in the early 1960s. Today, its principal space exploration customer is the Space Shuttle Program, for which the Company supplies approximately one-half to substantially all of Program AP requirements. The Company's AP is also used in expendable rockets that launch satellites for communications, navigation, intelligence gathering, space exploration, weather forecasting and environmental monitoring. Due to the nature and extent of the economic and military applications to which satellites are being put, the Company expects the use of satellites to increase. 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. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information respecting the Company's assessment of the AP market. Customers Prospective purchasers of AP consist principally of contractors in programs of the DOD and NASA. As a practical matter, the specialized nature of these contractors' activities restricts entry by others into competition with them. As a result, there are relatively few potential customers for AP, and individual customers for AP typically account for a significant portion of the revenues of AP manufacturers. Prospective customers also include companies providing commercial satellite launch services and agencies of foreign governments and their contractors, although sales to foreign agencies and their contractors are not expected to account for significant percentages of AP sales. (See Competition.) Thiokol Corporation - Space Operations accounted for 71%, 71% and 78% of the Company's revenues during the fiscal years ended September 30, 1995, 1994 and 1993, respectively. Substantially all of the revenues from AP production at the WECCO facility have been derived from and in accordance with the NASA/Thiokol Agreements. (See NASA/Thiokol Agreements for information about the identity of prospective purchasers of AP produced by WECCO.) Other customers accounting for 10% or more of the Company's revenues during one or more of the three fiscal years ended September 30, 1995 are the following: Atlantic Research Corporation-11% (1994) and Hercules-12% (1993). NASA/Thiokol Agreements Following the May 1988 Incident, NASA issued Determinations and Findings that included a determination that it was essential to planned space exploration and to national security that the lost AP production capacity be replaced as quickly as possible and that a reliable supply of AP again be available from two domestic manufacturers. The NASA/Thiokol Agreements implemented this determination by 5 providing for purchases of AP from WECCO to assure revenues in respect of sales of not less than 140,000,000 pounds over a period of seven years commencing with initial production. Under the NASA/Thiokol Agreements, which include an Advance Agreement and included a Surcharge Agreement, each dated as of March 3, 1989, WECCO agreed to cause the construction of a facility capable of producing 30,000,000 pounds (expandable to 40,000,000 pounds) of AP annually. Most of the facility cost (including loan fees and associated costs) in the aggregate amount of $92,000,000 was borrowed by WECCO under a credit facility (the "WECCO loan") (see AP Plant Financing) and was amortized under the NASA/Thiokol Agreements through collection and application of a surcharge on all sales of AP by WECCO. In this connection, Thiokol obligated itself, subject to the contingency described below, to purchases of AP, which when aggregated with purchases of AP made by others, would assure revenues in respect of sales of 5,000,000 pounds of AP quarterly, 20,000,000 pounds annually and 140,000,000 pounds over the term of the agreements. Under the Surcharge Agreement, the price of AP sold by WECCO was adjusted at least quarterly, by way of a surcharge determined with reference to costs incurred under the plant financing and periodically as required with reference to costs of manufacture. For certain periods, however, the surcharge was paid in advance. (See Note 6 of Notes to Consolidated Financial Statements.) The surcharge was intended to be sufficient to amortize costs of the plant financing over a period of not more than seven years. In addition to the surcharge, the NASA/Thiokol Agreements provided that the selling price of AP was to cover all of the costs of production of AP and to return a profit to WECCO. NASA/Thiokol agreed to provide funds to eliminate any deficiency in the cash collateral account that was maintained under the plant financing to assure timely debt servicing and to cover any costs of the facility exceeding the amount of the plant financing. By memorandum of agreement, NASA and the DOD allocated between them, to the extent of 45% of AP orders in the case of NASA and 55% of AP orders in the case of the DOD, the responsibility for causing their respective contractors to place orders for AP manufactured by WECCO in respect of revenues in the aggregate amount of 140,000,000 pounds over a period of seven years. On May 10, 1994, WECCO and Thiokol finalized and signed the Amendment. The Amendment fully resolved all issues between Thiokol and WECCO relating to the interpretation and application of the NASA/Thiokol agreements. Under and because of the resolution of its dispute with Thiokol completed by the Amendment, on May 10, 1994, WECCO exercised the contractual right reserved solely to it in the WECCO loan agreement to direct that the funds in the cash collateral account and default account be used to repay the WECCO loan, including accrued interest, any interest rate swap termination fee, and any other costs relating to the repayment. Upon early repayment in full of the WECCO loan, the Amendment provides for the termination as fulfilled of the Surcharge Agreement and termination of certain other agreements relating to the repayment of advances (the Working Capital Agreement and the Repayment Plan). The Amendment confirms that the 1989 Advance Agreement has a continuous term commencing with the first production of AP at the WECCO plant in August 1989 and ending September 30, 1996, (approximately two months subsequent to the estimated original term of the Advance Agreement). The Amendment provides for WECCO to receive revenues from sales of AP of approximately $33 million, $28 million and $20 million during the fiscal years ending September 30, 1994, 1995 and 1996, respectively, excluding surcharge revenues received in 1994. The Amendment expires on September 30, 1996. Prior to the effective date of the Amendment, WECCO was indebted to Thiokol for approximately $10,208,000 under the Working Capital Agreement and Repayment Plan. Under the terms of the Amendment, WECCO paid $750,000 of this amount ratably as deliveries of AP were made over the remainder of the fiscal year ended September 30, 1994 . The remaining obligation under the Working Capital Agreement and Repayment Plan will be repaid by WECCO through delivery of AP. 6 The Company has estimated that the cost of producing such AP will be approximately $3.5 million and has included this amount in the current portion of long-term debt at September 30, 1995. Thiokol's obligations under the Advance Agreement, as amended, are contingent upon adequate funding by NASA. NASA and DOD have agreed to reimburse Thiokol and all other contractors for all amounts paid by them to purchase AP for which they are not otherwise reimbursed. The funding obligation of NASA is subject only to the adequacy of Congressional appropriations to NASA's overall budget. The Company believes that appropriated funds available to NASA at any time during the term of the Amendment will be sufficient to enable any such termination claim referred to above to be paid. Backlog As a result of the Amendment, the Company's backlog for planning purposes at September 30, 1995 was approximately $20,000,000 of AP sales in fiscal 1996. In October 1995, the Company received a purchase order for the delivery of AP from October 1996 through 1999 having a value in the range of $8 million to $10 million. This contract includes options that could increase the order during the 1997-1999 period, and that could extend the contract to the year 2000. AP Plant Financing To finance construction of its AP facility, WECCO entered into a Loan Agreement dated as of March 3, 1989, (the "Loan Agreement") with a bank ("Seafirst Bank"), under which WECCO borrowed $92,000,000. Such principal balance was payable quarterly over a seven-year term commencing June 1, 1990, together with interest at an annual rate of 13 1/2% (after giving effect to an interest rate swap agreement). The terms of the Loan Agreement provided for amortization in full over the seven-year loan term, although the Company expected that the loan would be fully paid sooner. (See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.) The WECCO loan was secured by liens on and security interests in all of the present and future assets of WECCO, whether tangible or intangible, real or personal. The WECCO loan was further secured by a pledge to Seafirst Bank by the parent company of WECCO of all of the outstanding stock of WECCO. The NASA/Thiokol Agreements were intended to ensure, through the commitments of Thiokol and NASA and by imposition of the surcharge, the repayment of all obligations of WECCO under the Loan Agreement. (See NASA/Thiokol Agreements.) The WECCO loan was prepaid on May 10, 1994. See Notes 7 and 12 of Notes to Consolidated Financial Statements and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Manufacturing Capacity and Process The WECCO facility, as it currently exists, is capable of producing 30,000,000 pounds of AP annually. The facility is expandable to enable production of up to 40,000,000 pounds annually. Production of AP commenced there in July 1989. In satisfaction of the sole condition to the NASA/Thiokol purchase commitments in respect of revenues for a total of 140,000,000 pounds of AP, on August 7, 1989 Thiokol completed testing of sample AP produced by WECCO and certified that all of the properties of such AP fell within the limits of the Space Shuttle AP specifications. 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. Since the qualification process was completed, AP produced at the WECCO facility has been used in numerous Space Shuttle launches. AP produced by the Company is also used in programs such as the Navy Standard Missile and Multiple Launch Rocket System programs. 7 WECCO'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 WECCO's customers, insurance carriers and governmental authorities. Equipment required in the manufacturing process includes storage tanks for use at various stages, electrolytic cells, glass-lined reactor vessels, crystallizer vessels, dryers and blenders. 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. The Company is a party to an agreement with Utah Power & Light Company for its electrical requirements at the WECCO facility. Prices paid by WECCO for raw materials have been relatively stable, with no discernible long-term price fluctuations. WECCO's agreement with Utah Power and Light provides for the supply of power for a minimum ten-year period, which began in 1988, and obligates WECCO to purchase minimum amounts of power, while assuring WECCO competitive pricing for its electricity needs for the duration of the agreement. WECCO's AP production requires substantial amounts of electric power. The AP manufacturing process is basically non-patentable. Certain of its aspects are proprietary to the Company and knowledge of these aspects is confined to a small number of personnel upon whose expertise the Company is dependent. The Company has entered into appropriate agreements with such personnel mandating non-disclosure and prohibiting competition with the Company, but there can be no assurance that such provisions will be enforceable in all events. In addition to the manufacture of perchlorate chemicals, the Company's business includes the design of, and the furnishing of technology and equipment for, electrochemical plants. The Company has previously provided such services and materials to two foreign plants and may provide these services and materials to others in the future, although the Company is not presently a party to arrangements to provide such services. Competition Kerr McGee Chemical Corporation ("Kerr-McGee") is the only other manufacturer of AP in the United States, and currently claims an annual capacity of approximately 36,000,000 pounds. Kerr-McGee has in the past produced more AP than the Company and has substantially greater financial resources. The Company has historically competed with Kerr-McGee primarily on the basis of availability of production capacity. The pricing and procurement practices of the principal AP customers that have been in effect for over 10 years have thus far been formulated to support more than one United States producer of AP. There is no assurance that this U.S. government derived dual source policy will continue after September 1996. These practices result in a negotiated price for the bulk of the Company's product based on settled margins above fully allocated costs. As described above, the Advance Agreement, as amended, effectively assures the Company a minimum level of revenues from the AP market over a period of about seven years, beginning in August, 1989 and ending in September, 1996. The Company maintains close communication with its principal customers and with the relevant governmental agencies for the purpose, among other things, of enabling management to assess on a continuing basis future product demand and customer satisfaction and to maintain the Company's market share. 8 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 automotive airbag safety systems. In addition, Dynamit Nobel is providing technical support for the design, construction and startup of the new facility. The new facility has been 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 6,000,000 pounds. Although the facility has not operated at design capacity, the Company believes such capacity can be achieved as demand for sodium azide increases. There can be no assurance in that regard, however, and as a consequence the Company cannot predict over what period of time, if at all, its sodium azide plant will operate at levels consistent with the above expectations. Dynamit Nobel is an established German firm engaged in the manufacture of explosives and detonators, specialty chemicals, defense technologies, ammunition, plastics and composites. It is the developer of the sodium metal- based process used in the manufacture of sodium azide, and has successfully utilized the process on a commercial basis for over 80 years, although on a much smaller scale than as practiced by the Company. Financing On February 21, 1992, the Company concluded a $40,000,000 financing for the design, construction and startup of the sodium azide facility through the sale of noncallable subordinated secured notes (the Azide Notes). The funds were provided by a major state public retirement fund and an investment management company. The Azide Notes provide for the semi-annual payment in arrears of interest at the rate of 11% per annum. Principal is to be amortized to the extent of $5,000,000 on each of the fourth through ninth anniversary dates of funding, with the remaining $10,000,000 principal amount to be repaid on the tenth anniversary date. The Azide Notes are secured by the fixed assets and stock of AAC, the stock of the Company's principal real estate development subsidiary, as well as by a deed of trust on certain land in Clark County, Nevada being developed by the Company (see Notes 5 and 7 of Notes to Consolidated Financial Statements). 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 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 terms of the Warrants permit their exercise by delivery to the Company for cancellation of a principal amount of the Azide Notes equivalent to the exercise price of the Warrants being exercised. 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 Indenture under which the Azide Notes were issued imposes various operating restrictions upon the Company, including restrictions on (i) the incurrence of debt; (ii) the declaration of dividends and the purchase and repurchase of stock; (iii) certain mergers and consolidations, and (iv) certain 9 dispositions of assets. Management believes the Company has complied with these operating restrictions. On each of December 31, 1995, 1997 and 1999, holders of the Warrants will have the right to put to the Company as much as one-third thereof at prices determined by the Company's fully diluted earnings per share and multiples of 13, 12 and 11 respectively, but the Company's obligation in such respect is limited to $5,000,000 on each of such dates and to $15,000,000 in the aggregate. Such put rights may not be exercised if the Company's Common Stock has traded at values during the preceding 90-day period that would yield to the warrant holders a 25% per annum internal rate of return to the date of the put (inclusive of the Azide Notes' yield). On or after December 31 of each of the years 1995 through 1999, the Company may call up to 10% of the Warrants (but no more than 50% in the aggregate) 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). 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 on one occasion, as well as certain incidental registration rights. Market A number of firms has devoted extensive efforts for at least 20 years in 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 is based principally upon sodium azide, combined in tablet or granule form with limited amounts of other materials. Therefore, virtually all commercially developed automotive airbag systems installed to date incorporate inflation technology based on the use of the sodium azide. Other inflator technologies, such as the hybrid or heated-gas inflator have recently been developed and appear to be achieving some level of market acceptance. (See Competition) The Company expects demand for airbag systems in North America and worldwide, to increase significantly over the next 10 years. Changes in the level of demand for sodium azide will depend in part, upon the penetration, if any, of competing inflator technologies that are not based upon the use of sodium azide. On December 18, 1991, former President George Bush signed the highway and mass transit bill, which included the Intermodal Surface Transportation Efficiency Act. As part the Act, dual airbags became mandated, rather than merely encouraged. As of September 1, 1997, new passenger cars sold in the U.S. must have two front seat airbags plus manual belts. In 1997, 95% of the new car population must meet this requirement. As of September 1, 1998, light trucks and vans with an unloaded vehicle weight of 5,500 pounds or less must meet these requirements. The Company believes that the primary factor now affecting demand for airbag systems is consumer preference rather than governmental and regulatory requirements. Automobile manufacturers have responded by announcing plans for general airbag system use in all passenger vehicles, and in light trucks and vans. The amount of sodium azide required for the driver and passenger side airbag inflators varies depending upon the size of the vehicle because the airbag must, when deployed, fill the space on the driver or the passenger side. In general, the amount of sodium azide used in each vehicle, with both a driver and passenger side airbag system installed, ranges from about 400 grams (0.88 pounds) to about 572 grams (1.26 pounds). In addition to the sodium azide that is actually contained in the inflators, the inflator manufacturers purchase additional amounts of sodium azide for testing and related purposes. 10 The Company previously 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 is 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 capacity expansions by existing producers, although the Company's information with respect to competitors' existing and planned capacity is limited. There can be no assurance that other manufacturing capacities not now known to the Company will not be established. By reason of this highly competitive market enviroment, there exists considerable pressure on the price of sodium azide. Customers The two major suppliers of airbag inflators in the United States are TRW and Morton. AAC has received notification that sodium azide produced at its Utah plant is qualified for use in most airbag inflator products of Morton and TRW. Although the Company does not expect to enter into long-term contracts with these suppliers, they have expressed their intent to purchase sodium azide from the AAC facility, provided such sodium azide continues to meet their qualification requirements and is priced competitively. The present selling price for sodium azide is in the range of $4.50 to $6.00 per pound. Development and Operation of Airbags In the 1960s, automotive airbag systems inflated by releasing nitrogen gas stored under very high pressure. This method entailed technical problems relating to the reliability of the module that housed such gas and the variation in nitrogen gas dynamics caused by the necessarily wide range of operating temperatures in which automobiles operate. Research and testing resulted in sodium azide-based propellant. This propellant eliminated the problems associated with high-pressure storage because sodium azide is stored in solid form and releases nitrogen gas only when ignited. In a frontal impact of sufficient severity, sensors in an airbag-equipped vehicle detect a sudden deceleration and fire a pyrotechnic device called an initiator. In the airbag system, the initiator ignites the sodium azide-based propellant, which is similar to solid propellants used in certain rocket engines. The gas generant or solid propellant includes a booster and a main propellant. The booster, which consists mainly of sodium azide, propagates the flame front, elevates the combustion pressure and transfers heat to the main propellant. The main propellant is also composed of sodium azide and an oxidant. As the propellant burns over a period of approximately 50 milliseconds, it produces nitrogen gas. The nitrogen gas passes through a filter, out through a nozzle and into a woven nylon bag, inflating the bag in less than one-tenth of a second. The airbag absorbs the crash energy by cushioning forward movement and then immediately deflates through exit holes in the airbag. Competition The Company believes that a Canadian facility is currently the sole competing producer of sodium azide in commercial quantities in North America. Dynamit Nobel in Germany, three producers in Japan and two producers in India also produce sodium azide. The Company believes that sodium azide demand in North America will not be adequately satisfied by imports from outside North America due to purchasers' requirements for frequent plant inspections, product quality verification and similar logistical problems, as well as costs of transportation. It is possible, however, that domestic or foreign entities will seek to develop sodium azide production facilities in North America. It is also possible that other inflator technologies, such as the hybrid or heated gas inflator, will achieve significant market share and consequently reduce demand for sodium azide. The Company's plans with respect to its sodium 11 azide project continue to be grounded in the Company's objective to become the major supplier to the North American airbag inflator market, although there can be no assurance given with respect thereto. Azide Agreements Under the Azide Agreements, Dynamit Nobel will 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. On February 21, 1992, the Company made a lump sum payment to Dynamit Nobel of $1,589,000 for the use of the process changes, developed by Dynamit Nobel for partial continuous production of sodium azide and the related engineering drawings and specifications. Halotron On August 30, 1991, the Company entered into an agreement (the "Halotron Agreement") with Jan Andersson and AB-Bejaro Product, granting the Company the option to acquire the exclusive worldwide rights to manufacture and sell Halotron. Halotron is a fire suppression system, including a series of chemical compounds and application technologies, designed to replace halons, chemicals presently in wide use as fire suppression agents in military, industrial, and commercial applications. This option was exercised in February 1992. Background The impetus for the invention of Halotron was provided by 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. A reduction in stratospheric ozone is believed to have the potential to result in long-term increases in skin cancer and cataracts, suppression of the human immune system and damage to crops and natural ecosystems. As a result of disclosures concerning the various halon compounds in use, the Montreal Protocol on Substances that Deplete the Ozone Layer, which became effective in 1989 and was strengthened in 1992, freezes at 1986 levels the production of halons and mandates a phase-out of the production of halons by December 31, 1993. To date, the Montreal Protocol has been adopted by 59 nations, including the United States. Some of its signatories, such as Germany and Sweden, have already banned the manufacture and general use of halons, and others, including the United States, are considering bans earlier than those contained in the Montreal Protocol. The United States Air Force has banned the purchase of controlled ozone layer depleting substances, including halons. The ban covers all Air Force, Air Force Reserve, Air National Guard and Air Force-related government owned contractor operated activities. Certain exemptions from the Air Force- related ban can be granted through a waiver process. Halotron Agreement The Halotron Agreement provides for disclosure to the Company of all confidential and proprietary information concerning Halotron I (see below), which, together with testing performed at independent laboratories in Sweden and the United States and consulting services that have been provided by its inventors, was intended to enable the Company to evaluate Halotron I's commercial utility and feasibility. In February 1992, the Company announced that a series of technical evaluations and field tests conducted at the University of New Mexico had been positive and equivalent to the performance previously reported in testing at the Swedish National Institute of Testing and Standards and 12 the University of Lund in Sweden. Additional testing is ongoing. On February 26, 1992, the Company acquired the rights provided for in the Halotron Agreement, gave notice to that effect to the inventors, and exercised its option. In addition to the exclusive license to manufacture and sell Halotron I, the rights acquired by the Company include rights under all present and future patents relating to Halotron 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 $700,000 (the exercise price of $1,000,000, less advance payments previously made) and became obligated to pay the further sum of $1,500,000 in monthly installments of $82,000, commencing in March 1992. The license agreement between the Company and the inventors of Halotron I provide for a royalty to the inventors of 5% of the Company's net sales of Halotron I over a period of 15 year (however, see below for a discussion of certain litigation that terminated the inventors' rights to royalties). In addition, the Company entered into employment and consulting agreements with Mr. Andersson and AB-Bejaro Product under which, among other things, Halotron II (see below) has been developed. Andersson and Bejaro breached the contract under which they had sold the rights to Halotron. This breach resulted in litigation initiated by AmPac Technologies, Inc. and Halotron, Inc., ( both wholly-owned subsidiaries of the Company). This initial litigation was settled when Andersson and Bejaro promised to perform faithfully their duties and to honor the terms of the contracts that, among other things, gave Halotron, Inc. exclusive rights to the Halotron chemicals and delivery systems. Following the settlement of the initial litigation, however, Andersson and Bejaro failed to perform the acts they had promised in order to secure dismissal of that litigation. As a result, litigation was initiated in the Utah state courts in March 1994, for the purpose of establishing Halotron, Inc.'s and AmPac Technologies, Inc.'s exclusive rights to the Halotron chemicals and delivery systems. On August 15, 1994, the court entered a default judgment ("Judgment") against Andersson and Bejaro granting the injunctive relief requested by Halotron, Inc. and AmPac Technologies, Inc. and awarding damages in the amount of $42,233,000. The trial court further ordered Andersson and Bejaro to execute documents required for patent registration of Halotron in various countries. When Andersson and Bejaro ignored this order, the Court directed the Clerk of the Court to execute these documents on behalf of Andersson and Bejaro. Finally, the Court ordered that Andersson's and Bejaro's rights to any future royalties from sales of Halotron were terminated. AmPac Technologies, Inc. and Halotron, Inc. are exploring ways to collect the Judgment from Andersson and Bejaro. It appears that Andersson and Bejaro have few assets and those assets they do have appear to have been placed beyond reach of the Judgment. 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 13 handling stations and repositories of literature and cultural heritage. Its worldwide production peaked in 1988 at 12,500 metric tons. Potential Customers The end-user market for halons and consequently, Halotron, 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 to the military that military specifications for the procurement of halon replacements include Halotron. 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. These industries have indicated a desire to accept the data generated in accordance with the military procurement evaluation programs and to consider carefully the recommendations and determinations made by the military. Other market segments include other business organizations and small users that typically follow selections made by the industry users described above. Halotron I, the first phase of Halotron, has been extensively and successfully tested. Application specific qualification testing is ongoing. Halotron I is designed to replace halons in streaming and in limited flooding applications. Halotron II, which has been designed and is presently being tested, is intended to replace halons in flooding applications. Succeeding Halotron phases, to be designed, are intended to supersede earlier Halotron phases, generally on an optimized application by application basis, and are intended to meet more strict environmental constraints expected to be applied in the future. The Company's efforts to produce, market and sell Halotron I and Halotron II 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. Market for Halotron In 1992, the Company commissioned a market study by Easton Consultants, Inc. ("Easton"). The Company was advised by Easton that the potential market for Halotron products is both domestic and international, with the potential international market significantly larger than the domestic. In 1990, worldwide production and consumption of halons was approximately 12,600 metric tons of streaming agent and approximately 9,000 metric tons of flooding agent, representing an overall decline from 1986 halon production levels of approximately 35%. This decline is primarily attributed to the imposition of regulations restricting or banning entirely the manufacture and use of halons. Future demand for halon replacements such as Halotron products is anticipated to be initially great as halon is replaced in existing applications. Thereafter, demand may decrease as sales may be limited to new applications, new installations and replacement of materials consumed in training, demonstrations and fire suppression. Further, demand may be negatively impacted by technological improvements in fire prevention and detection, changes in the cost, redundancy and survivability of equipment being protected and the anticipated reduction of activities by the military, a key user of fire suppression equipment. 14 In 1993, Halotron I was approved by the Environmental Protection Agency ("EPA") as a halon 1211 replacement agent in connection with the EPA's Significant New Alternatives Project program. During 1995 the Federal Aviation Administration ("FAA") approved Halotron I as an acceptable airport firefighting agent. The FAA concluded that Halotron I will suppress or extinguish fire in the same manner as halon. In addition, the Company, in concert with Buckeye Fire Equipment Company, has successfully completed Underwriters Laboratories (UL) fire tests for six sizes of portable fire extinguishers using Halotron I. Certain steps in the remaining UL testing program are scheduled to be completed shortly. In anticipation of final UL approvals, the Company and Buckeye recently signed an agreement that calls for the Company to supply Buckeye's requirements of Halotron I during calendar 1996. This agreement includes Buckeye's estimate of its requirements, which approximate sales of Halotron I of $2.2 million per calendar quarter, although actual requirements may be more or less than these estimates. Competition Potential halon alternatives and substitutes will compete as to performance characteristics, environmental effects and cost. Performance characteristics include throw ability, visibility after application, after-fire damage, equipment portability and versatility, low temperature performance, corrosion probability, shelf life and efficiency. The environmental effects include ODP (ozone depletion potential), GWP (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. Based upon Easton's survey of potential competitors in 1992 and the Company's current knowledge, no competitor has yet developed a halon alternative that meets the overall performance and environmental standards met by Halotron I in streaming and limited flooding applications, although there can be no assurance in this regard. However, the Company expects that there will be several competitive products in the same market as Halotron II. Halotron Facility The Company has designed and constructed a Halotron facility that has an annual capacity of at least 6,000,000 pounds, located on land owned by the Company in Iron Country, Utah. Under the Halotron Agreement, the Company received the technical support of the inventors for the design, construction and operation of the new facility. Real Estate Development The Company's two real estate development subsidiaries (collectively "AMDECO") own a 420-acre tract in Clark County, Nevada, and about 4,700 acres in Iron County, Utah. The Nevada tract, the site of the Gibson Business Park and the Company's Ventana Canyon joint venture residential project (see below), is located adjacent to the site of the May 1988 Incident. Its development was adversely affected by the May 1988 Incident, but the resumption of active marketing efforts has resulted in land sales. 15 AMDECO maintains close ties with the Nevada Development Authority, the regional agency primarily responsible for economic development and diversification in Southern Nevada. Local marketing is done through real estate professionals and through business and organizational ties. The Gibson Business Park competes with five to six other industrial parks in the Las Vegas Valley, some of which offer comparable sites and amenities. It also competes with industrial parks in the Phoenix, Reno and Salt Lake City areas. During fiscal 1993, AMDECO contributed approximately 240 acres of its Clark County development property to Gibson Ranch Limited Liability Company ("GRLLC"), the developers of Ventana Canyon, a master-planned community primarily residential in character. The development property contributed had a carrying value of approximately $12,300,000 at the date of contribution which was transferred to Real Estate Equity Investments. AMDECO's contribution is subject to its ability to obtain a release of a mortgage lien in favor of the holders of the Azide Notes. AMDECO's interest in GRLLC is assigned to secure the Azide Notes. An unrelated local real estate development group ("D") contributed an adjacent 80 acre parcel to GRLLC. GRLLC is developing the 320-acre parcel as primarily a residential real estate development. D is the managing member of GRLLC and will manage 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 AMDECO is equally represented. The profits and losses of GRLLC will be split equally between AMDECO and D after the return of advances and agreed upon values for initial contributions. See Note 5 of Notes to Consolidated Financial Statements for further information with respect to GRLLC. The 4,700 acre Utah site is primarily dedicated to the Company's growth and diversification. Environmental Protection Equipment The Company's subsidiary, PEPCON Systems, Inc. ("PSI") designs, manufactures and markets systems for the control of noxious odors, the disinfection of waste water streams and the treatment of sea water. 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. Sodium hypochlorite is generated on-site from salt brine or sea water by circulation through electrolytic cells. Once generated, it is utilized within a scrubber tower containing both a spray area and a packing section to maximize contact between the scrubbing solution and the contaminated air. Sodium hypochlorite reacts chemically with the two most common air stream contaminants, hydrogen sulfide and ammonia, to produce non-noxious gases, water and salts. The salts, a by-product of the process, are then used to produce additional sodium hypochlorite which is then used for further odor treatment. Advanced OdorMaster(TM) systems place two or three scrubber towers in series to treat complex odors, such as those 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. PSI's customers for its OdorMaster(TM) Systems 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. PSI competes both with companies that utilize other decontamination processes and those that utilize technology similar to PSI's. All are substantially larger than PSI. PSI's success to date is derived from the ability of 16 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. The market for this type of environmental protection equipment is estimated at several hundred million dollars annually and includes replacement as well as new sales. PSI's backlog at the end of the fiscal years ending September 30, 1995, 1994, and 1993 was $2,500,000 $1,000,000, and $2,000,000, respectively. Research and Development The Company's existing laboratory facilities are located on the premises of WECCO and are used to support WECCO's perchlorate production activities and to support its sodium azide and Halotron production activities. The Company conducts research and development programs directed towards enhancement of product quality and performance and the development of complementary or related products at these facilities. The Company's diversification efforts may create the need for an additional, centralized research and development facility that would be used to support not only perchlorate, sodium azide and Halotron production, but also any future business opportunities that may become available to the Company. Subject to improvement in its Halotron business, since phases of Halotron are still in the research and testing phase, and because Halotron may require a substantial research and development effort on an on-going basis, the Company may maintain a research and development facility for its Halotron operations. Insurance The Company's insurance currently includes property insurance at replacement value on all of its facilities and business interruption insurance. The Company also maintains 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 the types of insurance in the amounts it has sought. Government Regulation As a supplier to United States government projects, the Company is subject to audit and 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 Federal Acquisition Regulations ("FARS"). The Company's AP costs are 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. Environment In the operation of its chemical plants, the Company is subject to a number of environmental constraints relating to atmospheric emissions, industrial effluent and operating conditions. The Company has thus far met successfully all requirements imposed, and does not anticipate any adverse effects from existing or presently foreseeable statutes and regulations, although there can be no assurance in this regard, particularly since the Company's plants are subject to continued compliance with the changing requirements of federal and state occupational safety and health administration regulations. The costs of compliance with applicable requirements were a component of the AP and sodium azide plant financings. 17 The imposition of environmental constraints is a positive factor in the development of the Company's environmental protection activities. As environmental awareness continues to increase, the Company anticipates that these business activities will be enhanced. Although a number of states have adopted laws and regulations that place environmental controls and zoning restrictions on real estate, such regulations have not had a significant effect on the Company. The Company does not anticipate that its real estate development activities will be adversely affected by such regulations. The May 1988 Incident released certain materials in the area of the former AP plant. The Company has expended substantial amounts of time and effort on cleanup activities, and has filed final reports with state and federal environmental protection agencies. The Company has been notified that its reports have been accepted and that no further action will be taken by these agencies. Accordingly, management does not believe that the Company has any further material environmental liability resulting from the May 1988 Incident. Employees At September 30, 1995, the Company employed approximately 216 persons in executive, administrative, sales and manufacturing capacities. The Company considers relationships with its employees to be satisfactory. Item 2. Properties - - ------------------ The following table sets forth certain information regarding the Company's properties at September 30, 1995.
Approximate Area or Appproximate Location Principal Use Floor Space Status Annual Rent - - -------- ------------- ------------- ------ ------------- Iron County, UT WECCO Manufacturing 217 acres Owned __ Facility (1) Iron County, UT AAC Manufacturing 41 Acres Owned(3) __ Facility (2) Iron County, UT Halotron, Inc. 6,720 sq. ft. Owned __ Manufacturing Facility Las Vegas, NV Executive Offices: 22,262 sq. ft. Leased(4) $540,000 AMDECO, American Pacific Corporation, PSI
(1) This facility, used for the production of perchlorate products, 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. (2) This facility is used for the production of sodium azide and consists of approximately 34,600 sq. ft. of enclosed manufacturing and laboratory space. 18 (3) The AAC manufacturing facility and land upon which it is situated is subject to a deed of trust in favor of the holders of the Azide Notes. (4) 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 11 of Notes to Consolidated Financial Statements.) The Company's facilities are considered by it to be adequate for its present needs and suitable for their current use. For information with respect to properties owned by AMDECO see Item 1. Business -Real Estate Development. Substantially all land in Clark County, Nevada owned by AMDECO secure the Azide Notes and is subject to a mortgage and deed of trust in favor of the Azide Note holders. (See Notes 5 and 7 of Notes to Consolidated Financial Statements.) Item 3. Legal Proceedings - - ------------------------- The Company previously had a dispute with Thiokol with respect to the interpretation of the NASA/Thiokol Agreements. Certain shareholder lawsuits have been filed against the Company and certain of its directors and officers. On December 10, 1993, the Company was served with a complaint that alleges the Company is liable for approximately $5.9 million related to a guarantee executed in 1982. Certain litigation involving Halotron was initiated by the Company in 1994 and has been resolved. The information set forth in Note 11 of Notes to Consolidated Financial Statements describing the foregoing litigation 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. 19 PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters - - -------------------------------------------------------------------------------- The Company's Common Stock is traded in the over-the-counter market on NASDAQ/NMS under the symbol "APFC." The table below sets forth the high and low closing prices of the Common Stock on NASDAQ/NMS for the periods indicated.
NASDAQ/NMS (Closing Prices) High Low Fiscal Year 1995 - - ---------------- 1st Quarter 9 3/4 6 3/4 2nd Quarter 7 3/4 5 3/4 3rd Quarter 7 4 9/16 4th Quarter 6 1/2 4 3/4 Fiscal Year 1994 - - ---------------- 1st Quarter 15 3/4 11 1/4 2nd Quarter 16 3/4 13 3rd Quarter 16 1/4 14 4th Quarter 15 1/4 9
At December 1, 1995, there were approximately 1,755 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 certain borrowing agreements restrict the Company's ability to pay dividends. (See Note 7 of Notes to Consolidated Financial Statements.) 20 Item 6. Selected Financial Data - - -------------------------------- FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA FOR THE YEARS ENDED - - ----------------------------------------------------------------------------- SEPTEMBER 30, - - -------------
1995 1994 1993 1992 1991 -------------------------------------------------------------- ........(in thousands except per share amounts)........ STATEMENT OF OPERATIONS DATA: Surcharge revenues $ 8,913 $ 19,774 $ 24,127 $ 25,094 Total sales and operating revenues $ 39,250 51,193 57,215 63,075 61,645 Cost of sales 29,861 26,317 24,612 28,125 29,282 Gross profit 9,389 24,876 32,603 34,950 32,363 Operating expenses and research and development 11,436 12,522 11,931 10,390 8,160 Litigation settlement 8,135 Impairment charge 39,401 Operating income (loss) (2,047) (27,047) 20,672 16,425 24,203 Interest and other income 1,429 1,088 2,928 3,435 2,307 Interest and other expense 1,709 3,315 7,796 11,834 12,138 Income (loss) before provision (credit) for income taxes (2,327) (29,274) 15,804 8,026 14,372 Provision (credit) for income taxes (791) (9,937) 5,369 2,608 5,401 Net income (loss) (1,536) (19,337) 10,435 5,418 8,971 Net income (loss) per common share (1) $ (.19) $ (2.38) $ 1.26 $ .71 $ 1.59 BALANCE SHEET DATA: Cash and cash equivalents and short-term investments $ 26,540 $ 24,884 $ 20,782 $ 70,929 $ 9,348 Restricted cash 3,743 1,584 37,218 35,232 28,007 Inventories and accounts and notes receivable 13,086 14,630 17,694 7,782 9,408 Restricted receivables 132 1,318 Property, plant and equipment - net 80,944 81,606 122,346 84,092 68,917 Development property 10,296 11,525 12,717 23,495 22,795 Real estate equity investments 17,725 14,526 12,979 618 621 Total assets 157,789 154,922 231,138 231,089 147,135 Working capital 26,440 34,383 28,109 73,225 9,595 Notes payable and current portion of long-term debt 8,500 504 43,504 14,661 19,581 Long-term debt 34,054 42,176 46,177 88,597 61,342 Shareholders' equity 94,251 95,846 114,253 102,975 43,818
1) Per share amounts are based on the weighted average number of shares of Common Stock outstanding considering the dilutive effect of stock options and warrants. 2) The independent auditors' report for 1995, 1994, 1993 and 1991 each included an explanatory paragraph discussing uncertainties. 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results - - ------------------------------------------------------------------------------- of Operations - - ------------- Results of Operations Sales and Operating Revenues Sales and operating revenues were $39,250,000 in fiscal 1995 compared to $51,193,000 in fiscal 1994. The decrease is primarily due to a decrease in the surcharge and a decrease in AP revenues associated with an amendment to the 1989 Advance Agreement (see below). Such decrease was partially offset by an increase in sodium azide and real estate sales. Sales and operating revenues were $51,193,000 in 1994 compared to $57,215,000 in 1993. The decrease is principally due to a decrease in the surcharge related to AP sales (see below). The decrease was partially offset by the commencement of commercial sales of sodium azide. The Company's perchlorate chemicals operations accounted for approximately 75%, 86% and 94% of revenues during the fiscal years ended September 30, 1995, 1994 and 1993, respectively. There were no significant sales of Halotron during these periods. Gross profit as a percentage of sales and operating revenues was 24 percent during fiscal 1995 compared to 49 percent during fiscal 1994. The significant decrease in gross profit percentage is due to a number of factors. As discussed below, the Surcharge was eliminated from AP pricing. In addition, depreciation expense associated with AP plant assets was substantially lower in 1995 as a result of the impairment charge in fiscal 1994 discussed below. The elimination of Surcharge revenues, partially offset by the reduction in depreciation expense, contributed significantly to the reduction in gross profit percentage. The results of sodium azide operations in fiscal 1995 also added to the reduction in comparable gross profit percentages. The level of sodium azide sales during the fiscal year ended September 30, 1995 was not sufficient to absorb operational (fixed and variable) costs associated with the production of sodium azide at relatively low amounts in comparison to the productive capacity of the plant. The Company expects gross profit percentages to improve as sodium azide sales increase, although there can be no assurance in that regard since any improvement will be dependent upon, among other things, the pricing of sodium azide (see below) and the level of customers' orders and plant utilization. Perchlorate Chemical Operations As part of the NASA/Thiokol agreements, WECCO entered into a Surcharge Agreement with Thiokol pursuant to which a surcharge was imposed on all purchases of AP by Thiokol and others. The Surcharge Agreement required Thiokol to place sufficient AP orders which, when combined with WECCO's other AP sales, would assure WECCO revenues in respect of not less than 5,000,000 pounds of AP per quarter, 20,000,000 per year and 140,000,000 in the aggregate over a seven- year period. (See below and Note 12 of Notes to Consolidated Financial Statements for a discussion of an amendment to the Advance Agreement that, in May 1994, terminated the Surcharge Agreement and certain other agreements.) All surcharge payments were deposited into a cash collateral account and $.05 per pound of the AP base price payments was deposited into a default account under the WECCO loan. The Surcharge Agreement was approved and consented to by NASA. NASA and Thiokol entered into separate agreements regarding Thiokol's obligations for AP orders under the Surcharge Agreement. 22 Surcharge revenues were $8,913,000 and $19,774,000 during the fiscal years ended September 30, 1994 and 1993, respectively. The minimum surcharge required to amortize indebtedness decreased by approximately $.025 per pound each successive quarter until the WECCO loan was amortized, as a result of the reduction in interest payable on the declining balance of the WECCO loan. The net difference between surcharge revenues, and depreciation and amortization and interest expense related to the AP manufacturing facility was approximately $863,000 and $2,800,000 during the fiscal years ended September 30, 1994 and 1993, respectively. On an annualized basis, orders for 20,000,000 pounds of AP were not received during the period March 1, 1992 through September 30, 1993. However, the selling price of AP was increased to cover all costs of production and return the same profit which would have resulted from the sale of 20,000,000 pounds on an annualized basis. In January 1994, WECCO concluded negotiations with Thiokol relating to the revenue requirement for the period March 1, 1993 through September 30, 1993. WECCO and Thiokol agreed that the amount due for this period, in excess of amounts previously paid, was approximately $7.6 million. This amount included $5.5 million relating to the order quarter ended August 31, 1993. The Company recognized the difference between the $7.6 million and the $5.5 million as revenues in the first quarter of its fiscal year ended September 30, 1994, since such difference applied to the third order quarter ended November 30, 1993. WECCO collected the $7.6 million during the fiscal year ended September 30, 1994. As discussed in Note 11 of Notes to Consolidated Financial Statements, in December 1992, Thiokol issued a Request for Quotation, inviting WECCO to submit a proposal for the sale of NASA-related AP over a period extending through mid- 1998, approximately three years after the expiration of the NASA/Thiokol agreements. To enable WECCO to submit a proposal which did not prejudice the NASA/Thiokol agreements, Thiokol and WECCO signed an agreement to the effect that WECCO and Thiokol would deal with the Request for Quotation and WECCO's responsive proposal without reference to the NASA/Thiokol agreements or any effects thereon, but WECCO reserved its rights under the NASA/Thiokol agreements. At the time it submitted its proposal, WECCO also offered to negotiate a termination of the NASA/Thiokol agreements, subject to the consent and approval of NASA and Seafirst Bank. At a meeting on June 11, 1993, Thiokol advised WECCO that it had commenced a legal action against WECCO in Weber County (Ogden) Utah, seeking declaratory relief to the effect that once the principal and interest balance owing by WECCO to Seafirst Bank was fully paid, Thiokol would have no further obligation to purchase AP from WECCO under the NASA/Thiokol agreements, and to the effect that there existed an alleged agreement among NASA, Thiokol, WECCO and Seafirst Bank to prepay the WECCO loan on or about October 1, 1993. Thiokol also advised WECCO that it intended to proceed with the declaratory relief action only if negotiations underway between the parties were not concluded in a manner satisfactory to Thiokol. On July 8, 1993, Thiokol dismissed, without prejudice, its declaratory relief lawsuit against WECCO. A dismissal "without prejudice" operates as a dismissal of the lawsuit, but does not prevent its re-filing at a later date, nor does it constitute a final resolution of the dispute. On May 10, 1994, WECCO and Thiokol executed the Amendment. The Amendment fully resolved all issues between Thiokol and WECCO relating to the interpretation of the NASA/Thiokol agreements. Thiokol separately agreed not to refile its declaratory relief lawsuit. (See Note 12 of Notes to Consolidated Financial Statements.) 23 Under and because of the resolution of its dispute with Thiokol completed by the Amendment, WECCO exercised the contractual right reserved solely to it in the WECCO loan agreement to direct that the funds in the cash collateral account and default account be used to repay the WECCO loan. On May 10, 1994, such prepayment was completed. Upon repayment in full of the WECCO loan, the Amendment provided for the termination as fulfilled of the Surcharge Agreement, the Working Capital Agreement and the Repayment Plan. The Amendment confirmed that the 1989 Advance Agreement had a continuous term commencing with the first production of AP at the WECCO plant in August 1989 and ending September 30, 1996, (approximately two months subsequent to the estimated original term of the Advance Agreement). The Amendment provides for WECCO to receive revenues, excluding surcharge revenue, from sales of AP of approximately $33 million, $28 million and $20 million during the fiscal years ending September 30, 1994, 1995 and 1996, respectively. Total perchlorate chemical sales (including surcharge revenues) were $29,300,000, $44,100,000 and $53,800,000 during the fiscal years ended September 30, 1995, 1994 and 1993, respectively. Prior to the effective date of the Amendment, WECCO was indebted to Thiokol for approximately $10,208,000 under the Working Capital Agreement and Repayment Plan. Under the terms of the Amendment, WECCO paid $750,000 of this amount ratably as deliveries of AP were made over the remainder of the fiscal year ended September 30, 1994 . The remaining obligation under the Working Capital Agreement and Repayment Plan will be repaid by WECCO through delivery of AP. The Company has estimated that the cost of producing such AP will be approximately $3.5 million and has included this amount in debt at September 30, 1995. The Company believes that the Amendment represents a fully satisfactory commercial resolution of its dispute with Thiokol. AP revenues under the Amendment have resulted in net cash flows to WECCO from AP operations during the fiscal years ended September 30, 1995 and 1994, substantially the same as those that would have been generated under the NASA/Thiokol agreements absent the Amendment. The Company expects similar results for the fiscal year ending September 30, 1996. As the Company has previously reported, however, certain changes in revenues and cash flows, which would have also been present under the NASA/Thiokol agreements absent the Amendment, have occurred with the cessation of surcharge receipts. (See Note 12 of Notes to Consolidated Financial Statements for a discussion of such charges.) In 1988-89, the government indicated that the yearly demand for AP was approximately 60 million pounds. Since then, there has been a considerable decline in AP demand. As discussed in Note 13 of Notes to Consolidated Financial Statements, the Company recognized a non-recurring impairment charge of $39,401,000 relating to the WECCO fixed assets as of March 31, 1994. Such charge resulted from the effects of the change in the AP market. Operating income, net income and earnings per share, before the non-recurring fixed asset impairment charge of $39,401,000, were $12,354,000, $6,640,000 and $.82, respectively, during the fiscal year ended September 30, 1994. Sodium Azide Operations Sodium azide sales (net of a five percent royalty) were $4,640,000 during fiscal 1995. Commercial shipments of sodium azide began in April, 1994. Sodium azide sales were approximately $3,378,000 during the six-month period ended September 30, 1994. The Company's plans with respect to its sodium azide project continue to be grounded in the Company's objective of becoming the primary 24 supplier to the U.S. airbag inflator market. The volume of shipments during the months of October and November 1995, equate to an annual sales level of approximately $15 million. The Company believes that the level of sodium azide sales will continue to increase. There can be no assurance in that regard however, and, as a consequence, the Company cannot predict over what period of time, if at all, such increases in sales levels will occur. In addition, by reason of a highly competitive market environment there appears to be considerable market pressure on the price of sodium azide. At the time the Company began this project, prices for sodium azide were approximately $8.00 per pound. Prices currently appear to be in the range of $4.50 to $6.00 per pound. Depreciation expense increased in the third quarter of fiscal 1995 as the sodium azide facility completed its transition from construction to production activities. On an annualized basis, cost of sales associated with sodium azide activities increased by approximately $3 million beginning April 1, 1995 as a result of this increase in depreciation expense. The Company expects depreciation expense related to sodium azide production to approximate $6 million in fiscal 1996. Real Estate Operations The Company's real estate development properties consist of approximately 4,700 acres in Iron County, Utah near Cedar City, Utah and a 420-acre tract (Gibson Business Park) in Clark County, Nevada. All development property is held in fee simple. Substantially all of the Gibson Business Park land is pledged as collateral for certain debt (the "Azide Notes"). The Company is actively marketing its Nevada property for sale and development. About 240 acres of its Clark County land has been transferred to a limited liability corporation for the purpose of residential development, construction, and sale. (See Notes 5 and 7 to Consolidated Financial Statements.) The Iron County site is primarily dedicated to the Company's growth and diversification. Real estate and related sales amounted to $3,375,000, $558,000 and $26,000 during the fiscal year ended September 30, 1995, 1994 and 1993, 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. Environmental Protection Equipment Operations Environmental protection equipment sales were approximately $1,656,000, $2,934,000 and $3,437,000 during the fiscal years ended September 30, 1995, 1994 and 1993, respectively. The Company is continuing its evaluation of future operating activities in this business segment. Effective December 31, 1994, the Company laid off the work force associated with assembly activities (approximately four hourly employees) and terminated the assembly facility lease (saving $67,000 in annual operating rents). Operating activities in this segment are now being conducted at the Company's Iron County facility. As of November 30, 1995, this segment had a backlog of approximately $2,500,000. In addition, the Company has recently submitted a number of bids, although there can be no assurance that any of these bids will result in future orders. Operating Expense Operating (selling, general and administrative) expenses were $11,006,000 $12,364,000 and $11,657,000 during the fiscal years ended September 30, 1995, 1994 and 1993, respectively. The decrease in fiscal 1995 is primarily due to the Company's implementation of cost control, containment and reduction measures. As discussed below, the Company's objective is to achieve annualized cost 25 reductions, in comparison to fiscal 1994, of $4,000,000 by fiscal year end. (Not all of such reductions, however, will be in the operating expense category.) During the third quarter of fiscal 1995, the Company reduced total full- time employee equivalents by approximately ten percent through involuntary terminations and an offering of enhanced retirement benefits to a certain class of employees. The Company recognized a charge to operating expense of approximately $226,000 as a result of these terminations and the acceptance of the offer of enhanced retirement benefits by certain employees. Research and Development The Company incurred approximately $204,000, $158,000 and $274,000 in research and development costs related to its specialty chemicals segment in 1995, 1994 and 1993, respectively. The Company's level of research and development will be dependent upon the progress and growth of its new products. Interest and Other Income The decrease in interest and other income in 1994 compared to 1993 is primarily a result of the use of proceeds from the issuance of the Azide Notes for construction of the sodium azide facility, use of the proceeds from an April 1992 equity offering for capital expenditures (principally the sodium azide and Halotron facilities) and working capital purposes, and WECCO's election to use the funds in the cash collateral and default accounts to repay the WECCO loan. The increase in interest income in fiscal 1995 is principally due to the higher average cash and cash equivalents balances. Interest and Other Expense Interest and other expense was $1,709,000, $3,315,000 and $7,796,000 during the fiscal years ended September 30, 1995, 1994 and 1993, respectively. The decreases are primarily a result of WECCO's election to use the funds in the cash collateral and default accounts to repay the WECCO loan. However, interest expense increased during the third quarter of fiscal 1995 compared to the third quarter of fiscal 1994 as a result of the cessation of interest capitalization on the sodium azide facility. Such quarter to quarter comparative increase will continue through the second quarter of fiscal 1996. Provisions for Income Taxes The Company's effective income tax rates were approximately 34% during the fiscal years ended September 30, 1995, 1994, and 1993, respectively. Net Income (Loss) Per Common Share and Operating Results Although the Company's net income (loss) and primary and fully 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) order quarters under the NASA/Thiokol agreements did not coincide with the Company's fiscal quarters; (ii) as discussed in Note 11, the Company may incur material legal and other costs associated with certain litigation; (iii) the timing of real estate and related sales is not predictable; (iv) the recognition of revenues from environmental protection equipment orders not accounted for as 26 long-term contracts depends upon the timing of shipment of the equipment; (v) weighted average common and common equivalent shares for purposes of calculating primary and fully 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; (vi) interest expense (net of amounts capitalized) and depreciation expense increased significantly in the third quarter of fiscal 1995 as the sodium azide facility completed its transition from construction to production activities; and (vii) certain changes (including the cessation of surcharge revenues) described in Note 12 in the Company's AP business have occurred and will occur as a result of the Amendment to the 1989 Advance Agreement and the eventual expiration thereof in September, 1996. The Company's efforts to produce, market and sell Halotron I and Halotron II are dependent upon the political climate and environmental regulations that exist and may vary from country to country. Halotron I has been extensively and successfully tested. These products continue to undergo testing. Although the Company is satisfied with the progress and performance characteristics of Halotron I and Halotron II, the magnitude of orders received, if any, in the future 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 and the ultimate extent of market acceptance. As a result of the uncertainties with respect to volume and price of sodium azide referred to above, the Company may experience significant variations in sodium azide sales and related operating results from quarter to quarter. The Company continues to believe, however, that, notwithstanding these uncertainties, revenues and associated cash flows from its sodium azide operations will be sufficient to recover the Company's investment in its sodium azide facility, although there can be no assurance in that regard. Litigation Following the announcement of Thiokol's lawsuit against WECCO described above, and the consequent decline in the trading prices of the Company's common stock, three shareholder lawsuits, purporting to be class actions, were filed in the United States District Court for the District of Nevada against the Company and certain of its directors and officers. The complaints, which have since been consolidated, allege that the Company's public statements violated federal securities laws by inadequately disclosing information concerning its agreements with Thiokol and the Company's operations. The Company believes that the allegations of the consolidated complaint are without merit and the Company and other defendants are vigorously defending the lawsuits. (See Note 11 of Notes to Consolidated Financial Statements.) 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, 1995. The Company does not expect inflation to have a material effect on gross profit in the future, because any increases in production costs should be recovered through increases in product prices, although there can be no assurance in that regard. Liquidity and Capital Resources On July 29, 1994, the Board of Directors of the Company authorized the repurchase of up to 1.5 million shares of the Company's common stock through open market purchases and private transactions. 27 Such authorization was briefly suspended. As of November 30, 1995, the Company had repurchased approximately 116,000 shares through this program. Management of the Company has implemented cost reduction measures which are consistent with maintaining the highest level of product quality and service for customers. The Company has a current objective of achieving annualized cost savings, in comparison to fiscal 1994, of approximately $4,000,000 as a result of these activities. The Company finalized and implemented certain cost reduction measures, focused principally upon staff reductions, in the third quarter of fiscal 1995 (see above). As a result of the above described shareholder lawsuits, the Company may incur material legal and other costs associated with the resolution of this matter in future periods. Certain of these costs may be reimbursable under policies providing for insurance coverage. The Company has adopted certain policies in its Charter and Bylaws as a result of which the Company may be required to indemnify its affected officers and directors to the extent, if at all, that existing insurance coverages are insufficient. The Company's insurance carriers have reserved the right to exclude or disclaim coverage under certain circumstances. The Company is currently unable to predict or quantify the amount or range of such costs, if any, or the period of time that such costs will be incurred. No specific amount of damages has been claimed in the shareholder lawsuits, which involves extensive discovery, and the ultimate resolution of multiple legal and factual issues. Accordingly, a reliable estimate of the amount of potential damages, if any, to the Company cannot be made at the present time. The Company has in force substantial insurance covering this risk. However, as indicated above, defense costs and any potential settlement or judgment costs associated with this litigation, to the extent borne by the Company and not recovered through insurance, would adversely affect the Company's liquidity. (See Note 11 of Notes to Consolidated Financial Statements.) Cash flows provided by operating activities were $10,366,000 during fiscal 1995 compared to $62,806,000 during fiscal 1994. Approximately $8,913,000 of cash flows provided by operating activities in fiscal 1994 related to Surcharge revenues. As discussed above, the collection of Surcharge receipts ceased effective March 31, 1994. During the third fiscal quarter of 1994, the WECCO loan was repaid which also increased operating cash as a result of the balances in the cash collateral and default accounts being immediately available to repay principal as opposed to being restricted for WECCO loan collateral purposes. In addition, cash flows from operating activities were significantly less in fiscal 1995 due to the results of sodium azide operations as discussed above. 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. However, the satisfactory resolution of the shareholder lawsuits, the timing, pricing and magnitude of the receipt of orders for its new products, sodium azide and Halotron, and the Company's ability to achieve cost reductions may have an effect on the use and availability of cash. As discussed above, on May 10, 1994, WECCO elected to use the funds in the cash collateral and default accounts to repay the WECCO loan. In February 1992, the Company concluded a $40,000,000 financing for the design, construction and start-up of a sodium azide facility. As a result of the Company's decision to increase the production capacity of the plant and construction cost overruns, the Company's cost estimates for the sodium azide facility increased significantly during the construction process. The majority of the increase relates to the Company's decision to increase the productive capacity of the plant, as discussed above. In addition, certain estimates increased throughout the construction process as a result of the highly automated and 28 technical nature of the operation and the difficulty in assigning cost estimates to such an operation. Design and construction also occurred over a longer period of time than was originally estimated, which increased actual expenditures. Although production and sales have recently increased, the facility has not been operated at significant production levels in comparison to capacity and greater- than-expected capital costs have been and may continue to be incurred. Subject to the ongoing receipt and magnitude of orders for sodium azide and the avoidance of further erosion of the selling price per pound of sodium azide, the Company believes that the increased costs associated with the sodium azide facility will be recovered through future sodium azide sales, although there can be no assurance in this regard. In February 1992, the Company exercised an option to acquire the worldwide rights, including the development, manufacture and market applications, to Halotron I. Halotron products are intended to replace halons, which have been found to be ozone depleting chemicals. The Company may also engage in operations to acquire, reclaim, store and distribute halons. The option required the Company to pay $1,000,000 upon exercise, plus an additional $1,500,000, all of which has been paid. Amounts paid toward the exercise price of the option, and for testing and evaluation of Halotron I through December 31, 1991, were included in selling, general and administrative expenses since there was no assurance that the option would be exercised. Amounts paid for technology and other rights related to Halotron I after December 31, 1991 have been capitalized as intangible assets and are being amortized. Periodic costs associated with both Halotron I and Halotron II continue to be expensed as incurred. Item 8. Financial Statements and Supplementary Data - - --------------------------------------------------- Financial statements called for hereunder are included herein on the following pages:
Page(s) ------- Independent Auditors' Report 39 Consolidated Balance Sheets 40 Consolidated Statements of Operations 41 Consolidated Statements of Cash Flows 42 Consolidated Statements of Changes in Shareholders' Equity 43 Notes to Consolidated Financial Statements 44 - 64
29 Summarized Quarterly Financial Data (Unaudited) (amounts in thousands except per share amounts)
Quarters For Fiscal Year 1995 1st 2nd 3rd 4th Total Sales and Operating Revenues $ 9,309 $ 8,908 $ 8,179 $ 12,854 $ 39,250 Gross Profit 1,573 2,188 1,953 3,675 9,389 Net Income (Loss) (480) (164) (998) 106 (1,536) Net Income (Loss) Per Common Share $ (.06) $ (.02) $ (.12) $ .01 $ (.19) Quarters For Fiscal Year 1994 1st 2nd 3rd 4th Total Sales and Operating Revenues $ 14,374 $ 16,351 $ 10,335 $ 10,133 $ 51,193 Gross Profit 9,189 9,462 3,817 2,408 24,876 Impairment Charge 39,401 39,401 Net Income (Loss) 3,178 (22,763) 725 (477) (19,337) Net Income (Loss) Per Common Share $ .39 $ (2.69) $ .09 $ (.06) $ (2.38)
Item 9. Changes in and Disagreements with Accountants on Accounting and - - ----------------------------------------------------------------------- Financial Disclosure - - -------------------- Not Applicable. 30 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 1996 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than January 29, 1996. Item 11. Executive Compensation - - ------------------------------- The required information regarding executive compensation is incorporated herein by reference from the Company's definitive proxy statement for its 1996 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than January 29, 1996. 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 1996 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than January 29, 1996. 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 1996 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than January 29, 1996. 31 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - - ------------------------------------------------------------------------- (a) (1) Financial Statements -------------------- See Part II, Item 8 for index to 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): 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 "Form S-14"). 3.2 Registrant's By-Laws, incorporated by reference to Exhibit 3B to the Form S-14. 3.3 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 "Form S-3"). 3.4 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 Form S-3. 10.1 Term Loan Agreement between the Registrant and Security Pacific National Bank, N.A., dated as of March 3, 1989, incorporated by reference to Exhibit 10(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1989 (the "1989 10-K"). 10.2 Advance Agreement between the Registrant and Morton-Thiokol, Inc. dated as of March 3, 1989 (the "Advance Agreement"), incorporated by reference to Exhibit 10(b) to the 1989 10-K. 10.3 Amendments dated August 31, 1989 and June 27, 1990 to the Advance Agreement, incorporated by reference to Exhibit 10.3 of Registrant's Registration Statement on Form S-2 (File No. 33- 36664) (the "1990 S-2"). 10.4 Amendment dated May 10, 1994 to the Advance Agreement, incorporated by reference to Exhibit 19 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994. 32 10.5 Amendment dated August 30, 1994 to the Advance Agreement, incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (the "1994 10-K"). 10.6 Surcharge Agreement between the Registrant and Morton-Thiokol, Inc. dated as of March 3, 1989, incorporated by reference to Exhibit 10(c) to the 1989 10-K. 10.7 Amendment of Solicitation/Modification of Contract dated March 24, 1989 between National Aeronautics and Space Administration and Morton-Thiokol, Inc., incorporated by reference to Exhibit 10(d) to the 1989 10-K. 10.8 National Aeronautics and Space Administration Determination and Findings dated March 28, 1989, incorporated by reference to Exhibit 10(e) to the 1989 10-K. 10.9 Memorandum of Agreement dated April 19, 1989 between the Department of Defense and the National Aeronautics and Space Administration, incorporated by reference to Exhibit 10(f) to the 1989 10-K. 10.10 Incentive Stock Option Plan for Key Employees 1982, incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1990 (the "1990 10-K"). 10.11 First Amendment to American Pacific Corporation Incentive Stock Option Plan for Key Employees -1982, incorporated by reference to Registrant's Definitive Proxy Statement dated January 27, 1989 (the "1989 Proxy"). 10.12 American Pacific Corporation 1988 Nonqualified Stock Option Plan and 1988 Incentive Stock Option Plan, incorporated by reference to the 1989 Proxy. 10.13 First Amendment to American Pacific Corporation 1988 Nonqualified Stock Option Plan, incorporated by reference to Exhibit 10.11 to the 1990 S-2. 10.14 Nonqualified Stock Option Agreement between the Registrant and David N. Keys dated July 1, 1989, incorporated by reference to Appendix E to Registrant's Registration Statement on Form S-8 (File No. 33-30321). 10.15 Employment Agreement between Registrant, Pacific Engineering & Production Co. of Nevada, and AmPac Development Company, and C. Keith Rooker, and Retainer Agreement between Mr. Rooker and Registrant, Pacific Engineering & Production Co. of Nevada, and AmPac Development Company executed on July 15, 1987, as of June 1, 1986, incorporated by reference to Exhibit 10(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988. 10.16 Employment Agreement dated as of March 3, 1989 between Western Electrochemical Company and Fred D. Gibson, Jr., incorporated by reference to Exhibit 10(o) to the 1989 10-K. 33 10.17 Employment Agreement dated as of March 3, 1989 between Western Electrochemical Company and James J. Peveler, incorporated by reference to Exhibit 10(p) to the 1989 10-K. 10.18 Employment Agreement dated as of September 9, 1985 between American Pacific Corporation and Fred D. Gibson, Jr., incorporated by reference to Exhibit 10.20 to the 1990 S-2. 10.19 Employment agreement dated November 7, 1994 between the Registrant and David N. Keys, incorporated by reference to Exhibit 10.22 of the 1994 10-K. 10.20 Form of American Pacific Corporation Defined Benefit Pension Plan, incorporated by reference to Exhibit 10.21 to the 1990 S-2. 10.21 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. 10.22 Limited Partnership Agreement of 3770 Hughes Parkway Associates, Limited Partnership, incorporated by reference to Exhibit 10.23 to the 1990 S-2. 10.23 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. 10.24 Amended and Restated Stock Option Agreement between the Registrant and David N. Keys dated November 12, 1990, effective October 30, 1990, incorporated by reference to Exhibit 19 to the Registrant's quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1990. 10.25 American Pacific Corporation 1991 Nonqualified Stock Option Plan, incorporated by to Exhibit 10.26 to the 1990 S-2. 10.26 Indenture dated February 21, 1992, between the Registrant and American Azide Corporation, a Nevada corporation, and Security Pacific National Bank, Trustee, relating to the Registrant's outstanding 11% Subordinated Secured Term Notes, incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated February 28, 1992 (the "Form 8-K"). 10.27 Form of Subordinated Secured Term Note dated February 21, 1992, made by Registrant Incorporated by reference to Exhibit 10.2 to the Form 8-K. 10.28 Form of Note and Warrants Purchase Agreement dated February 21, 1992, relating to the Registrant's Subordinated Secured Term Notes, incorporated by reference to Exhibit 10.3 to the Form 8-K. 10.29 Form of Warrant to purchase Common Stock of the Registrant dated February 21, 1992, incorporated by reference to Exhibit 10.4 to the Form 8-K. 34 10.30 Form of Warrant to purchase Common Stock of American Azide Corporation dated February 21, 1992, incorporated by reference to Exhibit 10.5 to the Form 8-K. 10.31 Stock Option Agreement between American Pacific Corporation and Joseph W. Cuzzupoli dated January 30, 1992, incorporated by reference to Exhibit 4.6 of Registrant's Registration Statement on Form S-8 (File No. 33-52898). 10.32 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"). 10.33 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. *10.34 American Pacific Corporation 1994 Directors' Stock Option Plan. *10.35 Stock Option Agreement between American Pacific Corporation and General Technical Services, Inc. dated July 11, 1995. *22 Subsidiaries of the Registrant. *23 Consent of Deloitte & Touche LLP. *24 Power of Attorney, included on Page 36. *27 Financial Data Schedule (filed electronically) * Filed herewith. (b) Reports on Form 8-K. None. 35 POWER OF ATTORNEY ----------------- American Pacific Corporation and each of the undersigned do hereby appoint C. Keith Rooker and David N. Keys and each of them severally, its or his true and lawful attorneys 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. 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 22, 1995 AMERICAN PACIFIC CORPORATION (Registrant) By: C. Keith Rooker Executive Vice President and General Counsel By: David N. Keys Vice President, Chief Financial Officer and Treasurer, Principal Financial and Accounting Officer 36 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. Date: December 22, 1995 Fred D. Gibson, Jr. President and Chief Executive Officer, and Director Date: December 22, 1995 C. Keith Rooker Executive Vice President, and Director Date: December 22, 1995 John R. Gibson Vice President, and Director Date: December 22, 1995 Norval F. Pohl, Ph.D. Director Date: December 22, 1995 - - ------------------------------------ Thomas A. Turner Director Date: December 22, 1995 T. L. War Director Date: December 22, 1995 David N. Keys Vice President, Chief Financial Officer, and Treasurer; Principal Financial and Accounting Officer Date: December 22, 1995 Berlyn D. Miller Director 37 Date: December 22, 1995 Jane L. Williams Director Date: December 22, 1995 Charles H. Feltz Director Date: December 22, 1995 Victor M. Rosenzweig Director 38 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, 1995 and 1994, 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, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Las Vegas, Nevada November 27, 1995 39 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1995 AND 1994 =============================================================================================================================
Notes 1995 1994 --------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents 1,7 $ 24,540,000 $ 22,884,000 Short-term investments 1 2,000,000 2,000,000 Accounts and notes receivable 1 2,534,000 8,005,000 Income tax receivable 8 2,570,000 Related party notes receivable 1 888,000 942,000 Inventories 1,2 7,094,000 5,683,000 Prepaid expenses and other assets 986,000 1,062,000 ---------------------------------- Total current assets 40,612,000 40,576,000 PROPERTY, PLANT AND EQUIPMENT, NET 1,4,7,13,16 80,944,000 81,606,000 DEVELOPMENT PROPERTY 1,5,7 10,296,000 11,525,000 RESTRICTED CASH 3,7,10,11,12 3,743,000 1,584,000 REAL ESTATE EQUITY INVESTMENTS 5,7 17,725,000 14,526,000 DEBT ISSUE COSTS 1 1,220,000 1,478,000 INTANGIBLE ASSETS 9,17 2,995,000 3,365,000 OTHER ASSETS 254,000 262,000 ---------------------------------- TOTAL ASSETS $157,789,000 $154,922,000 ================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 5,672,000 $ 5,689,000 Notes payable and current portion of long-term debt 3,6,7,10,11,12,13 8,500,000 504,000 ---------------------------------- Total current liabilities 14,172,000 6,193,000 LONG-TERM DEBT 3,6,7,10,11,12,13 34,054,000 42,176,000 DEFERRED INCOME TAXES 1,8 10,568,000 5,398,000 MINIMUM PENSION LIABILITY 9 1,175,000 1,740,000 ---------------------------------- TOTAL LIABILITIES 59,969,000 55,507,000 ---------------------------------- COMMITMENTS AND CONTINGENCIES 5,11,17 WARRANTS TO PURCHASE COMMON STOCK 7,14 3,569,000 3,569,000 SHAREHOLDERS' EQUITY: 7,14 Common stock - $.10 par value, 20,000,000 authorized: outstanding - 8,100,791 in 1995 and 8,190,691 in 1994 822,000 820,000 Capital in excess of par value 1 78,285,000 78,205,000 Retained earnings (September 30, 1985 - $50,344,000 deficit eliminated. See Note 1) 1 16,189,000 17,725,000 Treasury stock (116,000 shares in 1995 and 4,700 in 1994) 1 (789,000) (42,000) Receivable from the sale of stock 1,14 (97,000) (97,000) Excess additional pension liability 9 (159,000) (765,000) ---------------------------------- Total shareholders' equity 94,251,000 95,846,000 ---------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $157,789,000 $154,922,000 ==================================
See Notes to Consolidated Financial Statements. 40 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 ==============================================================================================================================
Notes 1995 1994 1993 --------------------------------------------------------------- SURCHARGE REVENUES 6,7,11,12,15 $ 8,913,000 $19,774,000 SALES AND OPERATING REVENUES 1,7,11,12,15,18 $39,250,000 42,280,000 37,441,000 -------------------------------------------- TOTAL SALES AND OPERATING REVENUES 39,250,000 51,193,000 57,215,000 COST OF SALES 1,10,16,17 29,861,000 26,317,000 24,612,000 -------------------------------------------- GROSS PROFIT 9,389,000 24,876,000 32,603,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,11,17 11,006,000 12,364,000 11,657,000 RESEARCH AND DEVELOPMENT 1 204,000 158,000 274,000 FIXED ASSET IMPAIRMENT CHARGE 13 39,401,000 INVOLUNTARY TERMINATION AND ENHANCED RETIREMENT BENEFITS 226,000 -------------------------------------------- OPERATING INCOME (LOSS) (2,047,000) (27,047,000) 20,672,000 INTEREST AND OTHER INCOME 1,3,5,10,12,14 1,429,000 1,088,000 2,928,000 INTEREST AND OTHER EXPENSE 1,5,6,7 1,709,000 3,315,000 7,796,000 -------------------------------------------- INCOME (LOSS) BEFORE PROVISION (CREDIT) FOR INCOME TAXES (2,327,000) (29,274,000) 15,804,000 PROVISION (CREDIT) FOR INCOME TAXES 1,8 (791,000) (9,937,000) 5,369,000 -------------------------------------------- NET INCOME (LOSS) 18 $(1,536,000) $(19,337,000) $10,435,000 ============================================ NET INCOME (LOSS) PER COMMON SHARE 1,18 $ (.19) $ (2.38) $ 1.26 ============================================
See Notes to Consolidated Financial Statements. 41 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
================================================================================================================================ 1995 1994 1993 ----------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(1,536,000) $(19,337,000) $ 10,435,000 ----------- ------------ ------------ Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 5,883,000 7,679,000 11,365,000 Fixed asset impairment charge 39,401,000 Changes in assets and liabilities: (Increase) decrease in short-term investments 5,995,000 (2,846,000) (Increase) decrease in accounts and notes receivable 5,525,000 2,003,000 (8,241,000) Increase in income tax receivable (2,570,000) (Increase) decrease in inventories (1,411,000) 1,061,000 (1,671,000) (Increase) decrease in restricted cash (2,159,000) 35,634,000 (1,986,000) Decrease in restricted receivables 132,000 (Increase) decrease in prepaid expenses and other (323,000) 335,000 (160,000) Basis in development property sold 1,614,000 Equity in real estate investments (11,000) Net change in pension assets and liabilities 190,000 435,000 (416,000) Increase (decrease) in accounts payable and accrued liabilities (17,000) 348,000 262,000 Increase (decrease) in deferred income taxes 5,170,000 (10,748,000) 2,844,000 ----------- ------------ ------------ Total adjustments 11,902,000 82,143,000 (728,000) ----------- ------------ ------------ Net cash provided by operating activities 10,366,000 62,806,000 9,707,000 ----------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,462,000) (9,218,000) (47,865,000) Real estate equity advances and development property additions (3,583,000) (2,078,000) (1,572,000) Payments for Halotron rights (188,000) (738,000) Treasury stock acquired (747,000) (42,000) ----------- ------------ ------------ Net cash used for investing activities (8,792,000) (11,526,000) (50,175,000) ----------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on debt (41,650,000) (13,913,000) Issuance of common stock 82,000 467,000 1,388,000 ----------- ------------ ------------ Net cash provided by (used for) financing activities 82,000 (41,183,000) (12,525,000) ----------- ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,656,000 10,097,000 (52,993,000) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,884,000 12,787,000 65,780,000 ----------- ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $24,540,000 $ 22,884,000 $ 12,787,000 =========== ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during period for interest (net of amounts capitalized) $ 1,700,000 $ 2,352,000 $ 6,788,000 =========== ============ ============ Taxes paid $ $ 700,000 $ 1,250,000 =========== ============ ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Development property transferred to real estate equity investment $ 12,300,000 =========== ============ ============ Receivable from the sale of stock $ $ 97,000 =========== ============ ============ Excess additional pension liability $ 606,000 $ 505,000 $ 545,000 =========== ============ ============ Development property transferred to property $ $ 1,723,000 =========== ============ ============
See Notes to Consolidated Financial Statements. 42 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
================================================================================================================================= Par Value of Notes Excess Number of Shares Capital in Receivable Additional Common Issued and excess of Retained Treasury from the Sale Pension Notes Shares Outstanding Par Value Earnings Stock of Stock Liability ----- ---------- ------------ ----------- ----------- ---------- -------------- ---------- BALANCES, OCTOBER 1, 1992 8,039,191 $804,000 $76,269,000 $26,627,000 $(725,000) Net income 10,435,000 Issuance of common stock 14 59,500 6,000 767,000 Tax effects of stock option transactions 615,000 Excess additional pension liability 9 (545,000) ---------- -------- ----------- ----------- --------- -------- --------- BALANCES, SEPTEMBER 30, 1993 8,098,691 810,000 77,651,00 37,062,000 (1,270,000) Net loss (19,337,000) Issuance of common stock 14 96,700 10,000 554,000 Treasury stock acquired (4,700) $ (42,000) Receivable from the sale of stock $(97,000) Excess additional pension liability 9 505,000 ---------- -------- ----------- ----------- --------- -------- --------- BALANCES, SEPTEMBER 30, 1994 8,190,691 820,000 78,205,000 17,725,000 (42,000) (97,000) (765,000) Net loss (1,536,000) Issuance of common stock 14 21,400 2,000 80,000 Treasury stock acquired (111,300) (747,000) Excess additional pension liability 9 606,000 ---------- -------- ----------- ----------- --------- -------- --------- BALANCES, SEPTEMBER 30, 1995 8,100,791 $822,000 $78,285,000 $16,189,000 $(789,000) $(97,000) $(159,000) ========== ======== =========== =========== ========= ======== =========
See Notes to Consolidated Financial Statements. 43 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 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. In connection with the disposal of certain net assets in fiscal 1995, the Company's Board of Directors approved a quasi- reorganization (effective as of September 30, 1985) pursuant to which the Company's assets and liabilities were restated to estimated fair values and an accumulated deficit of $50,344,000 was transferred to reduce capital in excess of par value. Cash and Cash Equivalents and Short-term Investments - All highly liquid investment securities with a maturity of three months or less when acquired are considered to be cash equivalents. Short-term investments consist of investment securities with maturities, when acquired, greater than three months but less than one year. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," during fiscal 1995. In accordance with SFAS 115, prior year's financial statements have not been restated to reflect the change in accounting method. There was no cumulative effect as a result of adopting SFAS 115 in 1995. The Company's investment securities, along with certain cash and cash equivalents that are not deemed securities under SFAS 115, are carried on the consolidated balance sheets in the cash and cash equivalents and short- term investments categories. SFAS 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 115, the Company has classified its investment securities in inventory as of October 1, 1994 and acquired during fiscal 1995 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, 1995 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, 1995. Related Party Notes Receivable - Related party notes receivable represent demand notes bearing interest at a bank's prime rate from various officers and a corporation owned by a director 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. 44 Property, Plant and Equipment - Property, plant and equipment are carried at the lower of cost less accumulated depreciation, or estimated fair value. Depreciation is computed on the straight line method over the estimated useful 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, representing $12,300,000 in carrying value 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 planning, development costs and carrying costs. Carrying costs include interest and property taxes until projects are substantially complete. Interest capitalized is the amount of interest on the Company's net investment in property under development limited to total interest expense incurred in a period. No interest was capitalized on development property during the three-year period ended September 30, 1995. Certain development property in Nevada is pledged to secure debt. (See Note 7.) Debt Issue Costs - Debt issue costs represent costs associated with debt and are amortized on the effective interest method over the terms of the related indebtedness. Fair Value Disclosure as of September 30, 1995: Cash and cash equivalents, accounts and notes receivable, restricted cash, and accounts payable and accrued liabilities - The carrying value of these items are a reasonable estimate of their fair value. Real estate equity investments - Management was not able to practicably estimate the fair value of the Company's equity investments in nonconsolidated real estate ventures. Notes payable, current portion of long-term debt and warrants - Market quotations are not available for any of the Company's notes payable, long- term debt or warrants. See Note 7 for a description of these instruments. Approximately $40 million of long-term debt and related warrants were issued in February 1992. The Company believes that similar terms would be available at September 30, 1995. Sales and Revenue Recognition - Sales of the specialty chemicals segment are recognized as the product is completed 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". 45 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 - Net income (loss) per common share is determined based on the weighted average number of common and common equivalent shares (if such equivalent shares are dilutive) outstanding (8,177,000, 8,121,000 and 8,288,000 for the years ended September 30, 1995, 1994 and 1993). Common share equivalents consist of outstanding stock options and warrants. See Notes 7 and 18 for a description of the effects on net income (loss) per common share of warrants issued in connection with the issuance of certain notes. Income Taxes - Effective October 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes". The adoption of SFAS 109 changed the Company's method of accounting for income taxes to an asset and liability approach. Prior to the fiscal year ended September 30, 1994, the Company accounted for income taxes under SFAS No. 96. Reclassification - Certain reclassifications have been made in the 1994 and 1993 consolidated financial statements in order to conform to the presentation used in 1995. 2. INVENTORIES Inventories consist of the following: September 30, ------------------------- 1995 1994 ---------- ---------- Work-in process $3,828,000 $2,884,000 Raw material and supplies 3,266,000 2,799,000 ---------- ---------- Total $7,094,000 $5,683,000 ========== ========== 3. RESTRICTED CASH At September 30, 1995, restricted cash consists, in part, of $1,121,000 held in a cash collateral account by Seafirst Bank, the lender which provided a term loan (the "WECCO loan") as the principal financing for an ammonium perchlorate ("AP") manufacturing facility erected and operated by the Company's indirect subsidiary, Western Electrochemical Company ("WECCO"). Funds in the cash collateral account are restricted for future indemnity (if any) payments relating to the WECCO loan. Pursuant to the contractual right reserved solely for WECCO in the WECCO loan agreement, on May 10, 1994, WECCO directed Seafirst Bank to apply all of the funds in the cash collateral account and default account (another restricted cash account that secured the loan), except for the funds that continue to be held, to effect an early repayment of the outstanding balances due under the WECCO loan. (See Note 12.) 46 The $1,121,000 will be retained in the cash collateral account until May 11, 1999, at which time the balance (including interest earned thereon) remaining after indemnity payments (if any) will be returned to Thiokol Corporation ("Thiokol"). WECCO's obligation to return such funds is included in long-term debt at September 30, 1995. Any indemnity payments made will serve to reduce the cash collateral account and WECCO's obligation to Thiokol. Restricted cash at September 30, 1995 also includes $2,622,000 held in a Trust account by the Trustee under the indenture relating to a $40,000,000 financing (the "Azide Notes") concluded in February 1992. (See Note 7.) 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are summarized as follows:
September 30, ---------------------------- 1995 1994 ------------ ----------- Land $ 305,000 $ 265,000 Buildings and improvements 13,860,000 7,423,000 Machinery and equipment 73,759,000 34,141,000 Construction in progress 142,000 42,097,000 ------------ ----------- Total l88,066,000 83,926,000 ------------ ----------- Less: accumulated depreciation 7,122,000 2,320,000 ------------ ----------- Property, plant and equipment, net $ 80,944,000 $81,606,000 ============ ===========
In 1995, 1994 and 1993, approximately $1,800,000, $4,000,000 and $4,895,000, respectively, in interest costs were capitalized on assets constructed for the Company's own use. Certain of the Company's property, plant and equipment is pledged as collateral to secure debt. (See Note 7.) A fixed asset impairment charge was recognized in 1994. (See Note 13.) 5. REAL ESTATE EQUITY INVESTMENTS During fiscal 1993, AmPac Development ("AMDECO"), a wholly-owned subsidiary of the Company, contributed approximately 240 acres of development property to Gibson Ranch Limited Liability Company ("GRLLC"). The development property contributed had a carrying value of approximately $12,300,000 at the date of contribution which was transferred to Real Estate Equity Investments on the a ccompanying consolidated balance sheet. AMDECO's contribution is subject to its ability to obtain a release of a mortgage lien in favor of the holders of the Azide Notes. AMDECO's interest in GRLLC is assigned to secure the Azide Notes. A local real estate development group ("D") contributed an adjacent 80-acre parcel to GRLLC. GRLLC is developing the 320-acre parcel principally as a residential real estate development. 47 Each of AMDECO and D is obligated to loan to GRLLC, under a revolving line of credit, up to $2,400,000 at market interest rates. However, D will not be required to advance funds under its revolving line of credit until AMDECO's line is exhausted. At September 30, 1995, AMDECO had advanced substantially all of its committed amount of $2,400,000 to GRLLC. In November, 1995, AMDECO committed to advance an additional $1,700,000 to D. D is required to advance any funds received to GRLLC. Funds advanced under this additional commitment bear annual interest of 12 percent. D 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 AMDECO is equally represented. The profits and losses of GRLLC will be split equally between AMDECO and D after the return of advances under the revolving line of credit and agreed upon values for initial contributions. In July 1990, AMDECO contributed $725,000 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 $315,000 in return for a 30% interest as limited partners. Such other limited partners included the Company's President and Executive Vice-President and certain members of the Company's Board of Directors. The Partnership, in turn, contributed $1,040,000 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 11). In 1992, AMDECO's investment in the partnership was transferred to the Company. 6. DEFERRED INCOME In October 1992, Thiokol, as directed by the National Aeronautics and Space Administration ("NASA"), transferred $19,774,000 to WECCO which in turn deposited such funds in the cash collateral account. Such amount represented a prepayment of the Surcharge component of the AP price (see Note 10) covering the fiscal year ended September 30, 1993. The prepaid Surcharge was recorded as deferred income and was amortized to sales during the fiscal year ending September 30, 1993. Seafirst Bank agreed to waive the requirement of a per pound Surcharge, the mandatory prepayment provisions of the WECCO loan, and certain other loan requirements for the period October 1, 1992 through September 30, 1993, subject to execution of definitive agreements. The cash collateral account was charged for the regularly scheduled quarterly principal and interest payments due under the WECCO loan during this period. On October 18, 1993, Thiokol, as directed by NASA, transferred $10,608,000 to the cash collateral account. In a letter dated October 18, 1993, Thiokol requested that this amount be deposited "directly into the cash collateral account in accordance with your (Seafirst Bank's) letter to us dated October 8, 1993." Seafirst Bank's letter dated October 8, 1993, stated that "such funds shall not be applied to any voluntary prepayment of any principal or interest remaining under the loan arrangements ...until such time as the bank has received written notice from WECCO that such amounts should be so applied. Until then, such funds will be used to pay the periodic installments of principal and interest as 48 presently provided for under such loan arrangements and shall be for all purposes to be a prepayment of the Surcharge amounts payable under such loan arrangements." The conditions of this letter were strictly satisfied. Approximately $8,913,000 of this $10,608,000 prepayment of Surcharge was amortized to sales during the six-months ended March 31, 1994. 7. NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt, collateralized by property, plant and equipment used in the production of sodium azide, and collateralized by substantially all development property and real estate equity investments of the Company, is summarized as follows:
September 30, -------------------------- 1995 1994 ----------- ----------- Subordinated secured term notes (interest at 11%) $37,933,000 $37,576,000 Note payable, interest at prime plus 2% (9.5% at September 30, 1994) 504,000 Obligation to deliver AP (see Note 12) 3,500,000 3,500,000 Indemnity obligation (see Notes 3 and 12) $ 1,121,000 $ 1,100,000 ----------- ----------- Total 42,554,000 42,680,000 Less current portion 8,500,000 504,000 ----------- ----------- Total $34,054,000 $42,176,000 =========== ===========
In February 1992, the Company concluded a $40,000,000 financing for the design, construction and start-up of a sodium azide facility. The funds were provided by a major state public employee retirement fund and a leading investment management company. The financing is in the form of $40,000,000 principal amount of noncallable subordinated secured notes (the "Azide Notes") issued at par, providing for the semi-annual payment in arrears of interest at the rate of 11% per annum. Principal is to be amortized to the extent of $5,000,000 on each of the fourth (February 1996) through ninth (February 2001) anniversary dates of the funding, with the remaining $10,000,000 principal amount to be repaid on the tenth anniversary date. The Company has registered the Azide Notes but has no obligation to maintain the effectiveness of the Registration Statement after December 31, 1994. The Azide Notes are secured by the fixed assets and stock of American Azide Corporation ("AAC"), an indirect wholly-owned subsidiary of the Company, as well as by a mortgage on land in Clark County, Nevada being developed by AMDECO and by certain restricted cash (see Note 3). Approximately 240 acres of such land has been contributed to GRLLC subject to certain conditions. AMDECO's interest in GRLLC has been assigned to secure the Azide Notes (see Note 5). The Company issued to the purchasers of the 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 49 exercisable, at the option of their holders, to purchase up to 20 percent 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. At the option of the Warrant holders, the exercise price of the Warrants may be paid by delivering an equal amount of Azide Notes. The indenture imposes various operating restrictions upon the Company including restrictions on (i) the incurrence of debt; (ii) the declaration of dividends and the purchase and repurchase of stock; (iii) certain mergers and consolidations, and (iv) certain dispositions of assets. Management believes the Company has complied with these operating restrictions. On each of December 31, 1995, 1997 and 1999, holders of the Warrants will have the right to put to the Company as much as one-third thereof based upon the differences between the Warrant exercise price and prices determined by multiplying the Company's fully diluted earnings per share at multiples of 13, 12 and 11, respectively, but the Company's obligation in such respect is limited to $5,000,000 on each of such dates and to $15,000,000 in the aggregate. Such put rights may not be exercised if the Company's Common Stock has traded at values during the preceding 90-day period that would yield to the warrant holders a 25% internal rate of return to the date of the put (inclusive of the 11% Azide Notes' yield). At September 30, 1995, the warrant holders had no put right and the Company incurred a net loss during the fiscal year ended September 30, 1995. Accordingly, at September 30, 1995, it is not probable that the put rights will become exercisable. On or after December 31, of each of the years 1995 through 1999, the Company may call up to 10% of the Warrants (but no more than 50% in the aggregate) 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. The Company has accounted for the proceeds of the financing applicable to the Warrants (and the potential put right) as temporary capital. Any adjustment of the value assigned at the date of issuance will be reported as an adjustment to retained earnings. Net income (loss) per common share is calculated on an "equity" basis or a "debt" basis using the more dilutive of the two methods. The "equity" basis assumes the Warrants will be exercised and the effect of the put feature adjustment, if any, on earnings available to common shareholders will be reversed. The treasury stock method will then be used to calculate net additional shares. The "debt" basis assumes the put will be exercised (if the right is available) and the Warrants will not be considered common stock equivalents. During the fiscal years ended September 30, 1995, 1994, and 1993, the "equity" basis was used for purposes of this calculation. 50 Notes payable and long-term debt maturities are as follows:
- - -------------------- For the Years Ending September 30,1996 - - -------------------- 1996 $ 8,500,000 1997 5,000,000 1998 5,000,000 1999 6,121,000 2000-2001 17,933,000 ------------- Total $ 42,554,000 =============
8. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109 using an asset and liability approach. 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 is more likely than not. These future tax benefits are measured by applying currently enacted tax rates. As discussed in Note 1, the Company effected a quasi-reorganization on September 30, 1985 in which the Company's assets and liabilities were restated to estimated fair values. The quasi-reorganization was not a taxable event and, accordingly, differences between the financial reporting and tax bases of assets and liabilities arose from the quasi- reorganization. The following table provides an analysis of the Company's provision (credit) for income taxes for the years ended September 30:
----------------------------------------------- 1995 1994 1993 ------------ ------------- ----------- Current $ (4,888,000) $ 426,000 $ 2,525,000 Deferred (federal & state) 4,097,000 (10,363,000) 2,844,000 ------------ ------------- ----------- Provision (credit) for income taxes $ (791,000) $ (9,937,000) $ 5,369,000 ============ ============= ===========
51 The temporary differences and tax carryforwards (which expire in years beginning after September 30, 2008) that created deferred tax assets and liabilities at September 30, 1995 are detailed below: Net operating loss carryforwards $ 14,353,000 Inventory capitalization 269,000 Alternative minimum tax credits 1,354,000 --------------- Total deferred assets 15,976,000 --------------- Property 25,394,000 Accrued income and expenses 569,000 State taxes 575,000 Other 6,000 --------------- Total deferred liabilities 26,544,000 --------------- Net Deferred Tax Liability $ 10,568,000 =============== A reconciliation of the total provision (credit) for income taxes to amounts computed by applying the federal tax rate to income is as follows for the years ended September 30:
------------------------------------------------------------------------------ 1995 1994 1993 Amount % Amount % Amount % ------------------------------------------------------------------------------ Computed at statutory federal rate $ (814,000) 35% $ (9,953,000) 34% $ 5,531,000 35% State income taxes net of federal benefits 292,000 1 Surtax benefit 23,000 (1) (292,000) (1) (162,000) (1) Other 16,000 ----------------------------------------------------------------------------- Provision (Credit) for income taxes $ (791,000) 34% $ (9,937,000) 34% $ 5,369,000 34% =============================================================================
9. EMPLOYEE BENEFIT PLANS The Company maintains, for the benefit of its employees, 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. 52 The discount rate and rate of salary progression used to determine the projected benefit obligations were 7% and 5%, respectively in 1995. The salary range progression rate was 6% in 1994. The expected long-term rate of return on plan assets was 7.0%. The following table reconciles the Plan's funded status and summarizes amounts recognized in the Company's consolidated financial statements for the years ended September 30, 1995 and 1994.
1995 1994 ---- ----- Actuarial present value of benefit obligations: Vested benefits $ 7,131,000 $ 6,309,000 Nonvested benefits 832,000 711,000 ----------- ----------- Accumulated benefit $ 7,963,000 $ 7,020,000 =========== =========== Projected benefit obligation $10,159,000 $ 9,939,000 Plan assets at fair value (7,012,000) (5,280,000) ----------- ----------- Projected benefit obligation in excess of Plan assets 3,147,000 4,659,000 Unrecognized net transition obligation amortized over fifteen years (1,069,000) (1,222,000) Unrecognized net loss and prior service cost (2,302,000) (3,628,000) ----------- ----------- Prepaid pension (224,000) (191,000) Additional liability 1,399,000 1,931,000 ----------- ----------- Required minimum liability $ 1,175,000 $ 1,740,000 =========== =========== Balance of: Intangible asset $ 1,016,000 $ 1,165,000 =========== =========== Equity account $ 159,000 $ 765,000 =========== ===========
Net periodic pension cost was $1,295,000, $1,480,000 and $982,000, respectively, for the years ended September 30, 1995, 1994 and 1993, and consists of the following:
1995 1994 1993 ---- ---- ---- Service cost $ 787,000 $ 906,000 $ 552,000 Interest cost 620,000 592,000 494,000 Return on Plan assets (708,000) (315,000) (74,000) Net total of other components 596,000 297,000 10,000 ---------- ---------- ---------- Net periodic pension cost $1,295,000 $1,480,000 $ 982,000 ========== ========== ==========
In November 1994, the Board of Directors approved a Supplemental Retirement Plan ("SRP") that currently applies only to the Chairman of the Company. The SRP has not and is not expected to have a material affect on the Company's results of operations or financial condition. 53 10. AGREEMENTS WITH THIOKOL CORPORATION In 1989, WECCO entered into an Advance Agreement and Surcharge Agreement with Thiokol. Under the Advance and Surcharge Agreements Thiokol was required to place sufficient orders for AP such that, combined with orders from other AP customers, WECCO would receive revenues in respect of at least 20 million pounds per year, 5 million per quarter, over seven years (140 million pounds in the aggregate), beginning with initial production. WECCO was required to impose a surcharge on all sales of AP sufficient to amortize the WECCO loan over or during the period of such revenue assurance. The Surcharge Agreement required that the AP product price be divided into two components. The surcharge component of the AP price represented the amount necessary to amortize principal, pay interest, and meet related obligations on the WECCO loan over seven years. The surcharge component was deposited into the cash collateral account. The manufacturing component of the AP price included manufacturing costs and profits. The manufacturing component also included a $.05 per AP pound charge which was deposited into the default account. The Surcharge Agreement obligated Thiokol to fund the cash collateral account in the event the balance of such account was less than the balance required under the terms of the WECCO loan. Thiokol's obligation was subject to the availability of appropriations to NASA. Thiokol deposited approximately $7,935,000 in the cash collateral account on February 28, 1990 to bring the balance of the cash collateral account to the level required under the terms of the WECCO loan. In the event of the termination of or failure of NASA to continue to fund its contract with Thiokol (unless replaced by a successor contract) or in the event of default under the loan caused by the federal government, Thiokol was obligated to pay all termination expenses, including the outstanding principal and interest under the WECCO loan. Thiokol's obligations were subject to the availability of appropriations to NASA. The Advance and Surcharge Agreements were approved and consented to by NASA. NASA and the United States Air Force entered into a Memorandum of Agreement providing for a sharing of the obligations under the Advance and Surcharge Agreements. NASA and Thiokol entered into separate agreements regarding Thiokol's obligations for AP orders and payments under the Advance and Surcharge Agreements. On May 10, 1994, an amendment to the Advance Agreement was executed (see Note 12). Under the terms of the Amendment, the WECCO loan was repaid and the Surcharge Agreement was terminated. 11. COMMITMENTS AND CONTINGENCIES In December 1992, Thiokol issued a Request for Quotation, inviting WECCO to submit a proposal for the sale of NASA-related AP over a period extending through mid-1998, approximately two years after the expiration of the Surcharge Agreement and other agreements with Thiokol (the "NASA/Thiokol agreements"). To enable WECCO to submit a proposal which did not prejudice the NASA/Thiokol agreements, Thiokol and WECCO signed an agreement to the effect that WECCO and Thiokol would deal with the Request 54 for Quotation and WECCO's responsive proposal without reference to the NASA/Thiokol agreements or any effects thereon, but WECCO reserved its rights under the NASA/Thiokol agreements. Based upon the Request for Quotation and the agreement, WECCO submitted a proposal calculated to win the NASA-related AP business of Thiokol through the extended period covered by the proposal. At the time it submitted its proposal, WECCO also offered to negotiate a termination of the NASA/Thiokol agreements, subject to the consent and approval of NASA and Seafirst Bank. As a result of its proposal and discussions with Thiokol, WECCO was optimistic that it would succeed in achieving its objective of extending its base contractual assurances for AP sales set forth in the NASA/Thiokol agreements. At a meeting in Ogden, Utah on June 11, 1993, Thiokol delivered to a Company representative a draft memorandum that, if executed by WECCO, would have effectively released Thiokol from its obligations under the NASA/Thiokol agreements. Thiokol also delivered a proposed purchase order that covered AP sales only over a period approximately corresponding to the remaining term of the NASA/Thiokol agreements, rather than through mid-1998, as contemplated by the Request for Quotation, but for a lower quantity although at higher prices than were offered by WECCO over the longer term. Thiokol advised WECCO that it had made a similar proposal to the other producer of AP. At the June 11 meeting Thiokol also advised WECCO that it had commenced a legal action against WECCO in Weber County (Ogden), State of Utah, seeking declaratory relief to the effect that once the principal and interest balance owing by WECCO to Seafirst Bank was fully paid, Thiokol would have no further obligation to purchase AP from WECCO under the NASA/Thiokol agreements, and to the effect that there existed an agreement among NASA, Thiokol, WECCO and Seafirst Bank to prepay the WECCO loan on or about October 1, 1993. Thiokol also advised WECCO that it intended to proceed with the declaratory relief action only if negotiations underway between the parties were not concluded in a manner satisfactory to Thiokol. Thiokol's complaint alleged that Thiokol, WECCO, NASA and Seafirst Bank had agreed that Thiokol would prepay WECCO's Seafirst Bank loan in October 1993, and that upon prepayment Thiokol's obligation to purchase AP from WECCO under the NASA/Thiokol agreements would cease. In fact, there neither was nor is any such agreement. Moreover, before submitting its responsive proposal to Thiokol's Request for Quotation, WECCO sought and obtained from a nationally recognized law firm specializing in government contract law, opinions to the effect that (i) only WECCO had the right to prepay the balance owing to Seafirst Bank and (ii) even if the balance owing had been so prepaid, Thiokol would have continued to be obligated to purchase AP from WECCO under the NASA/Thiokol agreements through August, 1996. On July 8, 1993, Thiokol dismissed, without prejudice, its declaratory relief lawsuit against WECCO. A dismissal "without prejudice" operates as a dismissal of the lawsuit, but does not prevent its re-filing at a later date, nor did it constitute a final resolution of the dispute. According to a "Standstill Agreement" between the parties,"... Thiokol [could] not [have] re-file[d] its action nor commence[d] a new action against WECCO without first giving WECCO five days' notice of its intent to do so and WECCO [could] not [have] file[d] an action against Thiokol without first giving Thiokol 20 days' notice of its intent to do so; and (3) any such litigation [could have been] filed only in state or federal court in Salt Lake County, Utah." 55 On March 29, 1994, WECCO and Thiokol agreed to a draft amendment to the 1989 Advance Agreement. On May 10, 1994, the amendment (the "Amendment") was executed. The Amendment fully resolved all issues between Thiokol and WECCO relating to the interpretation and application of the NASA/Thiokol agreements. Thiokol separately agreed not to refile its declaratory relief lawsuit. (See Note 12.) Following and because of the announcement of Thiokol's lawsuit against WECCO described above, and the consequent decline in the trading prices of the Company's Common Stock, three shareholder lawsuits, purporting to be class actions, were filed in the United States District Court for the District of Nevada against the Company and certain of its directors and officers. The complaints, which have since been consolidated, allege that the Company's public statements violated Federal securities laws by inadequately disclosing information concerning its agreements with Thiokol and the Company's operations. Management of the Company believes that the allegations of the consolidated complaint are without merit and the Company and other defendants are vigorously defending the lawsuits. On November 27, 1995, the U.S. District Court granted in part the Company's motion for summary judgment ruling that the Company had not violated the federal securities laws in relation to disclosure concerning the Company's agreements with Thiokol. The remaining claims, which relate to allegedly inadequate disclosure relating to Haloton, are subject to a trial that began in December 1995 and is expected to conclude in January 1996. No specific amount of damages has been claimed in the shareholder lawsuits, which has involved extended discovery, multiple legal and factual issues and significant uncertainties. Accordingly, a reliable estimate of the amount of potential damages, if any, to the Company cannot be made at the present time. The Company has in force substantial insurance covering this risk. However, as indicated above, defense costs and any potential settlement or judgment associated with this litigation, to the extent borne by the Company and not recovered through insurance, may adversely affect the Company's liquidity. As a result of the above-described dispute with Thiokol and the resulting shareholder lawsuits, the Company has incurred legal and other costs and may incur material legal and other costs associated with the resolution of the shareholder lawsuits in future periods. Certain of these costs may be reimbursable under policies providing for insurance coverage. The Company has adopted certain policies in its Charter and Bylaws as a result of which the Company may have the obligation to indemnify its affected officers and directors to the extent, if at all, the existing insurance coverages are insufficient. The Company's insurance carriers have reserved the right to exclude or disclaim coverage under certain circumstances. The Company is currently unable to predict or quantify the amount or the range of such costs, if any, or the period of time during which such costs will be incurred. The Company was served with a complaint on December 10, 1993 in a lawsuit brought by limited partners in a partnership of which one of the Company's former subsidiaries, divested in 1985, was a general partner. The plaintiffs allege that the Company is liable to them in the amount of approximately $5.9 million on a guarantee executed in 1982. The Company believes that the claim against it is wholly without merit. See Note 17 for a discussion of certain litigation involving Halotron. 56 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 and is subject to escalation every three years based on changes in the consumer price index, and provides for the Company to occupy 22,262 square feet of office space. Future minimum rental payments under this lease for the years ending September 30, are as follows: 1996 $ 540,000 1997 540,000 1998 540,000 1999-2000 810,000 ---------- Total $2,430,000 ==========
12. AMENDMENT TO ADVANCE AGREEMENT On May 10, 1994, WECCO and Thiokol executed the Amendment. The Amendment fully resolved all issues between Thiokol and WECCO relating to the interpretation and application of the NASA/Thiokol agreements. Under and because of the resolution of its dispute with Thiokol completed by the Amendment, WECCO exercised the contractual right reserved solely to it in the WECCO loan agreement to direct that the funds in the cash collateral account and default account be used to repay the WECCO loan, including accrued interest, any interest rate swap termination fee, and any other costs relating to the repayment. On May 10, 1994, such prepayment was completed. Upon early repayment in full of the WECCO loan, the Amendment provided for the termination as fulfilled of the Surcharge Agreement and termination of certain other agreements relating to the repayment of advances (the Working Capital Agreement and the Repayment Plan). The Amendment confirms that the 1989 Advance Agreement has a continuous term commencing with the first production of AP at the WECCO plant in August 1989 and ending September 30, 1996, (approximately two months subsequent to the estimated original term of the Advance Agreement). The Amendment provides for WECCO to receive revenues, excluding surcharge revenues, from sales of AP of approximately $33 million, $28 million and $20 million during the fiscal years ending September 30, 1994, 1995 and 1996, respectively. Prior to the effective date of the Amendment, WECCO was indebted to Thiokol for approximately $10,208,000 under the Working Capital Agreement and Repayment Plan. The Amendment required WECCO to pay $750,000 of this amount ratably as deliveries of AP were made over the remainder of the fiscal year ended September 30, 1994. The remaining obligation under the Working Capital Agreement and Repayment Plan will be repaid by WECCO through delivery of AP. The Company has estimated that the cost of producing such AP will be approximately $3.5 million and 57 has included this amount in debt at September 30, 1995. Thiokol separately agreed not to refile the declaratory relief lawsuit referred to in Note 11. The Company believes that the Amendment to the 1989 Advance Agreement represents a fully satisfactory commercial resolution of its dispute with Thiokol. AP revenues under the NASA/Thiokol agreements have resulted in net cash flows to WECCO from AP operations during the fiscal years ended September 30, 1995 and 1994, substantially the same as those that would have been generated under the NASA/Thiokol agreements. The Company expects similar results for the fiscal year ending September 1996. As the Company has previously reported however, certain changes, which would have occurred in any event under the NASA/Thiokol agreements, have occurred. The Surcharge has been eliminated. The Surcharge would have ended in any event when amounts sufficient in the aggregate to pay principal and interest on the WECCO loan had been paid through the Surcharge. This was expected to occur during the calendar year 1994 under the NASA/Thiokol agreements. As a result of the elimination of the Surcharge and as expected, gross revenues from AP operations during fiscal 1994, 1995 and 1996 have been and will be less than gross AP revenues during the fiscal years ended September 30, 1993, 1992, 1991 and 1990. In addition, Surcharge revenues have historically been in excess of depreciation and amortization and interest expense related to the AP manufacturing facility. See Management's Discussion and Analysis of Financial Condition and Results of Operations for information with respect to the excess referred to above. Further, the default account payment of $0.05 per pound of AP, or $1 million per year, formerly included in the AP price, is no longer part of the AP price because there will no longer be a default account required under the WECCO loan, the contents of the default account having been dedicated to payments of principal and interest under and as collateral for the WECCO loan. In addition, the technology transfer fee of $0.05 per pound of AP, or $1 million per year, formerly included in the AP price, is no longer part of the AP price. Lastly, cash collateral account and default account balances were used to repay the WECCO loan. Accordingly, there will be no interest earnings associated with these accounts in the future. 13. IMPAIRMENT OF WECCO'S FIXED ASSETS The down-sizing of the defense budget has had a dramatic impact on AP requirements. The Company currently estimates that the total market available to the Company and its only U.S. competitor (including exports) now approximates 25 million pounds per year, as compared to over 60 million pounds per year as estimated by the government in 1988-89. The Company's understanding has been and continues to be that the government considers AP to be a critical material, and both the Company's plant and that of its competitor to be critical facilities, and intends as a matter of policy to maintain two viable and operating sources of AP for the foreseeable future. The Company believes that this policy has been implemented through the Amendment to the 1989 Advance Agreement described above in Note 12. The Company also believes that the government will maintain its dual source policy subsequent to September 30, 1996, or at the conclusion of the term of the Advance Agreement, as amended, although there can be no assurance in that regard. The Company is committed to a continuing strong participation and presence in the AP market after September 30, 1996. However, management believes that competitive conditions in the market place will not allow the 58 Company to recover any facility costs on sales of AP after September 30, 1996. Furthermore, management doesn't expect the demand for AP to increase significantly in the future. As of March 31, 1994, the Company's best estimate of the net cash flows expected to result from operation of the AP plant were not sufficient to recover any of the carrying amount of the WECCO fixed assets and, as a result, a non-recurring impairment charge of $39,401,000 was recognized in the second quarter of the Company's fiscal year ending September 30, 1994. 14. SHAREHOLDERS' EQUITY 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. The Series C redeemable convertible preferred stock was outstanding at September 30, 1989, was redeemed in December 1989, and is no longer authorized for issuance. 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. In 1994, the Executive Vice President of the Company exercised options for 45,000 shares of the Company's common stock by executing demand notes bearing interest at a bank's prime rate for the total option price of $174,000. Approximately $97,000 of this amount remains outstanding at September 30, 1995. Interest income of $8,000 and $1,000 was recorded on these notes in fiscal 1995 and 1994. Option and warrant transactions are summarized as follows:
Shares Under Options and Warrants Option Price ------------ -------------- October 1, 1992 3,310,650 $3.88 - $30.50 Exercised, expired or canceled (60,500) 3.88 - 21.50 ------------ -------------- September 30, 1993 3,250,150 3.88 - 30.50 Exercised, expired or canceled (96,700) 3.88 - 10.50 ------------ -------------- September 30, 1994 3,153,450 3.88 - 30.50 Granted 281,000 4.88 - 7.50 Exercised, expired or canceled (104,400) 3.88 - 30.50 ------------ -------------- September 30, 1995 3,330,050 $3.88 - $21.50 ============ ==============
At September 30, 1995, substantially all options and warrants were exercisable. Options for approximately 299,000 shares were available for additional grants under existing plans at September 30, 1995. 59 In February 1992, the Company issued $40,000,000 in Subordinated Secured Notes (the Azide Notes) with Warrants. See Note 7 for a description of the Warrants. Shares under options and warrants at September 30, 1995 include 2,857,000 Warrants at a price of $14 per Warrant. 15. SEGMENT INFORMATION The Company's principal business segments are specialty chemicals, environmental protection equipment and technology, and industrial/commercial and residential real estate development. Products of the specialty chemicals segment include AP used in the solid rocket propellant for the space shuttle and defense programs, sodium azide, and Halotron. During the three years ended September 30, 1995, there were no significant sales of Halotron. Information about the Company's industry segments is as follows:
Years ended September 30, ------------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Revenues: Specialty chemicals $ 34,219,000 $ 47,701,000 $ 53,752,000 Environmental protection 1,656,000 2,934,000 3,437,000 Real estate 3,375,000 558,000 26,000 ------------ ------------ ------------ Total $ 39,250,000 $ 51,193,000 $ 57,215,000 ============ ============ ============ Operating income (loss) before unallocated income and expenses: Specialty chemicals $(2,150,000) $(24,129,000) $ 23,435,000 Environmental protection (640,000) (1,965,000) (1,032,000) Real estate 1,356,000 24,000 (86,000) ------------ ------------ ------------ Total $(1,434,000) $(26,070,000) $ 22,317,000 ------------ ------------ ------------ Deduct (add) unallocated expense (income): General corporate $ 409,000 $ 819,000 $ 1,371,000 Research and development 204,000 158,000 274,000 Interest and other income (1,429,000) (1,088,000) (2,928,000) Interest and other expense 1,709,000 3,315,000 7,796,000 ------------ ------------ ------------ Income tax provision (credit) (791,000) (9,937,000) 5,369,000 Net income (loss) $(1,536,000) $(19,337,000) $ 10,435,000 ============ ============ ============ Identifiable assets: Specialty chemicals $ 95,845,000 $ 99,432,000 $181,242,000 Environmental protection 1,087,000 1,148,000 3,048,000 Real estate 29,827,000 27,897,000 25,333,000 Corporate 28,460,000 26,515,000 21,515,000 ------------ ------------ ------------ Total $155,219,000 $ 54,992,000 $231,138,000 ============ ============ ============ Financial information relating to domestic and export sales (domestic operations):
60 Domestic revenues $38,857,000 $49,616,000 $55,020,000 Export revenues 393,000 1,577,000 2,195,000 ----------- ----------- ----------- Total $39,250,000 $51,193,000 $57,215,000 =========== =========== ===========
The Company's operations are located in the United States. It is not practicable to compute a measure of profitability for domestic and export sales or for sales by geographic location. Substantially all export revenues relate to environmental protection equipment sales in the Far and Middle East. The majority of depreciation and amortization expense and capital expenditures relate to the Company's specialty chemicals segment. Depreciation and amortization expenses for the years ended September 30, are as follows:
1995 1994 1993 ----------- ----------- ----------- Specialty chemicals $4,824,000 $7,251,000 $11,029,000 All other segments 1,059,000 428,000 336,000 ---------- ---------- ----------- Total $5,883,000 $7,679,000 $11,365,000 ========== ========== ===========
Capital expenditures for the years ended September 30 are as follows:
1995 1994 ----------- ---------- Specialty chemicals $4,229,000 $8,636,000 All other segments 233,000 582,000 ---------- ---------- Total $4,462,000 $9,218,000 ========== ==========
By reason of the limited number of firms engaged in the manufacture of solid rocket propellants, the Company had three customers that accounted for 10% or more of the Company's revenues in one or more of 1995, 1994 and 1993. These three customers accounted respectively for the following revenues during the fiscal years ended September 30:
Customer End User Industry 1995 1994 1993 -------- ----------------- ----------- ----------- ----------- A Space $27,963,000 $36,524,000 $44,488,000 B Defense 108,000 5,570,000 1,450,000 C Defense - Space Applications 7,028,000
16. SODIUM AZIDE 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 automotive airbag 61 safety systems. In addition, Dynamit Nobel has provided technical support for the design, construction and start-up of the facility. The facility was constructed and is being operated by AAC, has an annual design capacity of approximately 6,000,000 pounds, and is located on land owned by AAC in Iron County, Utah. Pursuant to a condition of the Azide Agreements, in February 1992, the Company paid $1,589,000 to Dynamit Nobel for the technology and know-how for the production of sodium azide. The Company will also pay a royalty of 5% of net sodium azide sales to Dynamit Nobel for a period of 15 years. Commercial shipments of sodium azide began in April 1994 and are continuing, although sales and related variable operating margins have not reached a level sufficient to absorb fixed costs. The Company's plans with respect to its sodium azide project continue to be grounded in the Company's objective to become the major supplier to the U.S. airbag inflator market. There can be no assurance in that regard, however, and as a consequence the Company cannot predict over what period of time, if at all, it's sodium azide plant will operate at levels consistent with such expectations. Sodium azide prices have dramatically decreased since the Company began its efforts to finance and construct the facility. At the time the Company began this project, prices for sodium azide were approximately $8.00 per pound. Currently, domestic market prices appear to be in the range of $4.50 to $6.00 per pound. As a result of the uncertainties with respect to volume and price referred to above, the Company may experience significant variations in sodium azide sales and related operating results from quarter to quarter. The Company continues to believe, however, that, notwithstanding these uncertainties, revenues and associated net cash flows from its sodium azide operations will be sufficient to recover the Company's investment in its sodium azide facility, although there can be no assurance in that regard. 17. HALOTRON On August 30, 1991, Halotron, Inc. (a wholly-owned subsidiary of the Company) entered into an agreement (the "Halotron Agreement") granting the Company the option to acquire the exclusive worldwide rights to manufacture and sell Halotron I (a replacement for halon 1211). Halotron 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 Agreement provides for disclosure to the Company of all confidential and proprietary information concerning Halotron I, which together with testing undergone by Halotron I at independent laboratories in Sweden and the United States and consulting services that were provided was intended to enable the Company to evaluate Halotron I's commercial utility and feasibility. In February 1992, the Company announced that a series of technical evaluations and field tests conducted at the University of New Mexico had been positive and equivalent to the performance previously reported in testing at the Swedish National Institute of Testing and Standards and the University of Lund in Sweden. 62 In February 1992, the Company determined to acquire the rights provided for in the Halotron Agreement, gave notice to that effect to the inventors, and exercised its option. In addition to the exclusive license to manufacture and sell Halotron I, the rights acquired by the Company include rights under all present and future patents relating to Halotron 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 $700,000 (the exercise price of $1,000,000, less advance payments previously made) and became obligated to pay the further sum of $1,500,000 in equal monthly installments of $82,000, commencing in March 1992. The license agreement entered into between the Company and the inventors of Halotron I provides for a royalty to the inventors of 5% of the Company's net sales of Halotron I over a period of 15 years. The Company has designed and constructed a Halotron facility that has an annual capacity of approximately 6,000,000 pounds, located on land owned by the Company in Iron County, Utah. Amounts paid toward the exercise price of the option, and for testing and evaluation of Halotron through December 31, 1991 were included in selling, general and administrative expense since there was no assurance the option would be exercised. Amounts paid for technology and other rights related to Halotron since January 1, 1992 have been capitalized and are included with intangible assets in the accompanying consolidated balance sheets at September 30, 1995 and 1994. Amounts paid for testing and evaluation and administration costs continue to be expensed. As discussed above, in 1992, Halotron, Inc. purchased the rights to certain fire suppression chemicals and delivery systems called Halotron from their Swedish inventor, Jan Andersson and his corporation, AB Bejaro Product; Andersson and Bejaro breached the contract in which they had sold the rights to Halotron. This breach resulted in litigation initiated by AmPac Technologies, Inc. (also a wholly-owned subsidiary of the Company) and Halotron, Inc. This initial litigation was settled when Andersson and Bejaro promised to perform faithfully their duties and to honor the terms of the contracts that, among other things, gave Halotron, Inc. exclusive rights to the Halotron chemicals and delivery systems. Following the settlement of the initial litigation, however, Andersson and Bejaro failed to perform the acts they had promised in order to secure dismissal of that litigation. As a result, litigation was initiated in the Utah state courts in March 1994, for the purpose of establishing Halotron, Inc.'s and AmPac Technologies, Inc.'s exclusive rights to the Halotron chemicals and delivery systems. On August 15, 1994, the court entered a default judgment ("Judgment") against Andersson and Bejaro granting the injunctive relief requested by Halotron, Inc. and AmPac Technologies, Inc. and awarding damages in the amount of $42,233,000. The trial court further ordered Andersson and Bejaro to execute documents required for patent registration of Halotron in various countries. When Andersson and Bejaro ignored this order, the Court directed the Clerk of the Court to execute these documents on behalf of Andersson and Bejaro. Finally, the Court ordered that Andersson's and Bejaro's rights to any future royalties from sales of Halotron were terminated. AmPac Technologies, Inc. and Halotron, Inc. are exploring ways to collect the Judgment from 63 Andersson and Bejaro. It appears that Andersson and Bejaro have few assets and those assets they do have appear to have been placed beyond reach of the Judgment. The Company's efforts to produce, market and sell Halotron I and II are dependent upon the political climate and environmental regulations that exist and may vary from country to country. Halotron I has been extensively and successfully tested. These products continue to undergo testing. Although the Company is satisfied with the progress and performance characteristics of Halotron I and II, the magnitude of revenues in the future 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 qualifications in certain jurisdictions and the ultimate market acceptance of these products. 18. OPERATING RESULTS Although the Company's net income (loss) and primary and fully 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) order quarters under the NASA/Thiokol agreements did not coincide with the Company's fiscal quarters; (ii) as discussed in Note 11, the Company may incur material legal and other costs associated with litigation; (iii) the timing of real estate and related sales is not predictable; (iv) the recognition of revenues from environmental protection equipment orders not accounted for as long-term contracts depends upon the timing of shipment of the equipment; (v) weighted average common and common equivalent shares for purposes of calculating primary and fully 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; (vi) interest expense (net of amounts capitalized) and depreciation expense increased significantly in the third quarter of fiscal 1995 as the sodium azide facility completed its transition from construction to production activities; and (vii) certain changes (including the cessation of surcharge revenues) described in Note 12 in the Company's AP business have occurred and will occur as a result of the Amendment to the 1989 Advance Agreement and the eventual expiration thereof in September, 1996. The results of the Company's operations will also be affected by the timing and magnitude of orders, and pricing thereof, for the Company's products, sodium azide and Halotron. Such orders are dependent upon actions of customers and potential customers and the political and regulatory environment. (See Notes 16 and 17 for a discussion of the status of sodium azide and Halotron orders.) 64 EX-10.34 2 1994 DIRECTORS' STOCK OPTION PLAN EXHIBIT 10.34 AMERICAN PACIFIC CORPORATION 1994 DIRECTORS' STOCK OPTION PLAN --------------------------------- ARTICLE I PURPOSE ------- The purpose of the American Pacific Corporation 1994 Directors' Stock Option Plan (the "Plan") is to secure for American Pacific Corporation and its stockholders the benefits arising from stock ownership by its Directors. The Plan will provide a means whereby such Directors may purchase shares of the common stock, $.10 par value, of American Pacific Corporation pursuant to options granted in accordance with the Plan. ARTICLE II DEFINITIONS ----------- The following capitalized terms used in the Plan shall have the respective meanings set forth in this Article: 2.1 "Committee" shall mean the Stock Option Committee of the Board of Directors of the Corporation, American Pacific Corporation, which shall consist of at least three Eligible Directors (as defined below) of the Board of Directors of the Corporation. 2.2 "Chairman" shall mean the duly appointed Chairman of any standing committee of the Board. 2.3 "Company" shall mean American Pacific Corporation and any of its subsidiaries. 2.4 "Director" shall mean any person who is a member of the Board of Directors of the Company. 2.5 "Eligible Director" shall be any Director who is not a full or part- time Employee of the Company. 2.6 "Exercise Price" shall mean the price per Share at which an Option may be exercised. 2.7 "Fair Market Value" shall mean the closing price of publicly traded Shares on the national securities exchange on which Shares are listed (if the Shares are so listed) or on the Nasdaq Stock Market System (if the Shares are regularly quoted on the Nasdaq Stock Market System), or, if not so listed or regularly quoted, the mean between the closing bid and asked 1 prices of publicly traded Shares in the over-the-counter market Electronic Bulletin Board, or, if such bid and asked prices shall not be available, as reported by any nationally recognized quotation service selected by the Company. 2.8 "Grant Date" shall mean the later of (i) the date such Eligible Director is first elected as a member of the Board or (2) December 12, 1994. 2.9 "Option" shall mean an Option to purchase Shares granted pursuant to the Plan. 2.10 "Option Agreement" shall mean the written agreement described in Article VI herein. 2.11 "Permanent Disability" shall mean the condition of an Eligible Director who is unable to participate as a member of the Board by reason of any medically determined physical or mental impairment which can be expected to result in death or which can be expected to last for a continuous period of not less than twelve (12) months. 2.12 "Purchase Price" shall be the Exercise Price multiplied by the number of whole Shares with respect to which an Option may be exercised. 2.13 "Shares" shall mean shares of common stock, $.10 par value, of the Company. ARTICLE III ADMINISTRATION -------------- 3.1 General. This Plan shall be administered by the Committee in accordance with the express provisions of this Plan. 3.2 Powers of the Committee. The Committee shall have full and complete authority to adopt such rules and regulations and to make all such other determinations not inconsistent with the Plan as may be necessary for the administration of the Plan. ARTICLE IV SHARES SUBJECT TO PLAN ---------------------- Subject to adjustment in accordance with Article IX an aggregate of 40,000 Shares are reserved for issuance under this Plan. Shares sold under this 2 Plan may be either authorized but unissued Shares or reacquired Shares. If an Option or any portion thereof, shall expire or terminate for any reason without having been exercised in full, the unpurchased Shares covered by such Option shall be available for future grants of Options. ARTICLE V GRANTS ------ 5.1 Grant. On the Grant Date, each Eligible Director shall receive the grant of an option to purchase 5,000 Shares, of which 2,500 shall vest and become exercisable immediately and 2,500 shall vest 12 months after the Grant Date . 5.2 Compliance With Rule 16b-3(c) (2) (ii). The terms for the grant of Options to an Eligible Director may only be changed if permitted under Rule 16b- 3(c) (2) (ii) of the Securities Exchange Act of 1934, as amended, and accordingly the formula for the grant of Options may not be changed or otherwise modified more than once in any six month period, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. ARTICLE VI TERMS OF OPTION --------------- Each Option shall be evidenced by a written Option Agreement executed by the Company and the Eligible Director which shall specify the Grant Date, the number of Shares subject to the Option, the Exercise Price and shall also include or incorporate by reference the substance of all of the following provisions and such other provisions consistent with this Plan as the Board may determine. 6.1 Term. The term of the Option shall be five (5) years from the date an Option first become exercisable in accordance with Section 6.2 herein, subject to earlier termination in accordance with Articles VI and X. 6.2 Restriction on Exercise. Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Board at grant, provided, however, that except in the case of the Eligible Director's death or Permanent Disability, upon which events the Option will become immediately exercisable, unless a longer vesting period is otherwise determined by the Board at grant, Options shall be exercisable as follows: one- half of the 3 aggregate Shares purchasable under an Option shall be immediately exercisable on the Grant Date, and the balance of the Shares purchasable under an Option shall be exercisable commencing one year after the Grant Date. 6.3 Exercise Price. The Exercise Price for each Share subject to an Option shall be the Fair Market Value of the Share as determined in Section 2.7 herein. 6.4 Manner of Exercise. An Option shall be exercised in accordance with its terms, by delivery of a written notice of exercise to the Company and payment of the full purchase price of the Shares being purchased. An Eligible Director may exercise an Option with respect to all or less than all of the Shares for which the Option may then be exercised, but an Eligible Director must exercise the Option in full Shares. 6.5 Payment. The Purchase Price of Shares purchased pursuant to an Option or portion thereof, may be paid in United States Dollars, in cash or by check, bank draft or money order payable to the Company. 6.6 Transferability. No Option shall be transferable otherwise than by will or the laws of descent and distribution, and an Option shall be exercisable during the Eligible Director's lifetime only by the Eligible Director, his guardian or legal representative. 6.7 Termination of Membership on the Board. If an Eligible Director's membership on the Board terminates for any reason, an Option vested on the date of termination may be exercised in whole or in part at any time within one (1) year after the date of such termination (but in no event after the term of the Option expires) and shall thereafter terminate. ARTICLE VII GOVERNMENT AND OTHER REGULATIONS -------------------------------- 7.1 Delivery of Shares. The obligation of the Company to issue or transfer and deliver Shares for exercised Options under the Plan shall be subject to all applicable laws, regulations, rules, orders and approvals which shall then be in effect. 7.2 Holding of Stock After Exercise of Option. The Option Agreement shall provide that the Eligible Director, by accepting such Option, represents and agrees, for the Eligible Director and his permitted transferees hereunder that none of the 4 Shares purchased upon exercise of the Option shall be acquired with a view to any sale, transfer or distribution of the Shares in violation of the Securities Act of 1933, as amended (the "Act") and the person exercising an Option shall furnish evidence satisfactory to that Company to that effect, including an indemnification of the Company in the event of any violation' of the Act by such person. Notwithstanding the foregoing, the Company in its sole discretion may register under the Act the Shares issuable upon exercise of the Options under the Plan. ARTICLE VIII WITHHOLDING TAX --------------- The Company may in its discretion, require an Eligible Director to pay to the Company, at the time of exercise of an Option an amount that the Company deems necessary to satisfy its obligations to withhold federal, state or local income or other taxes (which for purposes of this Article includes an Eligible Director's FICA obligation) incurred by reason of such exercise. When the exercise of an Option does not give rise to the obligation to withhold federal income taxes on the date of exercise, the Company may, in its discretion, require an Eligible Director to place Shares purchased under the Option in escrow for the benefit of the Company until such time as federal income tax withholding is required on amounts included in the Eligible Director's gross income as a result of the exercise of an Option. At such time, the Company, in its discretion, may require an Eligible Director to pay to the Company an amount that the Company deems necessary to satisfy its obligation to withhold federal, state or local taxes incurred by reason of the exercise of the Option, in which case the Shares will be released from escrow upon such payment by an Eligible Director. ARTICLE IX ADJUSTMENTS ----------- 9.1 Proportionate Adjustments. If the outstanding Shares are increased, decreased, changed into or exchanged into a different number or kind of Shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made to the maximum number and kind of Shares as to which Options may be granted under this Plan. A corresponding adjustment changing the number or kind of Shares allocated to unexercised Options or portions thereof, which shall have been granted prior to any such change, shall likewise be made. Any such adjustment 5 in the outstanding Options shall be made without change in the Purchase Price applicable to the unexercised portion of the Option with a corresponding adjustment in the Exercise Price of the Shares covered by the Option. Notwithstanding the foregoing, there shall be no adjustment for the issuance of Shares on conversion of notes, preferred stock or exercise of warrants or Shares issued by the Board for such consideration as the Board deems appropriate. 9.2 Dissolution or Liquidation. Notwithstanding any other provision hereof, upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all of the assets or property or more than 80% of the then outstanding Shares of the Company to another corporation, the Company shall give to each Eligible Director at the time of adoption of the plan for liquidation, dissolution, merger or sale either (1) a reasonable time thereafter within which to exercise the Option prior to the effective date of such liquidation or dissolution, merger or sale, or (2) the right to exercise the Option as to an equivalent number of Shares of stock of the corporation succeeding the Company or acquiring its business by reason of such liquidation, dissolution, merger, consolidation or reorganization. ARTICLE X AMENDMENT OR TERMINATION OF PLAN -------------------------------- 10.1 Amendments. The Board may at any time amend or revise the terms of the Plan, provided no such amendment or revision shall, unless approved by the unanimous vote of the Board of Directors of the Corporation: (a) increase the maximum number of Shares which may be sold pursuant to Options granted under the Plan, except as permitted under the provisions of Article IX ; (b) change the minimum Exercise Price set forth in Article VI; (c) increase the maximum term of Options provided for in Article VI; or (d) permit the granting of Options to any one other than as provided in Article V. 6 10.2 Termination. The Board at any time may suspend or terminate this Plan. This Plan, unless sooner terminated, shall terminate on the fifth (5th) anniversary of its adoption by the Board. No Option may be granted under this Plan while this Plan is suspended or after it is terminated. 10.3 Holder of Consent. No amendment, suspension or termination of the Plan shall, without the consent of the holder of Options, alter or impair any rights or obligations under any Option theretofore granted under the Plan. ARTICLE XI MISCELLANEOUS PROVISIONS ------------------------ 11.1 Privilege of Stock Ownership. No Eligible Director entitled to exercise any Option granted under the Plan shall have any of the rights or privileges of a stockholder of the Company with respect to any Shares issuable upon exercise of an Option until certificates representing the Shares shall have been issued and delivered. 11.2 Plan Expenses. Any expenses incurred in the administration of the Plan shall be borne by the Company. 11.3 Use of Proceeds. Payments received from an Eligible Director upon the exercise of Options shall be used for general corporate purposes of the Company. 11.4 Governing Law. The Plan has been adopted under the laws of the State of Delaware. The Plan and all Options which may be granted hereunder and all matters related thereto, shall be governed by and construed and enforceable in accordance with the laws of the State of Delaware as it then exists. 7 Exhibit A American Pacific Corporation 3770 Howard Hughes Parkway Suite 300 Las Vegas, NV 89109 Gentlemen: Notice is hereby given of my election to purchase ________ shares of Common Stock, $.10 par value (the "Shares"), of American Pacific Corporation (the "Company"), at a price of $ per Share, pursuant to the provisions of the stock option granted to me on December 12, 1994, under the Company's 1994 Directors' Stock Option Plan. Enclosed is payment for the Shares as follows: [_] my check in the amount of $ __________. The following information is supplied for use in issuing and registering the Shares purchased hereby: Number of Certificates and Denominations ----------------------------- Name ----------------------------- Address ----------------------------- ----------------------------- Social Security Number ----------------------------- Dated: , ------------------------- ---- Very truly yours, ----------------------------- 8 EX-10.35 3 STOCK OPTION AGREEMENT EXHIBIT 10.35 STOCK OPTION AGREEMENT This Stock Option Agreement is made and entered into effective as of the 11th day of July, 1995, by and between American Pacific Corporation, a Delaware corporation (the "Company"), and General Technical Services, Inc., an Oklahoma corporation (the "Optionee"). RECITALS: A. The Optionee or its present principal is serving as a Consultant to the Company. The Company desires to encourage the ownership of its Common Stock by the Optionee, and to provide an incentive for the Optionee and its principal to assist in expanding and improving the growth, profitability and general prosperity of the Company and of its Subsidiary Corporations, and to stimulate the efforts of the Optionee and its principal by giving suitable recognition, in the form of compensation, to their abilities and industry, which contribute materially to the growth and profitability of the Company and of its Subsidiary Corporations. B. The Company has decided to grant to the Optionee the option to purchase shares of the Common Stock of the Company. C. The Company and the Optionee now desire to set forth the terms and conditions upon which the Optionee shall have the Option to purchase shares of the Common Stock of the Company, and certain terms and conditions that will govern the issuance, holding and exercise of such Options. PROVISIONS: NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, the parties to this Option Agreement agree as follows: ARTICLE I Definitions ----------- As used in this Option Agreement, the following terms shall have the indicated meanings: 1.01 Board of Directors. Unless otherwise indicated, the term Board of Directors shall mean the non-management members of the Board of Directors of the Company. 1.02 Committee shall mean the Stock Option Committee of the Board of Directors of the Company referred to in Article II of this Option Agreement. 1.03 Common Stock shall mean the Common Stock of the Company, par value ten cents ($0.10) per share. 1.04 Company shall mean American Pacific Corporation, a Delaware corporation. 1.05 Disability shall mean a physical or mental condition that, based upon medical reports and other evidence satisfactory to the Committee, presumably permanently prevents the present principal of the Optionee from satisfactorily performing on behalf of the Optionee its usual duties for the Company. 1.06 Exercise Price shall mean the price for which an Option granted hereunder may be exercised, as provided in Section 3.02 of this Option Agreement. 1 1.07 Option shall mean the right to purchase shares of the Common Stock of the Company, granted pursuant to the provisions of this Option Agreement. 1.08 Option Agreement or Agreement shall mean this Stock Option Agreement. 1.09 Optionee shall mean the Optionee identified above, to whom this Option has been granted, upon the terms and conditions set forth in this Option Agreement. 1.10 Subsidiary Corporations shall mean and include all corporations that join with the Company in, or would be eligible to join with the Company in, if timely and proper elections were made, the filing of a consolidated federal income tax return, under the applicable provisions of the Internal Revenue Code in effect from time to time. 1.11 Value of a share of the Common Stock of the Company shall mean the closing price of a share of the Company's Common Stock, as reported on the National Market System of the National Association of Securities Dealers, Inc. If a reported closing price is not available for the date on which the Common Stock is sought to be valued, the reported closing price for the next preceding business day shall be used. If reported closing prices are not available for either such date, the Value of a share of the Company's Common Stock shall be the arithmetic mean of the bid and asked prices of the Company's Common Stock, as published by the National Association of Securities Dealers, Inc., as of the date on which the Company's Common Stock is sought to be valued, or if quoted prices are not available as of such day, then the bid and asked prices as of the next preceding business day shall be used. If the Value cannot be determined under the preceding rules of this Section 1.11, the Value shall be the fair market value of the Company's Common Stock, determined under the method selected by the Committee. Unless modified by the Board of Directors, the Committee's good-faith determination of the Value of a share of the Company's Common Stock shall be conclusive, and shall be valid and binding upon all persons having any interest in any Option granted hereunder. ARTICLE II Administration -------------- 2.01 Committee. The Option granted pursuant to this Option Agreement shall be administered by the Stock Option Committee of the Board of Directors of the Company. If for any reason the Committee is not acting, the Board of Directors shall act as the Committee. All determinations, decisions, interpretations and other action made or taken with respect to the Option granted hereunder by the Committee shall be final and binding upon all persons having any interest in any Option granted pursuant hereto, unless otherwise determined by the Board of Directors. The Board of Directors shall have the power by appropriate action to reverse or modify any action taken by the Committee. 2.02 Committee to Construe Agreement. The Committee shall administer the Option granted pursuant hereto, and shall have all powers necessary for that purpose, including but not limited to the power to interpret this Agreement and the power to determine the rights hereunder of all persons. The Committee shall maintain the records of the Company that relate to the Option granted pursuant hereto, and shall have the power to adjust its records as necessary to correct errors and rectify omissions, in the manner that the Committee believes will best result in the equitable administration of the Option granted pursuant hereto. 2.03 Organization of Committee. The Committee may elect a chairman, and may adopt such rules as it deems desirable for the conduct of its affairs and for the administration of the Option. The Committee may appoint agents, who need not be members of the Committee, to whom it may delegate such powers as it deems appropriate. The action of a majority of the members of the Committee shall be the action of the Committee. 2.04 Indemnification of Committee Members. The Company shall defend, indemnify and hold harmless each member of the Committee against any and all claims, loss, damages, expense and liability arising from any actual or alleged action or failure to act in connection with the administration of the Option granted pursuant hereto, 2 except when the same is judicially determined to be due to the gross negligence or willful misconduct of such Committee member. ARTICLE III Terms and Conditions -------------------- 3.01 Number of Shares Subject to Option. The Company hereby grants to the Optionee, upon the terms and conditions set forth in this Option Agreement, the option to purchase Forty Thousand (40,000) shares of the Common Stock of the Company. 3.02 Exercise Price. The price for which each Option hereby granted to the Optionee may be exercised shall be $4.875 per share of the Common Stock of the Company, which amount represents the Value of a share of the Common Stock on the date of this Option Agreement. 3.03 Time for Exercise. The Option hereby granted to the Optionee shall be exerciseable at the following times: With respect to Ten Thousand (10,000) shares of Common Stock, the Option shall be exerciseable from the date of this Option Agreement through and including July 10, 2000, at which time such options will expire if not theretofore exercised; With respect to an additional Ten Thousand (10,000) shares of Common Stock, the Option shall be exerciseable from July 11, 1996, through and including July 10, 2001, at which time such options will expire if not theretofore exercised; With respect to an additional Ten Thousand (10,000) shares of Common Stock, the Option shall be exerciseable from July 11, 1997, through and including July 10, 2002, at which time such options will expire if not theretofore exercised; With respect to an additional Ten Thousand (10,000) shares of Common Stock, the Option shall be exerciseable from July 11, 1998, through and including July 10, 2003, at which time such options will expire if not theretofore exercised; Each annual increment of the Option granted hereunder shall be exerciseable for the five-year period set forth above unless the period of exercise is sooner terminated in accordance with the provisions of this Option Agreement. The Optionee shall have no right whatsoever to exercise the Option except during the times provided above. 3.04 Restrictions on Transfers and Encumbrance. The Option granted hereunder may not be sold, pledged, assigned, hypothecated, encumbered or transferred by the Optionee in any manner, either voluntarily or involuntarily, by operation of law or otherwise, except by will or by applicable laws of descent and distribution, and may be exercised only by the Optionee. In the event there is any change in control of the Optionee other than as a result of the death of the Optionee's present principal, the Option granted hereunder shall thereupon terminate unless the Company shall have agreed in writing to continue the Option notwithstanding such change in control. 3.05 Exercise After Termination of Consultancy. Except to the extent theretofore exerciseable, the Option granted hereunder shall expire upon termination for any reason of the services of the Optionee or its present principal as a Consultant to the Company. To the extent the Option granted hereunder is exerciseable at the date of such termination for any reason, the Option granted hereunder shall in any event expire six (6) months following such termination. 3.06 Exercise Related to Continuing Service. The Optionee may exercise the Option granted hereunder only if the Optionee or the Optionee's present principal has remained continuously in the service of the Company as a Consultant (or in such other capacity as the parties may agree) since the date on which the Option sought 3 to be exercised was granted to such Optionee, through a date that is not more than six (6) months prior to the date on which the Option is sought to be exercised. ARTICLE IV Procedure for Exercise ---------------------- 4.01 Time for Exercise. Subject to the provisions of this Article IV, the Option granted hereunder shall be exerciseable only during the times provided in this Option Agreement. 4.02 Exercise Upon Corporate Capital Transaction. In the event that the Company, its shareholders, or both, enter into a written agreement to dispose of all or substantially all of the assets or Common Stock of the Company by means of a sale, merger, consolidation, reorganization, liquidation or similar transaction (other than a reorganization, merger or consolidation effected solely to change the Company's name or state of incorporation), the Option issued pursuant to this Option Agreement shall become immediately exerciseable, whether or not such Option was exerciseable prior to such event, during the period of time beginning with the date on which the Company agrees in writing to enter into such transaction, and ending on the earlier of the date the Option would otherwise have expired or the date on which the transaction is consummated. Upon the consummation of the transaction, any unexercised portion of the Option issued hereunder shall terminate and cease to be effective. In the event that the agreement to enter into any such transaction is terminated, all unexercised portions of the Option shall revert to the status they had before the Company agreed to enter into the transaction in question. Any exercise of Option made before the agreement to enter into the transaction was terminated shall remain effective after the termination of the agreement, notwithstanding that the Option may have become exerciseable solely by reason of the Company entering into the agreement. 4.03 Withholding of Taxes. The Optionee hereby agrees that the Company may, if it elects to do so, withhold federal, state and other taxes attributable to taxable income realized by the Optionee upon the exercise of Option from any compensation or other payment payable to such Optionee by the Company. 4.04 Exercise. Subject to all other terms and provisions of this Option Agreement, the Option granted hereunder shall be deemed to be exercised when written notice of exercise has been given to the Company by the Optionee or other person entitled to exercise the Option and full payment in cash or cash equivalents for the shares of Common Stock with respect to which the Option is exercised has been received by the Company. Until certificates have been issued for the number of Shares represented by the exercise of the Option, the Optionee shall have no right to vote, to receive dividends, or other right as a stockholder with respect to shares of Common Stock purchased through the exercise of the Option. Except as provided in Section 5.01 hereof, no adjustments shall be made for dividends or other rights declared or paid with respect to stock acquired through the exercise of the Option for which the record date is prior to the date on which a stock certificate for such shares is issued. 4.05 Exercise in Installments. Subject to Section 3.03, the Optionee may exercise the Option in installments, but only in units of whole shares of the Common Stock of the Company. 4.06 Issuance of Certificates. As soon as practicable after the Option has been exercised in accordance with the provisions of this Option Agreement, the Company shall, without transfer or issue tax or other charge to the Optionee, deliver to the Optionee at the principal business office of the Company, or at such other place as may be agreed, certificates representing the number of shares of Common Stock as to which the Option has been exercised. The Company may, however, postpone the time of delivery of certificates for such period of time as the Company may determine to be necessary for it with reasonable diligence to comply with any applicable listing requirements of any national or regional securities exchange, of the National Association of Securities Dealers, Inc., or with any law or regulation applicable to the issuance or delivery of shares of the Company's Common Stock. 4 ARTICLE V Restrictions and Additional Provisions -------------------------------------- 5.01 Adjustments Upon Changes in Capitalization. If the number of outstanding shares of the Common Stock of the Company is increased or decreased, or if the Common Stock of the Company underlying the Option granted pursuant to the provisions of this Option Agreement is changed into or exchanged for a different number or kind of shares or securities of the Company through a reorganization, merger, recapitalization, reclassification, stock dividend, stock split or reverse stock split, an appropriate and proportionate adjustment shall be made by the Committee in the terms and conditions of the Options granted pursuant hereto, including the Exercise Price of the Option; provided, however, that no such adjustment need be made if, upon the advice of legal counsel to the Company, the Committee determines that any such adjustment could result in the recognition of federal taxable income by the Optionee, or by holders of Common Stock or other securities of the Company. 5.02 Reservation of Shares of Common Stock. The Company shall, at all times during the periods of time during which the Option may be exercised hereunder, reserve and keep available for issuance to the Optionee a number of shares of its Common Stock sufficient to satisfy all obligations of the Company hereunder. 5.03 Restrictions on Issuance of Shares. The Company shall use its best efforts to seek and to obtain from appropriate regulatory agencies any requisite authorization in order to issue and sell such number of shares of its Common Stock as shall be sufficient to satisfy the obligations of the Company under this Agreement. The inability of the Company to obtain authorization deemed to be necessary by the Company's legal counsel to the lawful issuance and sale of any shares of the Company's Common Stock shall relieve the Company of any liability for the nonissuance or nonsale of any Common Stock as to which the requisite approval or authorization shall not have been obtained. 5.04 Representations and Warranties. As a condition to the exercise of the Option granted hereunder, the Committee may require the person exercising the Option to make any representations or warranties to the Company that legal counsel to the Company may determine to be required or advisable under any applicable law or regulation, including without limitation a representation and warranty that the shares of the Company's Common Stock being acquired are being acquired only for investment and without any present intention or view to sell or distribute any such shares. 5.05 Optionee Rights. No provision of this Agreement shall be deemed to constitute a condition of the service or status of any Consultant. No provision of this Option Agreement shall be deemed to give to the Optionee any right to be retained in the service of the Company or of any Subsidiary Corporation in any capacity (whether as an employee, Director, independent contractor, consultant, or otherwise), or to interfere in any way with the right of the Company and its Subsidiary Corporations at any time to remove any Director, or to discontinue using the services of any individual. The Optionee shall have no right or interest in any share of the Company's Common Stock prior to exercise of the Option, except as provided in this Option Agreement. 5.06 Legends on Stock Certificates. Unless an appropriate registration statement is on file and effective with appropriate federal, state and local governmental authorities, each certificate representing Common Stock of the Company issued pursuant to the exercise of the Option shall be endorsed on its face with a legend similar to the following: Neither the Option pursuant to which the shares represented by this certificate are issued nor the shares represented hereby have been registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended, or with any state securities agency. The transfer or sale of the shares represented hereby without appropriate registration, or pursuant to an exemption from registration, is unlawful. 5 ARTICLE VI Miscellaneous Provisions ------------------------ 6.01 Notices (a) All notices, demands or requests provided for or permitted to be given pursuant hereto must be in writing. All notices, demands and requests shall be deemed to have been properly given or served when deposited in the United States mail, addressed to the individual or entity to whom notice is given, postage prepaid and registered or certified with return receipt requested, at the last known address of such individual or entity. (b) By giving at least fifteen (15) days prior written notice, the Company, a Subsidiary Corporation and the Optionee shall have the right from time to time to change their addresses and to specify any other address within the United States of America. 6.02 Titles and Captions. All Article and Section titles and captions in this Option Agreement are for convenience or reference only, and shall not be deemed part of this Option Agreement, and in no way define, limit, extend or describe the scope or intent of any provisions hereof. 6.03 Pronouns and Plurals. Whenever the context may require, any pronoun used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. 6.04 Applicable Law. This Option Agreement shall be construed in accordance with and shall be governed by the laws of the State of Nevada. 6.05 Binding Effect. This Option Agreement shall be binding upon the Optionee and upon the Optionee's successors, legal representatives, and assigns. 6.06 Creditors. None of the provisions of this Option Agreement shall be for the benefit of or shall be enforceable by any creditor of the Optionee. 6.07 Severability. In the event that any condition, covenant or other provision herein contained is held to be invalid or void by any court of competent jurisdiction, the same shall be deemed severable from the remainder of this Option Agreement and shall in no way affect any other covenant or condition herein contained. If such condition, covenant or other provision shall be deemed invalid due to its scope or breadth, such provision shall be deemed valid to the extent of the scope or breadth permitted by law. 6.08 Plan Controls. This Option Agreement is subject to the terms and provisions of the Plan, and in the event of an inconsistency herewith, the terms of the plan shall control. 6 IN WITNESS WHEREOF, the Company and the Optionee have executed this Option Agreement as of the date first set forth above. "Company" AMERICAN PACIFIC CORPORATION, a Delaware corporation By ________________________________ Fred D. Gibson, Jr. President Attest: __________________________ C. Keith Rooker Secretary "Optionee" GENERAL TECHNICAL SERVICES, INC.,, an Oklahoma corporation By ------------------------------ Its ----------------------------- Address: 3030 Northwest Expressway Suite 200 Oklahoma City, OK 73112-5465 7 EX-22 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 22 SUBSIDIARIES OF THE REGISTRANT
Location of Incorporation Percent Subsidiaries of the Registrant or Organization Ownership - - ------------------------------ ------------------------- --------- American Azide Corporation Nevada 100% AMPAC Development Company Nevada 100% AMPAC Development Company of Utah Utah 100% AMPAC Technologies Corporation Nevada 100% Halotron, Inc. Nevada 100% Pacific Engineering & Production Co. of Nevada Nevada 100% PEPCON Production, Inc. Utah 100% PEPCON Systems, Inc. Nevada 100% Western Electrochemical Company Delaware 100% AMPAC Farms, Inc. Nevada 100% AMPAC Chemicals Corporation Nevada 100% Sun Country Homes, Inc. California 100%
1 EX-23 5 INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Amendment No. 1 to Registration Statement No. 33-15674 on Form S-3, Post-Effective Amendment No. 2 to Registration Statement No. 33-21565 on Form S-8, Post-Effective Amendment No. 1 to Registration Statement No. 33-30321 on Form S-8, Registration Statement No. 33-36887 on Form S-8, Registration Statement No. 33-52898 on Form S-8, and Amendment No. 2 to Registration Statement No. 33-52196 on Form S-3 of American Pacific Corporation of our report dated November 27, 1995 appearing in this Annual Report on Form 10-K of American Pacific Corporation for the year ended September 30, 1995. Las Vegas, Nevada December 27, 1995 1 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS SEP-30-1995 SEP-30-1995 24,540 2,000 5,992 0 7,094 40,612 88,066 7,122 157,789 14,172 0 822 0 0 0 157,789 39,250 39,250 29,861 41,297 0 0 1,709 (2,327) (791) (1,536) 0 0 0 (1,536) (.19) (.19)
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