-----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, QH2/O5srYcHr5JWDaQxLbeNyOpQgC/Sq9wBes01ukqkqcHlwCvX+ICJo2wBMfYVD lfIDEPd8jtrvKIoCRIGItA== 0000898430-99-003058.txt : 19990809 0000898430-99-003058.hdr.sgml : 19990809 ACCESSION NUMBER: 0000898430-99-003058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990802 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PACIFIC CORP CENTRAL INDEX KEY: 0000350832 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 596490478 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21046 FILM NUMBER: 99676265 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15 (d) --- of the Securities Exchange Act of 1934 For Quarterly Period Ended June 30, 1999 Commission File Number 1-8137 OR Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 AMERICAN PACIFIC CORPORATION (Exact name of registrant as specified in its charter) Delaware 59-6490478 (State or other jurisdiction (IRS Employer of incorporation or Identification No.) organization) 3770 Howard Hughes Parkway, Suite 300 Las Vegas, NV 89109 (Address of principal executive offices) (Zip Code) (702) 735-2200 (Registrant's telephone number, including area code) NOT APPLICABLE -------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant has filed all reports required to be filed by Sections 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 / / Applicable Only to Corporate Issuers Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 8,135,037 as of July 31, 1999. -1- PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements ------------------------------------------- The information required by Rule 10-01 of Regulation S-X is provided on pages 4 through 9 of this Report on Form 10-Q. ITEM 2. Management's Discussion and Analysis of Financial Condition and ------------------------------------------------------------------ Results of Operations --------------------- The information required by Item 303 of Regulation S-K is provided on pages 10 through 15 of this Report on Form 10-Q. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ----------------- None. ITEM 2. Changes in Securities --------------------- None. ITEM 3. Defaults Upon Senior Securities ------------------------------- None. ITEM 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. ITEM 5. Other Information ----------------- None. ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- a) 10.1 Employment Agreement dated May 11, 1999 between the Registrant and John R. Gibson. 27. Financial Data Schedules. This Exhibit is filed in connection with the Registrant's electronic filing. b) None. -2- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN PACIFIC CORPORATION Date: August 2, 1999 /S/ JOHN R. GIBSON ------------------ John R. Gibson Chief Executive Officer and President Date: August 2, 1999 /S/ DAVID N. KEYS ----------------- David N. Keys Executive Vice President, Chief Financial Officer, Secretary and Treasurer; Principal Financial and Accounting Officer -3- AMERICAN PACIFIC CORPORATION Condensed Consolidated Statements of Operations (Unaudited)
- ----------------------------------------------------------------------------------------------------------------- For the three months ended For the nine months June 30, ended June 30, 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Sales and Operating Revenues $ 18,659,000 $ 13,136,000 $ 54,404,000 $ 38,523,000 Cost of Sales 12,429,000 9,047,000 34,987,000 26,282,000 --------------- --------------- ------------ ------------ Gross Profit 6,230,000 4,089,000 19,417,000 12,241,000 Operating Expenses 2,548,000 2,361,000 7,505,000 6,791,000 --------------- --------------- ------------ ------------ Operating Income 3,682,000 1,728,000 11,912,000 5,450,000 Equity in Earnings of Real Estate Venture 300,000 Net Interest and Other Expense 1,326,000 1,514,000 4,191,000 2,977,000 --------------- --------------- ------------ ------------ Income Before Provision for Income Taxes 2,356,000 214,000 7,721,000 2,773,000 Provision for Income Taxes --------------- --------------- ------------ ------------ Net Income Before Extraordinary Loss 2,356,000 214,000 7,721,000 2,773,000 Extraordinary Loss-Debt Extinguishment 174,000 174,000 5,005,000 --------------- --------------- ------------ ------------ Net Income (Loss) $ 2,182,000 $ 214,000 $ 7,547,000 $ (2,232,000) --------------- --------------- ------------ ------------ Basic Net Income (Loss) Per Share: Income Before Extraordinary Loss $ .29 $ .03 $ .95 $ .34 Extraordinary Loss (.02) (.02) (.61) --------------- --------------- ------------ ------------ Net Income (Loss) $ .27 $ .03 $ .93 $ (.27) --------------- --------------- ------------ ------------ Average Shares Outstanding 8,134,000 8,250,000 8,156,000 8,184,000 --------------- --------------- ------------ ------------ Diluted Net Income (Loss) Per Share: Income Before Extraordinary Loss $ .28 $ .02 $ .93 $ .33 Extraordinary Loss (.02) (.02) (.60) --------------- --------------- ------------ ------------ Net Income (Loss) $ .26 $ .02 $ .91 $ (.27) --------------- --------------- ------------ ------------ Diluted Shares 8,272,000 8,563,000 8,269,000 8,384,000 --------------- --------------- ------------ ------------
See the accompanying Notes to Condensed Consolidated Financial Statements. -4- AMERICAN PACIFIC CORPORATION Condensed Consolidated Balance Sheets (Unaudited)
- ----------------------------------------------------------------------------------------------------------------- June 30, September 30, 1999 1998 - ---------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and Cash Equivalents $ 35,924,000 $ 20,389,000 Accounts and Notes Receivable 11,667,000 8,927,000 Related Party Notes Receivable 458,000 536,000 Inventories 9,439,000 13,730,000 Prepaid Expenses and Other Assets 1,032,000 839,000 Restricted Cash 1,186,000 1,176,000 -------------- -------------- Total Current Assets 59,706,000 45,597,000 Property, Plant and Equipment, Net 18,484,000 19,529,000 Intangible Assets, Net 35,234,000 38,252,000 Development Property 6,569,000 7,036,000 Real Estate Equity Investments 12,543,000 17,112,000 Other Assets, Net 2,669,000 3,233,000 -------------- -------------- TOTAL ASSETS $135,205,000 $130,759,000 -------------- --------------
See the accompanying Notes to Condensed Consolidated Financial Statements. -5- AMERICAN PACIFIC CORPORATION Condensed Consolidated Balance Sheets (Unaudited)
- ------------------------------------------------------------------------------------------------------------- June 30, September 30, 1999 1998 - ------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts Payable and Accrued Liabilities $ 10,718,000 $ 9,635,000 Current Portion of Long-Term Debt 1,186,000 1,176,000 --------------- -------------- Total Current Liabilities 11,904,000 10,811,000 Long-Term Debt 67,000,000 70,000,000 Long-Term Payables 1,799,000 2,350,000 --------------- -------------- TOTAL LIABILITIES 80,703,000 83,161,000 --------------- -------------- Commitments and Contingencies Warrants to Purchase Common Stock 3,569,000 3,569,000 Shareholders' Equity: Common Stock 843,000 842,000 Capital in Excess of Par Value 79,559,000 79,488,000 Accumulated Deficit (27,171,000) (34,718,000) Treasury Stock (2,211,000) (1,486,000) Receivable from the Sale of Stock (87,000) (97,000) --------------- -------------- Total Shareholders' Equity 50,933,000 44,029,000 --------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' --------------- -------------- EQUITY $135,205,000 $130,759,000 --------------- --------------
See the accompanying Notes to Condensed Consolidated Financial Statements. -6- AMERICAN PACIFIC CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited)
- ---------------------------------------------------------------------------------------------------------------- For the three months For the nine months ended June 30, ended June 30, 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------- Cash Provided by Operating Activities $ 6,507,000 $ 8,916,000 $ 17,177,000 $ 8,505,000 ----------- ----------- ------------ ------------ Cash Flows Provided by (Used For) Investing Activities: Capital Expenditures (413,000) (406,000) (2,505,000) (2,054,000) Payment for Acquisition of Intangible (39,000,000) Real Estate Equity Investment Capital Activity 3,189,000 360,000 4,569,000 3,091,000 ----------- ----------- ------------ ------------ Net Cash Provided by (Used For) Investing Activities 2,776,000 (46,000) 2,064,000 (37,963,000) ----------- ----------- ------------ ------------ Cash Flows from Financing Activities: Debt Related Payments (3,053,000) (3,053,000) (34,416,00) Issuance of Notes 75,000,000 Debt issue Costs (360,000) (3,067,000) Issuance of Common Stock 27,000 192,000 72,000 791,000 Treasury Stock Acquired (725,000) ----------- ----------- ------------ ------------ Net Cash From Financing Activities (3,026,000) (168,000) (3,706,000) 38,308,000 ----------- ----------- ------------ ------------ Net Increase in Cash and Cash Equivalents 6,257,000 8,702,000 15,535,000 8,850,000 Cash and Cash Equivalents, Beginning of Period 29,667,000 19,029,000 20,389,000 18,881,000 ----------- ----------- ------------ ------------ Cash and Cash Equivalents, End of Period $35,924,000 $27,731,000 $ 35,924,000 $ 27,731,000 ----------- ----------- ------------ ------------ Supplemental Disclosure of Cash Flow Information: Interest Paid (Net of Amounts Capitalized) $ $ 3,238,000 $ 1,650,000 ----------- ----------- ------------ ------------
See the accompanying Notes to Condensed Consolidated Financial Statements. -7- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED): 1. BASIS OF REPORTING The accompanying Condensed Consolidated Financial Statements are unaudited and do not include certain information and disclosures included in the Annual Report on Form 10-K of American Pacific Corporation (the "Company"). The Condensed Consolidated Balance Sheet as of September 30, 1998 was derived from the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 1998. Such statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1998. In the opinion of Management, however, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included. The operating results and cash flows for the three-month and nine-month periods ended June 30, 1999 are not necessarily indicative of the results that will be achieved for the full fiscal year or for future periods. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by the Company include estimated useful lives for depreciable and amortizable assets, the estimated valuation allowance for deferred tax assets, and estimated cash flows in assessing the recoverability of long-lived assets. Actual results may differ from these and other estimates. 2. NET INCOME (LOSS) PER COMMON SHARE Basic per share amounts are computed by dividing net income (loss) by average shares outstanding during the period. Diluted per share amounts are computed by dividing net income (loss) by average shares outstanding plus the dilutive effect of common share equivalents. The effect of stock options and warrants outstanding to purchase approximately 2.9 million shares of common stock were not included in diluted per share calculations during the three-month and nine-month periods ended June 30, 1999 and 1998, since the average exercise price of such options and warrants was greater than the average price of the Company's common stock during these periods. 3. INVENTORIES Inventories consist of the following:
June 30, September 30, 1999 1998 ---------- ----------- Work-in-process $6,533,000 $ 8,685,000 Raw materials and supplies 2,906,000 5,045,000 ---------- ----------- Total $9,439,000 $13,730,000 ---------- -----------
-8- 4. COMMITMENTS AND CONTINGENCIES Trace amounts of perchlorate chemicals have been found in Lake Mead. Clark County, Nevada, where Lake Mead is situated, is the location of Kerr-McGee Chemical Corporation's ("Kerr-McGee") ammonium perchlorate ("AP") operations, and was the location of the Company's AP operations until May 1988. The Company is cooperating with State and local agencies, and with Kerr-McGee and other interested firms, in the investigation and evaluation of the source or sources of these trace amounts, possible environmental impacts, and potential remediation methods. Until these investigations and evaluations have reached definitive conclusions, it will not be possible for the Company to determine the extent to which, if at all, the Company may be called upon to contribute to or assist with future remediation efforts, or the financial impact, if any, of such cooperation, contributions or assistance. 5. INCOME TAXES The Company established a valuation allowance for deferred tax assets in the amount of $10.4 million as of September 30, 1997. At September 30, 1998, the balance of the valuation allowance was $11.0 million. The Company's effective tax rate will be 0% until its net operating losses expire or the Company has taxable income in an amount sufficient to eliminate the need for the valuation allowance. 6. REAL ESTATE EQUITY INVESTMENTS The Company's interest in Gibson Ranch Limited Liability Company ("GRLLC") is accounted for using the equity method. GRLLC operates on a calendar year. The Company recognizes its share of the equity in GRLLC on a current quarterly basis. Summarized financial information for GRLLC as of and for the three-month and nine-month periods ended June 30, 1999 was as follows:
Three-Month Period Ended Nine-Month Period Ended June 30, 1999 June 30, 1999 -------------- -------------- Income Statement: Revenues $ 8,430,000 $ 31,662,000 Gross Profit 2,921,000 4,955,000 Operating Expenses 380,000 1,136,000 Net Income 2,560,000 3,906,000
-9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is principally engaged in the production of AP for the aerospace and national defense industries. In addition, the Company produces and sells sodium azide, the primary component of a gas generant used in certain automotive airbag safety systems, and Halotron, a chemical used in fire suppression systems ranging from portable fire extinguishers to airport firefighting vehicles. The perchlorate, sodium azide and Halotron facilities are located on the Company's property in Southern Utah and the chemicals produced and sold at these facilities collectively represent the Company's specialty chemical segment. The Company's other lines of business include the development of real estate in Nevada and the production of environmental protection equipment, including waste and seawater treatment systems. The Company believes that North American AP demand is currently approximately 20 to 25 million pounds annually. However, supply capacity has historically been substantially in excess of these estimated demand levels. In an effort to rationalize the economics of the AP market, the Company entered into a Purchase Agreement with Kerr-McGee. On March 12, 1998, the Company sold $75.0 million of unsecured senior notes (the "Notes"), consummated an acquisition (the "Acquisition") of certain assets from Kerr-McGee and purchased and retired the remaining $25.0 million principal amount balance outstanding of subordinated secured notes (the "Azide Notes"). Upon consummation of the Acquisition, the Company effectively became the sole North American producer of AP. Sales and Operating Revenues. Sales of the Company's perchlorate chemical - ---------------------------- products, consisting almost entirely of AP sales, accounted for approximately 65% and 63% of revenues during the nine-month periods ended June 30, 1999 and 1998, respectively. In general, demand for AP is driven by a relatively small number of DOD and NASA contractors; as a result, any one individual AP customer usually accounts for a significant portion of the Company's revenues. Sodium azide sales accounted for approximately 20% and 23% of revenues during the nine-month periods ended June 30, 1999 and 1998, respectively. In the summer of 1998, shipments of sodium azide were negatively impacted by a labor strike at certain General Motor's ("GM") facilities. Shipments of sodium azide increased significantly subsequent to the settlement of the strike. Sales of Halotron amounted to approximately 2% and 3% of revenues during the nine-month periods ended June 30, 1999 and 1998, respectively. Halotron is designed to replace halon-based fire suppression systems. Accordingly, demand for Halotron depends upon a number of factors including the willingness of consumers to switch from halon-based systems, as well as existing and potential governmental regulations. Real estate and related sales amounted to approximately 10% and 6% of revenues during the nine-month periods ended June 30, 1999 and 1998, respectively. The nature of real estate development and sales is such that the Company is unable reliably to predict any pattern of future real estate sales or the recognition of the equity in earnings of real estate ventures. Environmental protection equipment sales accounted for approximately 3% and 5% of revenues during the nine-month periods ended June 30, 1999 and 1998, respectively. It is currently anticipated that sales of this segment will be adversely affected in fiscal 1999 and perhaps beyond by the adverse economic developments and conditions in the Company's foreign markets (particularly Asian markets). Cost of Sales. The principal elements comprising the Company's cost of sales - -------------- are raw materials, electric power, labor, manufacturing overhead and the basis in real estate sold. The major raw materials used by the Company in its production processes are graphite, sodium chlorate, ammonia, hydrochloric acid, sodium metal, and nitrous oxide. Significant increases in the cost of raw materials may have an adverse impact on margins if the Company is unable to pass along such increases to its customers, although all of the raw materials used in the Company's manufacturing processes have historically been available in commercial quantities with relatively stable pricing, and the Company has had no difficulty obtaining necessary raw materials. -10- The costs of operating the Company's specialty chemical plants are, however, largely fixed. Income Taxes. The Company's effective income tax rates were 0% during the nine- - ------------ month periods ended June 30, 1999 and 1998. The Company's effective income tax rate was 0% during these periods as a result of the establishment of a $10.4 million deferred tax valuation allowance in the fourth quarter of fiscal 1997. The Company's effective tax rate will be 0% until the Company's net operating losses expire or the Company has taxable income in an amount sufficient to eliminate the need for the valuation allowance. Net Income (Loss). Although the Company's net income (loss) and diluted net - ----------------- income (loss) per share have not been subject to seasonal fluctuations, they have been and are expected to continue to be subject to variations from quarter to quarter and year to year due to the following factors, among others: (i) as discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, the Company may incur material costs associated with certain contingencies; (ii) timing of real estate and related sales and the equity in earnings of real estate ventures is not predictable; (iii) the recognition of revenues from environmental protection equipment orders not accounted for as long-term contracts depends upon orders generated and the timing of shipment of the equipment; (iv) weighted average common and common equivalent shares for purposes of calculating diluted net income per share are subject to significant fluctuations based upon changes in the market price of the Company's Common Stock due to outstanding warrants and options; and (v) the magnitude, pricing and timing of AP, sodium azide, Halotron, and environmental protection equipment sales in the future is uncertain. (See "Forward Looking Statements/Risk Factors" below.) Results of Operations Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998 Sales and Operating Revenues. Sales increased $5.6 million, or 43%, during the - ---------------------------- three months ended June 30, 1999, to $18.7 million from $13.1 million in the corresponding period of the prior year. This increase was principally attributable to increased sales of specialty chemicals and real estate. Sodium azide sales increased approximately $0.9 million due to increased shipments. Real estate sales increased approximately $3.7 million as a result of increased land sales. Cost of Sales. Cost of sales increased $3.4 million, or 38%, in the three - ------------- months ended June 30, 1999, to $12.4 million from $9.0 million in the corresponding period of the prior year. Such increase was principally due to an increase in costs associated with higher real estate and sodium azide sales. The increase in sodium azide costs was primarily attributable to increased sales volumes. Operating Expenses. Operating (selling, general and administrative) expenses - ------------------ increased $0.1 million, or 4%, in the three months ended June 30, 1999, to $2.5 million from $2.4 million in the corresponding period of 1998. Net Interest Expense. Net interest and other expense decreased to $1.3 million - -------------------- in the three months ended June 30, 1999, from $1.5 million in the corresponding period of the prior year as a result of the early extinguishment of approximately $8.0 million in Notes (see below). Nine Months Ended June 30, 1999 Compared to Nine Months Ended June 30, 1998 Sales and Operating Revenues. Sales increased $15.9 million, or 41%, during the - ---------------------------- nine months ended June 30, 1999, to $54.4 million from $38.5 million in the corresponding period of the prior year. This increase was principally due to increased sales of specialty chemicals and real estate. Perchlorate chemical sales increased approximately $11.0 million during the nine months ended June 30, 1999, principally as a result of the consummation of the Acquisition. Cost of Sales. Cost of sales increased $8.7 million, or 33%, in the nine months - ------------- ended June 30, 1999, to $35.0 million from $26.3 million in the corresponding period of the prior year. The increase in cost of sales was primarily due to increases in perchlorate and sodium azide volume and the basis in real estate sold. As a percentage of sales, costs of sales decreased in the nine months ended June 30, 1999 to 64% as compared to 69% in the corresponding period of the prior year. The decrease was attributable to the -11- increase in perchlorate and sodium azide sales volume. Such decrease was partially offset by the amortization of capitalized Acquisition costs beginning April 1, 1998. Operating Expenses. Operating expenses were $7.5 million during the nine-month - ------------------ period ended June 30, 1999 compared to $6.8 million in the corresponding period of the prior year. The increase in operating expenses was primarily attributable to increased costs associated with the Company's investigation and evaluation of perchlorate chemicals found in Lake Mead (see Note 4 of Notes to Condensed Consolidated Financial Statements) and costs related to the Company's strategic review process. Net Interest Expense. Net interest and other expense increased to $4.2 million - -------------------- in the nine months ended June 30, 1999, from $3.0 million in the corresponding period of the prior year principally as a result of the issuance of the Notes. Equity in Earnings of Real Estate Venture. The Company's share of equity in its - ----------------------------------------- Ventana Canyon joint venture was $0 million and $0.3 million during the nine- month periods ended June 30, 1999 and 1998, respectively. The joint venture has historically operated at or near a break-even point on residential activity and has generated net income on sales of improved land. Segment Operating Income (Loss). Operating income (loss) of the Company's - ------------------------------- industry segments during the nine-month periods ended June 30, 1999 and 1998 was as follows:
1999 1998 -------------- -------------- Specialty chemicals $ 9,403,000 $ 3,882,000 Environmental protection equipment (239,000) 36,000 Real Estate 3,053,000 1,155,000 -------------- -------------- Total $ 12,217,000 $ 5,073,000 ============== ==============
The increase in operating income in the Company's specialty chemical industry segment was attributable to the increase in perchlorate and sodium azide sales referred to above. The decrease in operating performance of the environmental protection equipment segment was primarily due to decreased sales. The increase in real estate segment operating income was attributable to increased land sales. Inflation Inflation did not have a significant effect on the Company's sales and operating revenues or costs during the three-month or nine-month periods ended June 30, 1999 or 1998. Inflation may have an effect on gross profit in the future as certain of the Company's agreements with AP and sodium azide customers require fixed prices, although certain of such agreements contain escalation features that should somewhat insulate the Company from increases in costs associated with inflation. Liquidity and Capital Resources In March 1998, the Company sold Notes in the principal amount of $75.0 million, acquired certain assets from Kerr-McGee for a cash purchase price of $39.0 million and paid $28.2 million to repurchase the remaining $25.0 million principal amount outstanding of the Azide Notes. In June 1999 and September 1998, the Company purchased and retired $3.0 million and $5.0 million, respectively, in principal amount of Notes. The Company incurred extraordinary losses on debt extinguishment of approximately $0.2 million on each of these transactions principally as a result of writing off costs associated with the issuance of the Notes. Cash flows provided by operating activities were $17.2 million and $8.5 million during the nine-months ended June 30, 1999 and 1998, respectively. Cash flows from operating activities increased principally as a result of increased sales and margins in the Company's specialty chemicals and real estate operations and a reduction of inventory balances. The Company believes that its cash flows from operations and existing cash balances will be adequate for the foreseeable future to satisfy the needs of its operations. However, the resolution of contingencies, and the timing, pricing and magnitude of orders for AP, sodium azide and Halotron, may have an effect on the use and availability of cash. -12- Capital expenditures were $2.5 million during the nine months ended June 30, 1999, compared to $2.1 million during the same period last year. Capital expenditures are budgeted to amount to approximately $3.5 million in fiscal 1999 and relate principally to specialty chemical segment capital improvement projects. During the nine-month period ended June 30, 1999, the Company received cash of approximately $4.6 million relating to the return of capital invested in the Ventana Canyon joint venture. The Company currently anticipates that cash returns of invested capital and equity in earnings will continue through the conclusion of the project currently projected to be the end of calendar 2001. As a result of the contingencies discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, the Company has incurred legal and other costs, and it may incur material legal and other costs associated with the resolution of contingencies in future periods. Any such costs, to the extent borne by the Company and not recovered through insurance, would adversely affect the Company's liquidity. The Company is currently unable to predict or quantify the amount or range of such costs, if any, or the period of time over which such costs will be incurred. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company has completed an evaluation and is in the process of resolving the problems that might be associated with the Year 2000 issue. The Company's Year 2000 project has four major components: 1. Evaluation of all major manufacturing and business computing systems to determine which systems are Year 2000 compliant. 2. For each computing system found not to be Year 2000 compliant, development of a strategy to replace, modify or upgrade the system to a Year 2000 compliant system. 3. Evaluation of core vendors for Year 2000 compliance. 4. Preparation of contingency plans. The Company's evaluation found that the most critical digital control system, which is used in the manufacture of specialty chemical products, is Year 2000 compliant. The Company has received a letter of certification from its vendor, and the Company has tested the system by turning the dates forward on the computers to the year 2000, and all systems functioned normally. The Company's accounting system is being upgraded to a Year 2000 compliant version. This upgrade is in process, and should be completed in the fourth quarter of fiscal 1999. New maintenance and manufacturing (MRP) software packages have been implemented, and each is certified and tested as Year 2000 compliant. The majority of PC computers used by the Company are Pentium class, running Microsoft's Windows 95 operating system, and are Year 2000 compliant. The Company's file servers are running on Pentium computers with Microsoft NT 4.0, and each of these is also certified Year 2000 compliant. The Company also uses Microsoft's office suite, which is Year 2000 compliant. During the evaluation phase of its Year 2000 project, the Company identified certain potential issues related to many of its programmable logic controller units used in the manufacturing process and certain of the Company's laboratory instruments and the computers and software with which they operate. The Company is in the process of updating the equipment that is not Year 2000 compliant and expects this to be completed by the fourth quarter of fiscal 1999. The Company has identified all critical vendors of raw materials, supplies and services. Each such vendor has been contacted and asked to describe to the Company their year 2000 readiness program. All such -13- critical vendors have indicated to the Company that they are or will be prepared for the Year 2000 issue. However, the Company can provide no assurance as to the readiness of its critical vendors for the Year 2000 issue. Plant personnel have completed a contingency plan for plant operations that is currently being reviewed by senior management. The Company expects to have a complete Company contingency plan in place by the fourth quarter of fiscal 1999. The Year 2000 issue and related risks could potentially have a material impact on the Company's operations, working capital, results of operations and financial condition. In a worst case situation, long delays or interruptions in deliveries of critical raw materials, supplies or services could materially impact the Company's ability to produce and deliver products. In addition, problems encountered by the Company's customers could cause delays or possibly cancellations of shipments and billings of the Company's products. The Company is considering these risks, among others, in the preparation of its contingency plan. The Company recently reevaluated its estimates and assumptions of the costs directly associated with its Year 2000 project and currently estimates that approximately $0.5 million in costs have been incurred that are directly associated with the project. Through June 30, 1999, the Company had incurred approximately $0.4 million in costs that were directly related to its Year 2000 project. Given the inherent risks for a project of this nature, the timing and costs involved could differ materially from those anticipated by the Company. There can be no assurance that the Year 2000 project will be completed on schedule or within budget. Forward-Looking Statements/Risk Factors Certain matters discussed in this Report may be forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, the risk factors set forth below. The following risk factors, among others, may cause the Company's operating results and/or financial position to be adversely affected from time to time: 1. (a) Declining demand or downward pricing pressure for the Company's products as a result of general or specific economic conditions, (b) governmental budget decreases affecting the DOD or NASA that would cause a decrease in demand for AP, (c) the results achieved by the Suspension Agreement resulting from the Company's anti-dumping petition against foreign sodium azide producers and the possible termination of such agreement, (d) technological advances and improvements with respect to existing or new competitive products causing a reduction or elimination of demand for AP, sodium azide or Halotron, (e) the ability and desire of purchasers to change existing products or substitute other products for the Company's products based upon perceived quality, environmental effects and pricing, and (f) the fact that perchlorate chemicals, sodium azide, Halotron and the Company's environmental products have limited applications and highly concentrated customer bases. 2. Competitive factors including, but not limited to, the Company's limitations respecting financial resources and its ability to compete against companies with substantially greater resources, significant excess market supply in the sodium azide market and the development or penetration of competing new products, particularly in the propulsion, airbag inflation and fire suppression businesses. 3. Underutilization of the Company's manufacturing facilities resulting in production inefficiencies and increased costs, the inability to recover facility costs and reductions in margins. -14- 4. Risks associated with the Company's real estate activities, including, but not limited to, dependence upon the Las Vegas commercial, industrial and residential real estate markets, changes in general or local economic conditions, interest rate fluctuations affecting the availability and cost of financing, the performance of the managing partner of its residential real estate joint venture (GRLLC) and regulatory and environmental matters that may have a negative impact on sales or costs. 5. The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies or similar organizations, including, but not limited to, environmental, safety and transportation issues. 6. The cost and effects of legal and administrative proceedings, settlements and investigations, particularly those investigations described in Note 4 of Notes to Condensed Consolidated Financial Statements and claims made by or against the Company relative to patents or property rights. 7. Integration of new customers and the ability to meet additional production and delivery requirements resulting from the Acquisition. 8. The effects, if any, of problems associated with the Year 2000 issue. 9. The results of the Company's periodic review of impairment issues under the provisions of SFAS No. 121. 10. The dependence upon a single facility for the production of most of the Company's products. -15- EX-10.1 2 EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT (John R. Gibson) This Employment Agreement (the "Agreement") is made and entered into this 11th day of May, 1999, by and between American Pacific Corporation, a Delaware corporation having its principal place of business at 3770 Howard Hughes Parkway, Suite 300, Las Vegas, Nevada 89109 (the "Company"), and John R. Gibson, an individual residing in Clark County, Nevada (the "Executive"). RECITALS: A. The Company, through its subsidiary corporations, is engaged in the manufacture of specialty chemicals, including perchlorate chemicals, sodium azide and Halotron(TM) fire suppression agents, and is engaged in the design and manufacture of environmental protection products and real estate development. B. The Executive is serving as a President and Chief Executive Officer of the Company since July 16, 1997, and as Chairman since March 12, 1998. The Company desires to enter into this Agreement with the Executive in order to assure the Company of the continued service of the Executive. C. The Executive is willing to continue to provide services to the Company, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the promises and agreements herein contained, and intending to be legally bound, the Company and the Executive agree as follows: 1. Employment. The Company shall employ and retain the Executive as an ----------- Executive, and the Executive agrees to work for the Company and to provide services to the Company, for a term commencing on the Effective Date of this Agreement, and continuing thereafter throughout the period or periods of time provided in this Agreement, unless sooner terminated in accordance with the provisions hereof. 2. Duties of Employment. As the Chairman, President and Chief Executive -------------------- Officer of the Corporation, the Executive is to have generally the following responsibilities and those related thereto: The responsibility provided for in the By-Laws of the Corporation and the responsibilities generally of the Chairman, President and Chief Executive Officer of a publicly held corporation, including such responsibilities as may be designated by the Board of Directors of the Corporation. 3. Full-Time Employment. The Executive agrees to devote substantially -------------------- all of his full working time to the discharge of his duties as an employee of the Company. Without -1- limitation, the Executive shall not act in any advisory or other capacity for any individual, firm, association or corporation other than the Company and its subsidiary corporations in matters in any way pertaining to any business or undertaking in any way similar to or competitive with the business or activities of the Company and its subsidiary corporations. 4. Term of Employment. The Executive's employment commenced on February ------------------- 1, 1992, and has continued through the Effective Date of this Agreement. For purposes of this Agreement, the term of the Executive's employment shall be deemed to commence on February 1, 1992, and to continue throughout the term of this Agreement. The initial term of this Agreement shall commence on the Effective Date hereof, and, unless sooner terminated in accordance with the provisions hereof shall continue thereafter for a period of three (3) years; provided that the term of the Executive's employment shall be extended automatically and without any action by the parties for one additional year on each one-year anniversary of the Effective Date hereof, to and including the year in which the Executive attains age seventy (70), unless either the Company or the Executive shall, on or before the anniversary of the Effective Date hereof, notify the other party of such party's intention to terminate this Agreement on the expiration date hereof then in effect. The period of time between February 1, 1992 and the expiration date or other termination of this Agreement is hereinafter referred to as the "Term of Employment" or the "Term of the Executive's Employment." 5. Duration of Agreement; Term of Employment. The Term of Employment ----------------------------------------- of the Executive hereunder shall end upon the first to occur of the following circumstances: (a) The expiration of the Term of Employment pursuant to timely notice given in accordance with Section 4, above; (b) The death or total and permanent disability of the Executive; (c) The Company's election to terminate the Executive's employment due to the material breach by the Executive of any of the Executive's covenants under this Agreement, including, but not limited to, those covenants set forth in Sections 9 through 12 hereof; or (d) The Company's election to terminate the Executive's employment for "Cause." For purposes of this Agreement, "Cause" shall include, but shall not be limited to, dishonesty, negligence, fraud, embezzlement, habitual insobriety, conviction of a crime involving moral turpitude, willful destruction or misappropriation of Company property, entry of an order by the Securities and Exchange Commission or any state securities agency or regulatory body finding the Executive guilty of negligence or misconduct under federal or state securities laws, or willful commission of an act materially injurious to the Company's business, or the Executive's failure to perform his responsibilities in a competent, professional manner, as determined by the Company's Board of Directors in the exercise of its reasonable discretion. (e) The resignation of the Executive. -2- Upon the occurrence of any of the events set forth in this Section 5, the Executive shall be entitled to receive all compensation accrued hereunder to the date of the termination, but shall not be entitled to any additional compensation or benefits hereunder. 6. Termination of Agreement Upon Corporate Capital Transactions. In the ------------------------------------------------------------ event that the Company, its stockholders, or both, enter into a written agreement to dispose of all or substantially all of the assets or 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), then unless the Executive accepts such transaction in writing, the Executive shall, upon consummation of the transaction, be entitled to receive all compensation that would be payable hereunder through and including the expiration date of this Agreement then in effect. In the event that the Company's agreement to enter into any such transaction is terminated before such transaction is consummated, the status of this Agreement and the Executive's rights hereunder, including the Executive's rights to compensation, shall be determined as if the Company and its stockholders had not entered into the agreement to undertake the transaction. 7. Compensation and Benefits. -------------------------- (a) In consideration of the services to be provided by the Executive pursuant to this Agreement, the Company shall pay to the Executive, at monthly or more frequent intervals, an annual salary equal to the annual salary being paid to the Executive on the Effective Date of this Agreement. (b) The Company (or the employing subsidiary corporation) shall review the above salary on or about June 1 of each calendar year, and may make any increases it may deem appropriate. Any increases shall be made effective as soon as may be practicable following each review. (c) In addition to the salary referred to above, the Company (or the employing subsidiary corporation) shall provide to the Executive such supplemental benefits as the Company may from time to time provide to its regular full-time employees having positions, salaries, capacities and lengths of service with the Company comparable to the Executive's position, salary, capacity and length of service with the Company. 8. Place for Performance of Services. The Executive shall perform his --------------------------------- duties hereunder at such Company or subsidiary corporation office locations or customer facilities as the Company may from time to time designate. 9. Noncompetition. -------------- (a) The Executive shall not at any time during the Term of the Executive's Employment with the Company or for a period of two years after the termination of the Executive's Term of Employment render any services, directly or indirectly for any Competitor. -3- (b) The Executive shall not, at any time during the Term of the Executive's Employment with the Company or for a period of two years after the termination of the Executive's Term of Employment with the Company, influence or attempt to influence, either directly or indirectly, any employee of the Company or of any affiliated entity to leave or terminate such individual's employment with the Company or with an affiliate of the Company. (c) The Executive shall not, at any time during the Term of the Executive's Employment with the Company or for a period of two years after the termination of the Executive's Term of Employment with the Company, influence or attempt to influence, either directly or indirectly, any customer or client of the Company or of any affiliated entity to discontinue purchasing or using the products or services of, or to cancel or fail to renew a contract with, the Company or an affiliate of the Company. (d) For purposes of this Agreement, the term "Competitor" shall mean any individual (including the Executive) or entity that at any time is directly or indirectly (for example, through an affiliated or controlled individual or entity) engaged in or about to engage in the manufacture of perchlorate chemicals, sodium azide, fire suppression agents competitive with Halotron fire suppression agents, or environmental protection products competitive with those designed or manufactured by the Company and its subsidiaries. (e) The Executive agrees and acknowledges that the breach by the Executive of any of the provisions of this Section will cause Company irreparable damage, that the remedy at law for any such breach could be inadequate, and that the Company, in addition to any other relief available to it, shall be entitled to appropriate temporary and permanent injunctive relief restraining Executive from committing or continuing such breach, without the necessity of proving actual damages. The Executive agrees to pay all costs and attorneys' fees incurred by the Company in obtaining such injunctive or other relief. 10. Confidential Information. ------------------------ (a) The Executive shall never, either during the Term of the Executive's Employment by the Company or thereafter, use or employ for any purpose or disclose to any other individual or entity any Confidential Information. The Executive acknowledges and agrees that all Confidential Information is proprietary to the Company, is extremely important to the Company's business, and that the use by or disclosure of such Confidential Information to a Competitor could materially and adversely affect the Company, its business and its customers. (b) Upon any termination of the Executive's employment with the Company, the Executive shall leave with or return immediately to the Company any and all records and any and all compositions, articles, devices and other similar or related items that disclose or contain any Confidential Information, including all copies or specimens thereof, whether in the Executive's possession or under the Executive's control, or whether prepared by the Executive or by others. -4- (c) For purposes of this Agreement, the term "Company" shall refer to the Company and each of its subsidiary corporations, and any other corporation or entity that is owned or controlled, directly or indirectly, by Company or that is under common ownership or control with the Company. (d) For purposes of this Agreement, the term "Confidential Information" shall mean information in any form that is not generally known to the public that relates to the Company's past, present or future operations, processes, products or services, or to any research, development, manufacture, purchasing, accounting, engineering, marketing, merchandising, advertising, selling, leasing, financing or business methods or techniques (including without limitation customer lists, records of customer services, usages and requirements, sketches and diagrams of Company or customer facilities and like and similar information relating to actual or prospective customers) that is or may be related thereto. All information disclosed to the Executive or to which the Executive obtains access during any Term of the Executive's Employment with the Company, whether pursuant to this Agreement or otherwise, or to which the Executive obtains access by reason of his employment by the Company, that the Executive has a reasonable basis to believe is or may be Confidential Information, shall be presumed for purposes of this Agreement to be Confidential Information. 11. Subsequent Employment. For a period of five years after any --------------------- termination of the Executive's employment with the Company, the Executive will keep the Company advised in writing of the name and address of each of the Executive's employers, will provide each employer with a copy of this Agreement, and will provide the Company with evidence of the Executive's compliance with the provision of this Section. 12. Inventions. ---------- (a) Immediately upon its discovery or completion, the Executive shall promptly and fully disclose each Invention in writing to the Company. The Executive shall make this disclosure regardless of whether an Invention is discovered, conceived or completed by the Executive alone or jointly with others, and regardless of whether or not the Invention is discovered, conceived or completed in furtherance of the Executive's duties in the service of the Company, whether pursuant to this Agreement or otherwise, and regardless of whether or not the Invention was discovered, conceived or completed during normal working hours or on the premises of Company. (b) The Executive hereby assigns, and agrees to assign, to the Company all of the Executive's rights in and to all Inventions and in and to any and all letters patent or copyrights or applications therefor at any time granted or made, whether in the United States of America or in any foreign nation, upon or with respect to any Invention. (c) The Executive shall from time to time execute, acknowledge and deliver promptly to the Company (without charge to the Company but at the expense of the Company) such written instruments and documents, and shall take such other and further action with respect to any Invention, as may be necessary or desirable in order to enable the Company to obtain and -5- maintain patents and/or copyrights therein, or to vest the entire right title and interest thereto in the Company. (d) The Executive shall not assert any rights under any Inventions as having been made or acquired by the Executive prior to the commencement of the Executive's employment with the Company. (e) For purposes of this Agreement, the term "Inventions" means discoveries, developments, improvements and ideas (whether or not shown or described in writing or reduced to practice) and works of authorship (including computer software), whether or not patentable or copyrightable, (i) that are or may be related to the manufacture of perchlorate chemicals, sodium azide, fire suppression agents competitive with Halotron(TM) fire suppression agents, or environmental protection products competitive with those designed or manufactured by the Company and its subsidiaries, or to any research, development, manufacture, purchasing, accounting, engineering, marketing, merchandising, advertising, selling, leasing, financing or business methods or techniques or any improvements to any of the foregoing; (ii) that relate to the Company's actual or demonstrably anticipated research or development with respect to any of the foregoing; (iii) that result from any services at any time performed by the Executive for the Company, whether pursuant to this Agreement or otherwise; (iv) for which equipment, supplies, facilities or trade secret information of the Company is used; or (v) that are developed on any Company time with respect to any activity referred to above. 13. Survival. The Executive's obligations set forth in Sections 9 -------- through 12 hereof shall survive the expiration or other termination of this Agreement. 14. Effective Date. If this Agreement is approved by resolution of -------------- the Company's Board of Directors before May 31, 1999, the Effective Date hereof shall be May 1, 1999. Otherwise, the Effective Date hereof shall be the date as of which the Company's Board of Directors approves the execution of this Agreement by the Company. 15. Notices. Any notice permitted or required to be given pursuant to -------- this Agreement shall deemed to have been given when appropriate notice thereof has been be validly given or served in writing and delivered personally or sent by registered or certified mail, postage prepaid, to the following address: If to the Company or to any: American Pacific Corporation subsidiary corporation 3770 Howard Hughes Parkway, Suite 300 Las Vegas, NV 89109 If to the Executive, to: The Executive's address as set forth on the signature page to this Agreement or to such other addresses as either party may hereafter designate to the other in writing. -6- 16. Governing Law. This Agreement is made and entered into, and is -------------- executed and delivered, in Clark County, Nevada, and shall be construed and enforced in accordance with and shall be governed by the laws of the State of Nevada. 17. Entire Understanding. This Agreement constitutes the entire --------------------- understanding and agreement between the Company and the Executive with regard to all matters herein, and there are no other agreements, conditions, or representations, oral or written, expressed or implied, with regard thereto other than as referred to herein. This Agreement may be amended only in writing, signed by both parties hereto. 18. Severability. If any term or provision of this Agreement shall be ------------- held to be invalid or unenforceable for any reason, such term or provision shall be ineffective to the extent of such invalidity or unenforceability without invalidating the remaining terms and provisions hereof, and this Agreement shall be construed as if such invalid or unenforceable term or provision has not been contained herein. 19. Successors. This Agreement shall be binding upon and inure to the ----------- benefit of the parties hereto and their respective heirs, administrators, executors, and successors. Neither party may assign any of its rights hereunder, except that the Company and any subsidiary corporation may assign its rights hereunder to the Company or to any subsidiary corporation. 20. Consent to Jurisdiction. The Executive agrees that any action or ----------------------- proceeding to enforce, or that arises out of, this Agreement may be commenced and maintained in the district courts of the State of Nevada, or in the United States District Court for the District of Nevada, and Executive hereby waives any objection to the jurisdiction of said courts in any litigation arising hereunder on the basis that such court is an inconvenient forum or otherwise. 21. Attorneys' Fees. In the event that this Agreement is breached by ---------------- either party, the breaching party shall be liable for all costs and attorneys' fees incurred by the non-breaching party as a result of the breach or in enforcing the terms of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "Company" AMERICAN PACIFIC CORPORATION, a Delaware corporation By /s/ David N. Keys -------------------- Title EVP-CFO ----------------- -7- "Executive" /s/ John R. Gibson ------------------ John R. Gibson Address: 7409 Doe Avenue Las Vegas, Nevada 89117 -8- EX-27 3 FINANCIAL DATA SCHEDULE
5 9-MOS SEP-30-1999 JUN-30-1999 35,924,000 0 12,125,000 0 9,439,000 59,706,000 26,746,000 8,262,000 135,205,000 11,904,000 67,000,000 0 0 843,000 50,090,000 135,205,000 54,404,000 54,404,000 34,987,000 42,492,000 0 0 4,191,000 7,721,000 0 7,721,000 0 174,000 0 7,547,000 .93 .91
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