-----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, BhtVE2vFZH3g8EiginQGQfrHAmSs591jJ0qII04wAormIsvDTSPlmcDprc9Zb0g4 uKHlLMbQktXC+cpryaPvGg== 0000921895-98-000420.txt : 19980514 0000921895-98-000420.hdr.sgml : 19980514 ACCESSION NUMBER: 0000921895-98-000420 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NASD 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: 98618979 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 MARCH 31, 1998 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: 8,219,537 as of April 30, 1998. 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 5 through 12 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 14 through 19 of this Report on Form 10-Q. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information required by Item 103 of Regulation S-K is provided on page 10 of this Report on Form 10-Q. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following matters were submitted to a vote of Security Holder's at the Registrant's Annual Meeting of Stockholders held on March 10, 1998: 1) Election of the following four Class A Directors to serve for a term of three years expiring in 2001: Number of Nominee Votes For Number of Votes Withheld ------- --------- ------------------------ Thomas A. Turner 6,719,289 410,614 John R. Gibson 6,727,099 402,804 David N. Keys 6,730,179 399,724 Eugene A. Cafiero 6,342,167 787,736 2) Approval of the adoption of the Registrant's 1997 Stock Option Plan: Number of Number of Number of Number of Broker Votes For Votes Against Abstentions Non-Votes --------- ------------- ----------- --------- 3,258,898 1,744,958 30,709 2,095,338 3) Approval of the grant of non-qualified stock options to the non-employee members of the Board of Directors currently holding office: -2- Number of Number of Number of Number of Broker Votes For Votes Against Abstentions Non-Votes --------- ------------- ----------- --------- 4,027,804 972,921 33,840 2,095,338 4) Approval of the grant of non-qualified stock options to John R. Gibson, Chief Executive Officer and President and David N. Keys, Executive Vice President and Chief Financial Officer: Number of Number of Number of Number of Broker Votes For Votes Against Abstentions Non-Votes --------- ------------- ----------- --------- 4,312,448 970,066 30,185 1,817,204 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) (i) The following Exhibits are filed herewith, portions of each of which have been omitted pursuant to a request for confidential treatment: 10.1 Long-Term Pricing Agreement dated as of December 12, 1997 between Thiokol Corporation-Propulsion Group and the Registrant. 10.2 Partnershipping Agreement between Alliant Techsystems Incorporated ("Alliant") and Western Electrochemical Company and letter dated November 24, 1997 from the Registrant to Alliant and revised Exhibit B with respect thereto. (ii) The following Exhibit is filed in connection with the Registrant's electronic filing: 27. Financial Data Schedule. b) The following Reports on Form 8-K were filed during the three-month period ended March 31, 1998: 1) Form 8-K dated February 19, 1998, reporting the Registrant's intention to effect a private placement offering of $75 million principal amount of senior notes during March 1998. 2) Form 8-K dated February 19, 1998, reporting certain pro forma financial information. 3) Form 8-K dated March 27, 1998, reporting the acquisition of certain assets and the completion of a private placement of $75 million principal amount of senior notes. -3- 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: May 13, 1998 /S/ JOHN R. GIBSON -------------------------------------- John R. Gibson Chief Executive Officer and President Date: May 13, 1998 /S/ DAVID N. KEYS -------------------------------------- David N. Keys Executive Vice President, Chief Financial Officer, Secretary and Treasurer; Principal Financial and Accounting Officer -4- AMERICAN PACIFIC CORPORATION Condensed Consolidated Statements of Operations (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------ FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Sales and Operating Revenues $ 14,119,000 $ 9,382,000 $ 25,387,000 $ 17,778,000 Cost of Sales 9,129,000 8,025,000 17,235,000 15,108,000 ------------------------------------------------------------------------------------- Gross Profit 4,990,000 1,357,000 8,152,000 2,670,000 Operating Expenses 2,247,000 2,269,000 4,430,000 4,632,000 Equity in Earnings of Real Estate Venture 100,000 300,000 100,000 ------------------------------------------------------------------------------------- Operating Income (Loss) 2,743,000 (812,000) 4,022,000 (1,862,000) Net Interest and Other Expense 750,000 293,000 1,463,000 533,000 ------------------------------------------------------------------------------------- Income (Loss) Before Credit for Income Taxes 1,993,000 (1,105,000) 2,559,000 (2,395,000) Credit for Income Taxes (376,000) (816,000) ------------------------------------------------------------------------------------- Net Income (Loss) Before Extraordinary Loss $ 1,993,000 $ (729,000) $ 2,559,000 $ (1,579,000) Extraordinary Loss-Debt Extinguishment 5,005,000 5,005,000 ------------------------------------------------------------------------------------- Net Loss $ (3,012,000) $ (729,000) $ (2,446,000) $ (1,579,000) ------------------------------------------------------------------------------------- Basic Net Loss Per Share: Income (Loss) Before Extraordinary Loss $ .24 $ (.09) $ .31 $ (.19) Extraordinary Loss $ (.61) $ (.61) ------------------------------------------------------------------------------------ Net Loss $ (.37) $ (.09) $ (.30) $ (.19) ------------------------------------------------------------------------------------- Average Shares Outstanding 8,165,000 8,098,000 8,151,000 8,098,000 ------------------------------------------------------------------------------------- Diluted Net Loss Per Share: Income (Loss) Before Extraordinary Loss $ .24 $ (.09) $ .31 $ (.19) Extraordinary Loss $ (.60) $ (.61) ------------------------------------------------------------------------------------- Net Loss $ (.36) $ (.09) $ (.30) $ (.19) ------------------------------------------------------------------------------------- Diluted Shares 8,337,000 8,098,000 8,280,000 8,098,000 -------------------------------------------------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. 5 AMERICAN PACIFIC CORPORATION Condensed Consolidated Balance Sheets (unaudited) - -------------------------------------------------------------------------------- MARCH 31, SEPTEMBER 30, 1998 1997 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 19,029,000 $ 18,881,000 Accounts and Notes Receivable 9,297,000 5,551,000 Related Party Notes Receivable 588,000 637,000 Inventories 12,217,000 11,116,000 Prepaid Expenses and Other Assets 1,083,000 979,000 ----------------------------------- TOTAL CURRENT ASSETS 42,214,000 37,164,000 Property, Plant and Equipment, Net 19,212,000 19,314,000 Intangible Acquisition Assets 40,279,000 1,540,000 Development Property 6,945,000 7,362,000 Real Estate Equity Investments 17,517,000 20,248,000 Other Assets 2,793,000 873,000 Restricted Cash 1,168,000 3,580,000 ----------------------------------- TOTAL ASSETS $130,128,000 $ 90,081,000 ----------------------------------- See the accompanying Notes to Condensed Consolidated Financial Statements. 6 AMERICAN PACIFIC CORPORATION Condensed Consolidated Balance Sheets (unaudited)
- ----------------------------------------------------------------------------------- MARCH 31, SEPTEMBER 30, 1998 1997 - ----------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Liabilities $ 3,993,000 $ 7,519,000 Current Portion of Long-Term Debt 1,168,000 6,166,000 ------------------------------ TOTAL CURRENT LIABILITIES 5,161,000 13,685,000 Long-Term Debt 75,000,000 24,900,000 Long-Term Payables 2,694,000 2,376,000 ------------------------------ TOTAL LIABILITIES 82,855,000 40,961,000 ------------------------------ Commitments and Contingencies Warrants to Purchase Common Stock 3,569,000 3,569,000 SHAREHOLDERS' EQUITY: Common Stock 837,000 829,000 Capital in Excess of Par Value 79,152,000 78,561,000 Accumulated Deficit (35,153,000) (32,707,000) Treasury Stock (1,035,000) (1,035,000) Receivable from the Sale of Stock (97,000) (97,000) ------------------------------ TOTAL SHAREHOLDERS' EQUITY 43,704,000 45,551,000 ------------------------------ ------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 130,128,000 $ 90,081,000 ------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. 7 AMERICAN PACIFIC CORPORATION Condensed Consolidated Statements of Cash Flows (unaudited)
- -------------------------------------------------------------------------------------------------------------------- FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED MARCH 31, ENDED MARCH 31, 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Cash Provided by (Used For) Operating Activities $ 5,110,000 $ 7,151,000 $ (306,000) $ 6,297,000 ------------------------------------------------------------ Cash Flows Used for Investing Activities: Capital Expenditures (679,000) (389,000) (1,648,000) (1,301,000) Development Property Additions (51,000) (54,000) (405,000) (54,000) Payment for Acquisition Intangible (39,000,000) (39,000,000) Net Cash Received (Advanced) on Real Estate Equity Investments 1,018,000 (148,000) 3,031,000 (420,000) ------------------------------------------------------------ Net Cash Used For Investing Activities (38,712,000) (591,000) (38,022,000) (1,775,000) ------------------------------------------------------------ Cash Flows From Financing Activities: Principal Payments on Debt (30,000,000) (6,168,000) (31,166,000) (6,168,000) Issuance of Senior Notes 75,000,000 75,000,000 Premium Paid on Debt Extinguishment (3,250,000) (3,250,000) Debt Issue Costs (2,707,000) (2,707,000) Issuance of Common Stock 599,000 599,000 70,000 Treasury Stock Acquired (156,000) ------------------------------------------------------------ Net Cash Provided by (Used For) Financing Activities 39,642,000 (6,168,000) 38,476,000 (6,254,000) ------------------------------------------------------------ Net Increase (Decrease) in Cash and Cash Equivalents 6,040,000 392,000 148,000 (1,732,000) Cash and Cash Equivalents, Beginning of Period 12,989,000 16,377,000 18,881,000 18,501,000 ------------------------------------------------------------ Cash and Cash Equivalents, End of Period $ 19,029,000 $ 16,769,000 $ 19,029,000 $ 16,769,000 ------------------------------------------------------------ Supplemental Disclosure of Cash Flow Information: Interest Paid (net of amounts capitalized) $ 1,650,000 $ 851,000 $ 1,650,000 $ 851,000 ------------------------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. 8 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, 1997 was derived from the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 1997. 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, 1997. 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 six-month periods ended March 31, 1998 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 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 estimates. 2. NET INCOME (LOSS) PER COMMON SHARE During the first quarter of fiscal 1998, the Company adopted SFAS No. 128 "Earnings per Share." SFAS No. 128 requires the presentation of basic net income (loss) per share and diluted net income (loss) per share. Basic per share amounts are computed by dividing net income (loss) by average shares outstanding during the period. Diluted net income (loss) per share amounts are computed by dividing net income (loss) by average shares outstanding plus the dilutive effect of common share equivalents. Since the Company incurred a net loss before extraordinary loss during the three-month and six-month periods ended March 31, 1997, diluted per share calculations are based upon average shares outstanding during these periods. Accordingly, the effect of stock options and warrants outstanding for 3,525,000 shares at March 31, 1997 was not included in diluted net loss per share calculations. Diluted net income before extraordinary loss and diluted net loss per share during the three-month and six-month periods ended March 31, 1998 is determined considering the dilutive effect of stock options and warrants. The effect of stock options and warrants outstanding to purchase approximately 2,900,000 shares was not included in diluted per share calculations during the three-month and six-month periods ended March 31, 1998 as the average exercise price of such options and warrants was greater than the average price of the Company's common stock. 9 3. INVENTORIES Inventories consist of the following: March 31, September 30, 1998 1997 ---- ---- Work-in-process $ 7,963,000 $ 3,349,000 Raw materials and supplies 4,254,000 7,767,000 ----------- ------------ Total $12,217,000 $11,116,000 ----------- ------------ 4. COMMITMENTS AND CONTINGENCIES In fiscal 1993, three shareholder lawsuits were filed in the United States District Court for the District of Nevada against the Company and certain of its directors and officers (the "Company Defendants"). The complaints, which were consolidated, alleged that the Company's public statements violated Federal securities laws by inadequately disclosing information concerning its agreements with Thiokol Corporation ("Thiokol") and the Company's operations. 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 disclosures concerning the Company's agreements with Thiokol. The remaining claims, which related to allegedly misleading or inadequate disclosures regarding Halotron, were the subject of a jury trial that ended on January 17, 1996. The jury reached a unanimous verdict that none of the Company Defendants made misleading or inadequate statements regarding Halotron. The District Court thereafter entered judgment in favor of the Company Defendants on the Halotron claims. The plaintiffs appealed the summary judgment ruling and the judgment on the jury verdict to the Ninth Circuit of the United States Court of Appeals. On June 5, 1997, the Court of Appeals affirmed the judgments of the United States District Court in favor of the Company Defendants. On June 19, 1997, the plaintiffs filed an Appellants Petition for Rehearing and Suggestion of Rehearing En Banc with the Court of Appeals. On September 3, 1997, the Court of Appeals denied the Petition for Rehearing. In October 1997, the plaintiffs filed a Petition for Writ of Certiorari with the Supreme Court of the United States. On February 23, 1998, the Supreme Court denied the Petition for Writ of Certiorari. 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. 10 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. 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. FINANCING ACTIVITIES On March 12, 1998, the Company sold $75.0 million principal amount of unsecured senior notes (the "Notes"), consummated an acquisition (the "Acquisition") of certain assets from Kerr-McGee described below and repurchased the remaining $25.0 million principal amount balance outstanding of subordinated secured notes (the "Azide Notes"). The Notes mature on March 1, 2005. Interest on the Notes will be paid in cash at a rate of 9-1/4% per annum on each March 1 and September 1, commencing September 1, 1998. The indebtedness evidenced by the Notes represents a senior unsecured obligation of the Company, ranks pari passu in right of payment with all existing and future senior indebtedness of the Company and is senior in right of payment to all future subordinated indebtedness of the Company. The Indenture under which the Notes were issued contains various limitations and restrictions including (i) change in control provisions, (ii) limitations on indebtedness and (iii) limitations on restricted payments such as dividends, stock repurchases and investments. The Company is obligated to register and have declared effective the Notes, or exchange them for identical notes that have been registered, with the Securities and Exchange Commission within certain predefined time parameters. In April 1998, the Company filed a Form S-4 under the Securities Exchange Act of 1933 for the purpose of registering the Notes. The registration is in process and has not been declared effective. If the Company does not consummate an effective registration of the Notes within the required time frame, certain additional interest will accrue at a rate of 0.50% per annum. The Azide Notes were 11% noncallable subordinated secured term notes, which were issued and sold in February 1992 to finance the design, construction and start-up of the Company's sodium azide facility. A portion of the net proceeds from sale of the Notes was applied to repurchase the Azide Notes for approximately $28.2 million (approximately 113% of the outstanding principal amount thereof). In connection with the repurchase, the Company recognized an extraordinary loss on debt extinguishment of approximately $5.0 million. The extraordinary loss consisted of the cash premium paid of $3.2 million upon repurchase and a charge of $1.8 million to write-off the unamortized balance of debt issue and discount costs. 7. ACQUISITION On March 12, 1998 (the "Closing Date"), the Company acquired, pursuant to a purchase agreement (the "Purchase Agreement") with Kerr-McGee, certain process data, technical information, customer lists, marketing contracts and related expertise of Kerr-McGee related its production of AP (the "Rights") for a purchase price of $39.0 million. Under the Purchase Agreement, the Company acquired an option (the "Option") to purchase all or any portion of the inventory of AP stored at Kerr-McGee's premises on the Closing Date, which is not owned by, or identified to a firm order from, a Kerr-McGee customer (the "Inventory"). The 11 Option is exercisable from time to time within the 12 month period commencing on the Closing Date (the "Option Period"). The Acquisition did not include Kerr-McGee's production facilities (the "Production Facilities") and certain water and power supply agreements used by Kerr-McGee in the production of AP. Under the Purchase Agreement, Kerr-McGee ceased the production and sale of AP although the Production Facilities may continue to be used by Kerr-McGee for production of AP under certain limited circumstances described below. Under the Purchase Agreement, Kerr-McGee reserved a perpetual, royalty-free, nonexclusive license to use any of the technology forming part of the Rights as may be necessary or useful to use, repair or sell the Production Facilities (the "Reserved License"). Under the Purchase Agreement, Kerr-McGee reserved the right to sell the Inventory to the extent not purchased by the Company pursuant to the Option, to process and sell certain reclaimed AP that is not suitable for use in solid fuel rocket motors (the "Reclaimed Product"), and to produce and sell AP (i) to fulfill orders scheduled for delivery after the closing, subject to making payments to the Company with respect to such orders, as provided in the Purchase Agreement and (ii) in the event of the Company's inability to meet customer demand or requirements, breach of the Purchase Agreement or termination of the Company's AP business. The Purchase Agreement provides that, together with the Reserved License, Kerr-McGee is permitted in its discretion to (i) lease, sell, dismantle, demolish and/or scrap all or any portion of the Production Facilities, (ii) retain the Production Facilities for manufacture of Reclaimed Product and (iii) maintain the Production Facilities in a "standby" or "mothballed" condition so they will be capable of being used to produce AP under the limited circumstances referred to above. Under the Purchase Agreement, Kerr-McGee has agreed to indemnify the Company against loss or liability from claims associated with the ownership and use of the Rights prior to consummation of the Acquisition or resulting from any breach of its warranties, representations and covenants. The Company has agreed to indemnify Kerr-McGee against loss and liability from claims associated with the ownership and use of the Rights after consummation of the Acquisition or resulting from any breach of its warranties, representations and covenants. In addition, Kerr-McGee has agreed that it will, at the Company's request, store any Inventory as to which the Option is exercised until 90 days after the Option expires, introduce the Company to AP customers that are not currently customers of the Company, and consult with the Company regarding the production and marketing of AP. The Company has agreed that, at Kerr-McGee's request, it will use reasonable efforts to market Reclaimed Product on Kerr-McGee's behalf for up to three years following consummation of the Acquisition. The purchase price of $39.0 million was recognized as an Intangible Acquisition Asset and is being amortized to cost of sales on a straight line basis over a ten-year period. 8. AGREEMENTS WITH AP CUSTOMERS In December 1997, in connection with the Acquisition, the Company entered into an agreement with Thiokol with respect to the supply of AP through the year 2008. The agreement, which was contingent upon consummation of the Acquisition, provides that during its term Thiokol will make all of its AP purchases from the Company. The agreement also establishes a pricing matrix under which AP unit prices vary inversely 12 with the quantity of AP sold by the Company to all of its customers. The Company understands that, in addition to the AP purchased from the Company, Thiokol may use AP inventoried by it in prior years and AP recycled by it from certain existing rocket motors. In December 1997, in connection with the Acquisition, the Company entered into an agreement with Alliant Techsystems Incorporated ("Alliant") to extend an existing agreement through the year 2008. The agreement establishes prices for any AP purchased by Alliant from the Company during the term of the agreement as extended. Under this agreement Alliant agrees to use its efforts to cause the Company's AP to be qualified on all new and current programs served by Alliant's Bacchus Works. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is principally engaged in the production of AP for the aerospace and national defense industries. In addition, the Company produces and sells sodium azide, the primary component of a gas generant used in automotive airbag safety systems, and Halotron, a chemical used in fire suppression systems ranging from portable fire extinguishers to airport firefighting vehicles. 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 22 to 24 million pounds annually. However, supply capacity has historically been substantially in excess of these estimated demand levels. In an effort to rationalize the economics of the existing AP market, the Company entered into the Purchase Agreement with Kerr-McGee. Upon consummation of the Acquisition, the Company effectively became the sole North American producer of AP. SALES AND OPERATING REVENUES. Sales of the Company's perchlorate chemical products, consisting almost entirely of AP sales, accounted for approximately 61% and 56% of revenues during the six-month periods ended March 31, 1998 and 1997, respectively. In general, demand for AP is driven by a relatively small number of DOD and NASA contractors; as a result, any one individual AP customer usually accounts for a significant portion of the Company's revenues. Sodium azide sales accounted for approximately 24% and 29% of revenues during the six-month periods ended March 31, 1998 and 1997, respectively. The Company has incurred significant operating losses in its sodium azide operation during the last three fiscal years. Although the Company has achieved significant gains in market share that appear to relate to an anti-dumping petition filed by the Company against three Japanese sodium azide producers and the resulting suspension agreement, the Company believes that these factors were fully incorporated into the market by the end of fiscal 1997. The Company's evaluation of the sodium azide market indicated that the cash flows associated with sodium azide operations would not be sufficient to recover the Company's investment in sodium azide related fixed assets and, as a result, the Company recognized an impairment charge with respect to those assets of $52.6 million in the fourth quarter of fiscal 1997. Depreciation expense is expected to decrease annually by approximately $4.0 million as a result of the impairment charge. Real estate and related sales amounted to approximately 9% and 4% of revenues during the six-month periods ended March 31, 1998 and 1997, respectively. The nature of real estate development and sales is such that the Company is unable to reliably to predict any pattern of future real estate sales or the recognition of the equity in earnings of real estate ventures. Sales of Halotron amounted to approximately 1% and 5% of revenues during the six-month periods ended March 31, 1998 and 1997, 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. 14 Environmental protection equipment sales accounted for approximately 5% and 6% of revenues during the six-month periods ended March 31, 1998 and 1997, respectively. COST OF SALES. The principal elements comprising the Company's cost of sales are raw materials, electric, power, labor, manufacturing overhead and the basis in real estate sold. The major raw materials used by the Company in its production processes are graphite, sodium chlorate, ammonia, hydrochloric acid, sodium metal, and nitrous oxide. Significant increases in the cost of raw materials may have an adverse impact on margins if the Company is unable to pass along such increases to its customers, although all the raw materials used in the Company's manufacturing processes have historically been available in commercial quantities, and the Company has had no difficulty obtaining necessary raw materials. Raw material, electric power and labor costs have not changed significantly recently. The costs of operating both the Company's perchlorate plant and sodium azide plant are, however, largely fixed. Accordingly, the Company believes that the potential additional AP sales volume resulting from the Acquisition should generate significant incremental cash flow because of the operating leverage associated with the perchlorate plant. In addition, amortization of the Acquisition costs is expected to amount to approximately $4.0 million annually. INCOME TAXES. The Company's effective income tax rates were 0% during the three and six-month periods ended March 31, 1998 and 34% during the three and six-month periods ended March 31, 1997. The Company's effective income tax rate decreased to 17% for the entire 1997 fiscal year as a result of the establishment of a $10.4 million deferred tax valuation allowance in the fourth quarter. 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 common share have not been subject to seasonal fluctuations, they have been and are expected to continue to be subject to variations from quarter to quarter and year to year due to the following factors, among others: (i) as discussed in Note 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 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 (loss) per common share are subject to significant fluctuations based upon changes in the market price of the Company's Common Stock due to outstanding warrants and options; and (v) the magnitude, pricing and timing of AP, sodium azide, Halotron, and environmental protection equipment sales in the future is uncertain. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 SALES AND OPERATING REVENUES. Sales increased $4.7 million, or 50% during the three months ended March 31, 1998 to $14.1 million from $9.4 million in the corresponding period of the prior year. This increase was attributable to increased sales of perchlorate, sodium azide, real estate and environmental protection equipment. Such increase was partially offset by a decrease in Halotron sales. Approximately $3.5 million of the $4.7 million increase in sales was attributable 15 to increases in perchlorate sales. This increase was primarily attributable to the pendency and ultimate consummation of the Acquisition. COST OF SALES. Cost of sales increased $1.1 million, or 14%, in the three months ended March 31, 1998 to $9.1 million from $8.0 million in the corresponding period of the prior year. This increase was principally due to increases in perchlorate and sodium azide sales volume. As a percentage of sales, cost of sales decreased in the three months ended March 31, 1998 to 65% as compared to 86% in the corresponding period of the prior year. This decrease was due principally to the increase in perchlorate and sodium azide sales volume and a reduction in depreciation expense as a result of the sodium azide impairment charge referred to above. OPERATING EXPENSES. Operating (selling, general and administrative) expenses decreased $.1 million, or 1%, in the three months ended March 31, 1998 to $2.2 million from $2.3 million in the corresponding period of 1997. NET INTEREST EXPENSE. Net interest and other expense increased to $.75 million in the three months ended March 31, 1998 from $.3 million in the corresponding period of the prior year principally as a result of the cessation of interest capitalization on the Company's Ventana Canyon residential joint venture project. SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997 SALES AND OPERATING REVENUES. Sales increased $7.6 million, or 43%, during the six months ended March 31, 1998 to $25.4 million from $17.8 million in the corresponding period of the prior year. The increase was principally due to increased sales of perchlorate, sodium azide, real estate and environmental protection equipment. Such increase was partially offset by a decrease in Halotron sales. Approximately $5.0 million of the $7.6 million increase in sales was attributable to increases in perchlorate sales. This increase was primarily attributable to the pendency and ultimate consummation of the Acquisition. COST OF SALES. Cost of sales increased $2.2 million, or 14%, in the six months ended March 31, 1998 to $17.2 million from $15.1 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. As a percentage of sales, cost of sales decreased in the six months ended March 31, 1998 to 68% as compared to 85% in the corresponding period of the prior year. The decrease was attributable to the increase in perchlorate and sodium azide sales volume and a reduction in depreciation expense as a result of the sodium azide impairment charge referred to above. Cost of sales is expected to increase by approximately $4.0 million annually as a result of the amortization of capitalized Acquisition costs. OPERATING EXPENSES. Operating expenses were $4.4 million during the six-month period ended March 31, 1998 compared to $4.6 million in the corresponding period of the prior year. NET INTEREST EXPENSE. Net interest and other expense increased to $1.5 million in the six months ended March 31, 1998 from $.5 million in the corresponding period of the prior year principally as a result of the cessation of interest capitalization on the Company's Ventana Canyon residential joint venture project. Interest expense will increase significantly in future periods as a result of the issuance of the Notes described in Note 6 of Notes to Condensed Consolidated Financial Statements. 16 INFLATION Inflation did not have a significant effect on the Company's sales and operating revenues or costs during the three-month or six-month periods ended March 31, 1998 or 1997. 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 As discussed in Notes 6 and 7 of Notes to Condensed Consolidated Financial Statements, 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 connection with the Azide Notes repurchase, the Company recognized an extraordinary loss on debt extinguishment of approximately $5.0 million. Cash flows provided by (used for) operating activities were ($.3) million and $6.3 million during the six-months ended March 31, 1998 and 1997, respectively. Cash flows from operating activities declined in the first six months of fiscal 1998 principally as a result of changes in certain working capital balances, most notably a significant increase in receivables related to AP shipments in late March 1998. Such receivables are scheduled to be collected in the third quarter of fiscal 1998. 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. As a result of the litigation and 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 Company is currently in the process of evaluating its computer software and databases to determine whether or not modifications will be required to prevent problems related to the Year 2000. These problems, which have been widely reported in the media, could cause malfunctions in certain software and databases with respect to dates on or after January 1, 2000, unless corrected. Based upon its evaluation to date, the Company does not believe that the costs of any modifications required to correct for Year 2000 problems will have a material impact on operations, although there can be assurance given with respect thereto. 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. 17 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 Department of Defense or NASA that would cause a continued decrease in demand for AP, (c) the results achieved by the Suspension Agreement resulting from the Company's anti-dumping petition and the possible termination of such agreement, (d) technological advances and improvements 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 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 AP and sodium azide markets and the development or penetration of competing new products, particularly in the propulsion, airbag inflation and fire suppression businesses. 3. Underutilization of the Company's manufacturing facilities resulting in production inefficiencies and increased costs, the inability to recover facility costs and reductions in margins. 4. Risks associated with the Company's real estate activities, including, but not limited to, dependence upon the Las Vegas commercial, industrial and residential real estate markets, changes in general or local economic conditions, interest rate fluctuations affecting the availability and the cost of financing, the performance of the managing partner of its residential real estate joint venture (Ventana Canyon Joint Venture) 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 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. 18 7. Integration of new customers and the ability to meet additional production and delivery requirements resulting from the Acquisition. 8. The results of the Company's periodic review of impairment issues under the provision of SFAS No. 121. 9. The dependence upon a single facility for the production of most of the Company's products. 19 EX-10.1 2 LONG-TERM PRICING AGREEMENT LONG-TERM PRICING AGREEMENT This agreement is entered into as of the 12th day of December 1997. BETWEEN THIOKOL CORPORATION - PROPULSION GROUP A Corporation of the State of Delaware with offices at Thiokol Corporation P.O. Box 707, M/S T40 Brigham City, UT 84302-0707 (hereinafter referred to as THIOKOL) AND AMERICAN PACIFIC CORPORATION A Corporation of the State of Delaware with offices at American Pacific Corporation 3370 Howard Hughes Parkway, Suite 300 Las Vegas, Nevada 89109 (hereinafter referred to as AMPAC) WITNESSETH: WHEREAS, American Pacific Corporation has announced their intentions to purchase the ammonium perchlorate (AP) business of Kerr-McGee Chemical Corporation (hereinafter referred to as Asset Purchase Agreement); and WHEREAS, AMPAC desires the Federal Trade Commission not oppose the Asset Purchase Agreement; and WHEREAS, approval of said Asset Purchase Agreement may result in AMPAC becoming the single domestic source of aerospace quality AP; and WHEREAS, THIOKOL desires long term price stability for its purchased AP requirements for its solid rocket motor business; and WHEREAS, NASA also desires long term price stability. NOW, THEREFORE, in consideration of the premises, covenants and conditions contained herein, the parties agree as follows: 1. PURPOSE OF LONG-TERM AGREEMENT a. This agreement is entered into to ensure THIOKOL an ongoing domestic supply of aerospace quality AP that can be used in the manufacture of sold rocket motors. This agreement is intended to enhance each party's unique capabilities regarding their understanding, manufacture, quality, cost, delivery and use of AP for solid rocket motors. b. The parties agree to issue and accept purchase orders that are consistent with the terms of this agreement. The purchase orders shall further define the rights and obligations of the parties, including continued performance and/or termination. The purchase orders issued by THIOKOL pursuant to this agreement shall include, among other provisions mutually acceptable to the parties, those provisions required by law and regulation and any clauses of the prime contract that are mandatory or necessary. Nothing contained herein is intended to preclude either party from submitting proposals or performing work not related to this agreement. c. This agreement establishes that AP will be provided by AMPAC as a commercial product as defined in FAR 2.101 and 52.202-1 and purchased in accordance with FAR Part 12 and 52.244-6. d. The agreement is contingent on the satisfactory closing of that certain Asset Purchase Agreement between AMPAC and Kerr-McGee. e. The parties agree to cooperate fully and exchange information such that each can perform its obligations hereunder with optimum effectiveness. 2. AMPAC'S RESPONSIBILITIES a. Comply with the requirements, terms and conditions of all THIOKOL purchase orders insofar as such requirements, terms and conditions are consistent with this agreement and FAR Part 12 and 52.244-6. b. Provide AP of the desired quality and quantity in accordance with the terms of the purchase orders issued by Thiokol. c. Provide, pursuant to FAR 15-804.5, information to Thiokol as may be required and necessary to determine the reasonableness of prices charged under this agreement. -2- d. Provide sufficient material to perform qualification testing on all new and current programs. e. Provide a manufacturing capability that support THIOKOL's program needs. f. Provide technical expertise to ensure an ongoing supply of AP. g. In order to ensure product consistent and reliability, all process or supplier changes shall be reviewed and approved by THIOKOL before implementation, such approval not to be unreasonably withheld. 3. THIOKOL'S RESPONSIBILITIES a. Issue purchase orders that are consistent with this agreement and obtain all purchased AP requirements from AMPAC to the extent AMPAC can meet Thiokol's requirements with acceptable AP. b. Provide AMPAC with known and anticipated AP requirements forecasts and program schedules. 4. [THIS MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY] 5. PRICE VOLUME MATRIX [THIS MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY] -3- 6. REPROCESSED/RECLAIMED AP The parties shall work closely together and exchange business and technical information such that reprocessed and/or reclaimed AP may be utilized in THIOKOL'S solid rocket motor business at a cost savings for participating programs. Since there may be a limited supply, THIOKOL shall be given the first right of first refusal to take advantage of any available quantities of reprocessed or reclaimed AP. 7. LEGAL EFFECT OF AGREEMENT The parties agree to abide by this agreement and the covenants expressly contained herein. The business relationship that exists as a result of this agreement is not to construed as a business partnership under, nor governed by, the Uniform Partnership Act or the common law of business partnerships. Neither party shall have authority to create any obligations for the other. 8. DISPUTES Controversies or claims arising out of or relating to this agreement and its intended purchase orders, including any disagreements, interpretations or disputes, shall first be submitted jointly to the signatories of this agreement (or their successors) for settlement. A joint decision of the signatories or their designees shall be the disposition of such disagreement or dispute. If the signatories are unable to jointly resolve a dispute within 15 days of when the parties commence discussion of the dispute, the matter shall be submitted to an EXECUTIVE COMMITTEE for final resolution. Such EXECUTIVE COMMITTEE shall be composed of the senior executive or the designee of each party and one independent member acceptable to the two senior executives or, if no agreement regarding the third member can be reached in ten days, then such member is to designated by the National Aeronautics and Space Administration (NASA). A majority of the EXECUTIVE COMMITTEE is sufficient to render a binding final decision. If necessary, any court of competent jurisdiction may enforce the final decisions of the EXECUTIVE COMMITTEE. -4- To the extent AP is required under any purchase order under a Government contract subject to the Contract Dispute Act of 1978, this agreement shall also be subject to said Act. Failure or the parties to reach agreement as described above, on any request for equitable adjustment, claim, appeal or action arising under or relating to this agreement and its subsequent purchase orders and for which any appropriate Government Contracting Offer has issued a final determination and where such final determination has a bearing on this agreement or any purchase order issued under this agreement, shall be a dispute to be resolved in accordance with FAR 52.233-1. Thiokol agrees to sponsor any reasonable claim brought by AMPAC under FAR 52.233-1 in Thiokol's name and at AMPAC's expense. Pending the resolution of any dispute or claim, AMPAC shall proceed diligently with the performance of this agreement and all obligations in accordance with the direction of the THIOKOL signatory or designee. 9. TERM AND TERMINATION OF AGREEMENT Except as noted below, this agreement shall remain in effect for a minimum of ten years following the effective date and may be extended by the mutual agreement of the parties. The parties agree to issue and abide by purchase orders that are consistent with this agreement. Each Purchase order shall define the rights of the parties with respect to continued performance and/or termination. 10. PUBLICITY No publicity or advertising relating to this agreement shall be released without both parties prior written approval. Nothing in this provision shall prohibit publication of price lists and discount structures. 11. ASSIGNMENT Neither party shall assign, nor in any manner transfer, its interests or any part thereof in this agreement without the prior written consent of the other party. Nothing in this provision shall prevent the transfer of all or substantially all assets of either party to any other entity. 12. FORCE MAJEURE No party shall be liable for the consequences of any unforeseeable event beyond its reasonable control not caused by the fault or negligence of such party, that causes such party to be unable to perform its obligations under this agreement (and which it has been unable to overcome by the exercise of due diligence), including, but not limited to, flood, drought, earthquake, storm, fire, pestilence, lightning and other natural catastrophes, epidemic, war, riot, civil disturbance or disobedience, strikes, labor dispute, or failure, threat of failure, or sabotage of facilities, or any order, decree, or injunction made by a court or public agency, In the event of the occurrence of such a force majeure event, the -5- party unable to perform shall promptly notify the other party, shall further use its best efforts to resume satisfactory performance as quickly as possible, and shall suspend performance only for such period of time as is necessary as a result of the force majeure event. 13. APPLICABLE LAW The validity and performance of this agreement shall be governed by the generally accepted laws acceptable to federal government contracts, otherwise by the laws of the State of Utah. 14. ENTIRE AGREEMENT This agreement, including attachments hereto, constitutes the entire understanding between the parties and supersedes any prior oral or written agreements with respect to the subject matter hereof. The agreement shall not be modified unless agreed to in writing by both parties. Under no circumstances will this agreement violate any antitrust statutes. 15. ATTACHMENTS a. The following attachment is applicable to this agreement: EXHIBIT A: Ammonium Perchlorate price volume matrix dated 5 December 1997. IN WITNESS WHEREOF, the parties hereto have executed this agreement effective as of the date indicated on this first page. AMERICAN PACIFIC CORPORATION THIOKOL CORPORATION PROPULSION GROUP /s/ James P. Dyar /s/ Layne Winzeler - ----------------------------- ------------------------------------ (Signature) (Signature) James P. Dyar Layne Winzeler - ----------------------------- ------------------------------------ (Type Name) (Type Name) Vice President Director, Procurement - ----------------------------- ------------------------------------ (Title) (Title) -6- EXHIBIT A 5-Dec-97 [THIS MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY] EX-10.2 3 PARTNERSHIPPING AGREEMENT PARTNERSHIPPING AGREEMENT This agreement is entered into as of (date to be signed) BETWEEN ALLIANT TECHSYSTEMS INCORPORATED A Corporation of the State of Delaware with offices at Alliant Techsystems Incorporated P.O. Box 98 Magna, Utah 84044-0098 AND WESTERN ELECTROCHEMICAL COMPANY (WECCO) A Corporation of the State of Delaware with offices at Western Electrochemical Company P.O. Box 629 Cedar City, UT 84721 (hereinafter also referred to as "Subcontractor"). WITNESSETH: WHEREAS, Alliant Techsystems Incorporated, (hereinafter referred to as the "Customer") has issued a contract for the Delta III Program (hereinafter referred to as the "Program"); and, WHEREAS, the respective, unique technical capabilities of the parties complement one another; and, WHEREAS, by teaming together and utilizing the combined skills of the parties will offer the ultimate customer the most advantageous combination of capabilities to achieve the Program objectives; NOW, THEREFORE, in consideration of the premises, covenants and conditions contained herein, the parties agree as follows: 1. PURPOSE OF PARTNERSHIPPING a. This agreement is to enter into an arrangement to ensure an ongoing supply of Ammonium Perchlorate (AP) that can be used in the manufacture of solid rocket motors. This agreement is intended to complement each other's unique capabilities and offer the Government/Customer the best combination of performance, cost and delivery for solid rocket motors. b. The parties shall work closely together and exchange business and technical information such that Alliant Techsystems can perform with optimum effectiveness in the solid rocket motor business. For this reason, the parties agree to cooperate fully and exclusively with each other concerning the specific acquisition. c. Nothing contained herein is intended to preclude either party from independently submitting proposals or performing work not related to this mutual effort. WECCO agrees to provide certified cost or pricing data to Alliant Techsystems in conjunction with each procurement to the extent required by Alliant Techsystems in order to satisfy statutory or regulatory requirements or to verify that the price is fair and reasonable. WECCO also agrees to sell AP to Alliant Techsystems at fair market value. d. Each party will assist the other, as necessary, and will exert best efforts in meeting contract objectives. e. Alliant Techsystems will make every practicable effort to qualify WECCO AP for use on all new and current programs, to include: Delta II, Titan IV SRMU, EELV, and Pegasus Programs. Acceptance will be based on lowest total cost, test results and customer feedback. 2. WECCO'S RESPONSIBILITIES a. Support and adopt the Alliant Techsystems' Bacchus Supplier Partnershipping Policy including continuous improvement philosophy. b. Have and maintain a supplier rating of 98% with a goal of achieving 100%. c. Flow chart work processes eliminating non-value added processes and combining work processes in an effort to reduce total costs within the partnership agreement. d. Work towards increasing sales per employee, while decreasing general and administration and overhead costs per year. e. Identify and share total cost reduction ideas with Alliant Techsystems. -2- f. Comply with the requirements, terms and conditions of the purchase order. In order to ensure product consistency and reliability, all process or supplier changes shall be reviewed and approved by the parties to the partnershipping agreement before implementation. g. Develop, maintain, and ensure process controls are in place to reduce product variation. Provide data to appropriate parties in accordance with Alliant Techsystems requirements. h. Maintain a cost accounting system that meets the approval of DCAA. i. Establish long term partnershipping agreements with subtiered suppliers in those cases, if any, in which WECCO and Alliant Techsystems agree that such agreements would be to their mutual advantage. j. Take appropriate steps to become a certified supplier. k. Develop and maintain appropriate management systems to ensure cost, quality, schedule and technical requirements are met. l. Provide favorable long term pricing agreements with exercisable options. m. Share data as required or appropriate. n. Assist with concurrent engineering. o. Provide sufficient material to perform qualification testing on all new and current programs. p. Provide a manufacturing capability that supports Alliant Techsystem's program needs. q. Provide technical expertise to ensure an ongoing supply of AP. r. Maintain a safe and environmentally friendly facility. 3. ALLIANT TECHSYSTEMS INCORPORATED RESPONSIBILITIES a. Retain overall program responsibility. b. Provide long term AP forecasts and program schedules as anticipated from Alliant Techsystem's solid rocket motor customers. -3- c. Eliminate unnecessary follow-on proposal effort by exercising follow-on options to the extent reasonable and in accordance with FAR requirements if and to the extent applicable. d. Provide quarterly production status and future schedule updates for materials covered under this agreement. e. Consult with the Subcontractor regarding technical requirements, schedule requirements and pricing strategies. f. Work with potential customers to secure follow-on business and provide annual business plans identifying opportunities for new business that will mutually benefit both parties. g. Provide SPC data requirements and analysis services as appropriate. Update and review requirements to monitor critical processes sufficient to meet process variation goals. h. Provide technical support where cost saving opportunities have been identified, including design changes where appropriate to enhance quality productivity and profit margins. i. Provide training necessary to assist WECCO in becoming a certified supplier. 4. PERFORMANCE a. Following successful qualification testing and customer approval, Alliant Techsystems Incorporated will award WECCO, a subcontract for the specified work identified with mutually acceptable terms and conditions and the applicable requirements of the Federal Acquisition Regulation (particularly Parts 6, 15 and 17) shall be satisfied. b. The subcontract shall include, among other provisions mutually acceptable to the parties, those provisions required by law and regulation and clauses of the prime contract that are mandatory or necessary for incorporation into subcontracts. c. In the event a disagreement between the parties to the partnershipping agreement is not resolved through good faith negotiations within a reasonable time, but not exceeding thirty (30) days from the date of award of the prime contract, either party shall have the right, without prejudice, to enter into agreements with others for the subcontract work after discussions and notification of the other party. -4- 5. PROTECTION OF SENSITIVE DATA a. Each party agrees not to disclose sensitive financial or competitive data to unauthorized parties. However, neither party shall be liable for the inadvertent or accidental disclosure of such information if a disclosure occurs despite the exercise of the same precautions as the party normally takes to safeguard its own contractual data. b. During the terms of this agreement, it may be necessary for either party to disclose proprietary information to the other. With respect to such information, a separate proprietary agreement shall be created to identify and protect such data. Such data must be in writing and clearly identified as proprietary information or marked with a notice stating restrictions as to its use. 6. SECURITY To the extent the parties' obligations involve access to information classified "Top Secret", "Secret", or Confidential", FAR provisions 52.204-2 shall apply. 7. LEGAL EFFECT OF PARTNERSHIPPING AGREEMENT The parties agree that no legal relationship of any kind exists as a result of the agreement other than the covenants expressly contained herein. This is not to be construed as a business partnership under, nor governed by, the Uniform Partnership Act or the common law of business partnerships. Neither party shall have authority to create any obligations for the other except to the extent stated herein. The parties agree that this agreement may be made known to the Customer. 8. TERM AND TERMINATION OF PARTNERSHIPPING AGREEMENT a. This agreement shall remain in effect as long as the current Delta III contract, including options, with McDonnell Douglas remains in effect, unless terminated earlier by one of the following events: (i) The Customer terminates or cancels the procurement or does not award follow-on contracts or exercise options. (ii) The Customer awards the prime contract to other than Alliant Techsystems Incorporated. (iii) The parties dissolve the agreement by mutual consent. (iv) One of the parties petitions for bankruptcy or reorganization under bankruptcy laws, or makes an assignment for the benefit of creditors. -5- (v) The Customer directs Alliant Techsystems to have the subcontracted work performed by other than the Subcontractor specified herein. (vi) The Customer eliminates or substantially reduces the Subcontractor work contemplated hereby. (vii) Other valid, compelling reason by either of the parties to terminate the Agreement, e.g., debarment, suspension, or criminal investigation of a party; change in legal status due to merger or sale of one of the entities; unsatisfactory performance of a party; etc. 9. PUBLICITY No publicity or advertising relating to this partnershipping agreement shall be released by the Subcontractor without Alliant Techsystems' prior approval. 10. ASSIGNMENT Neither party shall assign, nor in any manner transfer, its interests or any part thereof in this agreement to others without written consent of the other party. 11. ATTACHMENTS a. The following attachments are applicable to this Agreement (i) Exhibit A: Listing of Delta III Materials and Pricing Matrix (ii) Exhibit B: Listing of Delta II Materials and Pricing Matrix (applicable only if WECCO supplied AP qualifies) (iii) Alliant Techsystems Supplier Partnershipping Policy 12. ENTIRE AGREEMENT This agreement, including attachments hereto, constitutes the entire understanding between the parties and supersedes any prior oral or written agreements with respect to the subject matter hereof. The agreement shall not be modified unless agreed to in writing by both parties. Under no circumstances will this agreement violate any antitrust statutes or override any requirements, terms and conditions of the purchase order that this partnershipping agreement supplements. -6- 13. APPLICABLE LAW The validity and performance of this agreement shall be governed by the law of the federal government contracts, if applicable; otherwise by the laws of the State of Utah. IN WITNESS WHEREOF, the parties hereto have executed this partnershipping agreement effective as of the date indicated on the first page. WESTERN ELECTROCHEMICAL CO. (WECCO) ALLIANT TECHSYSTEMS INCORPORATED (Subcontractor) (Customer) By:/S/ JAMES J. PEVELER By: /S/ SIDNEY R. CONRAD -------------------- ------------------------------------ (Signature) (Signature) JAMES J. PEVELER S.R. CONRAD -------------------- ------------------------------------ (Type Name) (Type Name) PRESIDENT MANAGER/MATERIAL CENTER OF EXCELLENCE -------------------- ------------------------------------- (Title) (Title) -7- AMERICAN PACIFIC CORPORATION November 24, 1997 Dave Peet Director of Material Acquisition Alliant Techsystems Inc. Bacchus Works Magna, UT 84044-0098 Dear Mr. Peet: We have appreciated very much the supportive discussions that we have had concerning the impacts of the pending Asset Purchase Agreement between AMPAC and Kerr-McGee. We certainly understand Alliant's desire, and need, for appropriate assurances as to pricing methodology that will be used by AMPAC in the future. To that end, please be assured that you can rely on the following undertakings by AMPAC: 1. The Strategic Partnering Agreement between AMPAC's WECCO Division and Alliant that is based on discussions that began in Fall of 1992, and that was concluded in the Summer of 1993, remains, and will remain, a long-term commitment of AMPAC. It is our intent and expectation that both parties will be faithful to those commitments. 2. In periods beyond the term of the Strategic Partnering Agreement, or within its terms when pricing has not by this date been definitively established, you may rest assured that AMPAC will establish the ammonium perchlorate price on the following basis: * [THIS MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY] * The price of ammonium perchlorate will be established and maintained at a fair and reasonable level. * AMPAC will not seek profits from its ammonium perchlorate operations that are beyond a reasonable level. * AMPAC's ammonium perchlorate pricing will comply both procedurally and substantively with applicable provisions of FARS and the DOD and NASA FAR Supplements. Such compliance will include the subject matters of cost, profit and compensation as governed by the foregoing Regulations and related Guidelines. * AMPAC will offer the same prices to its different ammonium perchlorate customers, subject only to reasonable variations based on quality, volume and ascertainable cost considerations. * AMPAC will engage in continuous cost reduction and control efforts, and will share appropriate information with Alliant concerning suggestions from Alliant in the spirit of the Strategic Partnering Agreement. * Alliant will be provided with appropriate information concerning AMPAC's ammonium perchlorate costs. We look forward to continuing improvements in our relationship with Alliant, and reiterate our commitment to the conduct of that relationship in full harmony with both the letter and the spirit of that Agreement. Sincerely yours, /S/ JOHN R. GIBSON - ------------------ John R. Gibson President & CEO -2- EXHIBIT B ALL ALLIANT PROGRAMS AMMONIUM PERCHLORATE [THIS MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY] -4- EX-27 4 FINANCIAL DATA SCHEDULE
5 XX TEXT TO FOLLOW 6-MOS SEP-30-1998 MAR-31-1998 19,029 0 9,885 0 12,217 42,214 24,849 5,637 130,128 5,161 75,000 0 0 837 42,867 130,128 25,387 25,387 17,235 21,882 0 0 1,463 2,559 0 2,559 0 5,005 0 (2,446) (.30) (.30)
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