SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 3)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 1-8137
AMERICAN PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 59-6490478
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
3770 HOWARD HUGHES PARKWAY, SUITE 300,
LAS VEGAS, NEVADA 89109
(Address of principal executive office) (Zip Code)
(702) 735-2200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.10 par value)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 1, 1997, was approximately $57,600,000. Solely for the
purposes of this calculation, shares held by directors and officers of the
Registrant have been excluded. Such exclusion should not be deemed a
determination by the Registrant that such individuals are, in fact, affiliates
of the Registrant.
The number of shares of Common Stock, $.10 par value, outstanding as of December
1, 1997 was 8,137,537.
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DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for 1998 Annual Meeting of Stockholders to
be filed not later than January 28, 1998 (Part III hereof).
S-14 Registration Statement (2-70830); Annual Reports on Forms 10-K for
the years ended September 30, 1995 and 1993; S-2 Registration Statement
(33-36664); Quarterly Report on Form 10-Q for the fiscal quarter ended December
31, 1990; S-8 Registration Statement (33-52898); S-3 Registration Statement
(33-52196) and Current Report on Form 8-K dated February 28, 1992; (all
incorporated by reference in Part IV hereof).
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PART 1
ITEM 1. BUSINESS
American Pacific Corporation (the "Company") is engaged in the
production of a specialty chemical, ammonium perchlorate ("AP"), for the
aerospace and national defense industries. The Company is one of two domestic
manufacturers of AP, which is used primarily as an oxidizing agent in composite
solid propellants for rockets, booster motors and missiles. The Company's
customers for AP are primarily contractors in programs of the National
Aeronautics and Space Administration ("NASA") and the Department of Defense
("DOD"), and companies providing commercial satellite launch services. These
NASA and DOD contractors are engaged in space exploration projects such as the
Space Shuttle Program and in the production of defense systems. Other customers
for the Company's AP include aerospace and defense agencies of foreign
countries.
On October 17, 1997, the Company entered into an Asset Purchase
Agreement (the "Agreement") with Kerr-McGee Chemical Corporation ("Kerr-McGee"),
the only other domestic manufacturer of AP, providing for the purchase by the
Company of certain process data, technical information, customers lists,
marketing contacts and related expertise of Kerr-McGee related to AP production
and Kerr-McGee's business relating to such assets and the manufacture and sale
of AP. Under the Agreement, Kerr-McGee agreed to cease production and sale of AP
except in the limited circumstances set forth in the Agreement. Upon
consummation of the transaction, the Company will become the sole domestic
manufacturer of AP. See "Ammonium Perchlorate - Agreement with Kerr-McGee."
The Company is a party to agreements with Dynamit Nobel A.G., of
Germany ("Dynamit Nobel") relating to the production and sale of sodium azide,
the principal component of a gas generant used in automotive airbag systems.
Dynamit Nobel licensed to the Company, on an exclusive basis for the North
American market, its technology and know-how in the production of sodium azide,
and has provided technical support for the design, construction and start-up of
the Company's sodium azide facility. Funding for the facility was partially
provided by means of the sale of $40,000,000 principal amount of noncallable
subordinated secured notes (the "Azide Notes") to a major state public employee
retirement fund and a leading investment management company. The Company
commenced commercial sales of sodium azide in fiscal 1994. In January 1996, the
Company filed an antidumping petition with the United States International Trade
Commission ("ITC") and the United States Department of Commerce ("Commerce") in
response to the unlawful pricing practices of Japanese producers of sodium
azide. In the fourth quarter of fiscal 1997, the Company recognized an
impairment charge of $52,605,000 relating to the fixed assets used in the
production of sodium azide. See "Sodium Azide - Market" and "Sodium Azide -
Competition."
In February 1992, the Company acquired (by exercise of an option
previously granted to it) the worldwide rights to Halotron, a fire suppression
system that includes chemical compounds and application technology intended to
replace halons, which have been found to be ozone layer-depleting chemicals.
Halotron has applications as a fire suppression agent for military, commercial
and industrial uses.
The Company is also engaged in the development of real estate and in
the production of environmental protection and waste water treatment equipment.
See Note 12 to the Notes to Consolidated Financial Statements of the
Company for information concerning revenues, operating profits and identifiable
assets of the Company's industry segments and for financial information about
domestic operations and export sales. The Company's perchlorate chemical
operations accounted for
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approximately 52%, 51% and 75% of revenues during the years ended September 30,
1997, 1996 and 1995, respectively. The term "Company" used herein includes,
where the context requires, one or more of the direct and indirect subsidiaries
or divisions of American Pacific Corporation.
SPECIALTY CHEMICALS
STRATEGY
The Company's strategy is to become the premier producer of AP and to
apply the technology and expertise gained over 30 years in the production of AP
to other activities, such as sodium azide and Halotron, perchlorate chemicals
other than AP, and additional specialty chemical business opportunities, and to
its environmental protection equipment business. The Company's strategy has been
to use proven technologies and target growing markets to produce and sell
specialty chemicals for which there is perceived demand. Where feasible, the
Company may endeavor to gain access to such technologies and markets by
cooperative arrangements with others to which it can contribute its operating
and management expertise. The Company regularly evaluates business opportunities
that are presented to it.
AMMONIUM PERCHLORATE
MARKET
AP is the sole oxidizing agent for solid fuel rockets, booster motors
and missiles used in space exploration, commercial satellite transportation and
national defense programs. A significant number of existing and planned launch
vehicles providing access to space for communications, observation, intelligence
and scientific exploration are propelled by solid fuel rockets and thus depend,
in part, upon AP. Many of the rockets and missiles used in national defense
programs are also powered by solid fuel.
The Company has supplied AP for use in space exploration programs for
over 30 years, beginning with the Titan program in the early 1960s. Today, its
principal space exploration customer is the Space Shuttle Program, for which the
Company supplies approximately one-half to substantially all of Program AP
requirements. The Company's AP is also used in expendable rockets that launch
satellites for communications, navigation, intelligence gathering, space
exploration, weather forecasting and environmental monitoring. The Company is a
qualified supplier of AP to a number of defense programs, including the Navy
Standard Missile, Patriot, and Multiple Launch Rocket System programs.
Demand for AP has declined steadily over the past five years but
appears to have leveled off recently on a worldwide basis at approximately
20,000,000 pounds annually. Supply capacity is substantially in excess of the
estimated demand levels. In an attempt to rationalize the AP industry, the
Company entered into the Agreement with Kerr-McGee. See "Ammonium Perchlorate -
Agreement with Kerr-McGee."
CUSTOMERS
Prospective purchasers of AP consist principally of contractors in
programs of the DOD and NASA. As a practical matter, the specialized nature of
these contractors' activities restricts entry by others into competition with
them. As a result, there are relatively few potential customers for AP, and
individual
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customers for AP typically account for a significant portion of the revenues of
AP manufacturers. Prospective customers also include companies providing
commercial satellite launch services and agencies of foreign governments and
their contractors. Historically sales to foreign agencies and their contractors
have not accounted for significant percentages of AP sales. See "Ammonium
Perchlorate - Competition."
Thiokol Corporation ("Thiokol") accounted for 35%, 47% and 71% of the
Company's revenues during the fiscal years ended September 30, 1997, 1996 and
1995, respectively. Alliant Techsystems, Inc. ("Alliant") accounted for
approximately 10% of the Company's revenues during the fiscal year ended
September 30, 1997.
BACKLOG
In September 1997, the Company received a purchase order for deliveries
of AP to Thiokol during the fiscal year ending September 30, 1998. The purchase
order amounts to approximately $16.1 million. In October 1995, the Company
received a purchase order from another customer for the delivery of AP from
October 1996 through 1999 having a value in the range of $8 million to $10
million. Approximately $4.5 million of this purchase order was delivered in
fiscal 1997. This purchase order includes options that could increase the order
during the 1998-1999 period, and that could extend the purchase order to the
year 2000. As a result of the above purchase orders, the Company has a backlog
of approximately $18.3 million for deliveries of AP in fiscal 1998.
MANUFACTURING CAPACITY AND PROCESS
Production of AP at the Company's current manufacturing facility
commenced in July 1989. This facility, as currently configured, is capable of
producing 30,000,000 pounds of AP annually. It is expandable to enable
production of up to 40,000,000 pounds annually. AP produced at the facility and
propellants incorporating such AP have qualified for use in all NASA and DOD
programs for which testing has been conducted. Since the qualification process
was completed, AP produced at the facility has been used in numerous Space
Shuttle launches. AP produced by the Company is also used in programs such as
the Navy Standard Missile and Multiple Launch Rocket System programs and
Alliant's Delta program.
The AP facility is designed to site particular components of the
manufacturing process in discrete areas of the facility. It incorporates modern
equipment and materials handling systems designed, constructed and operated in
accordance with the operating and safety requirements of the Company's AP
customers, insurance carriers and governmental authorities. Equipment required
in the manufacturing process includes storage tanks for use at various stages,
electrolytic cells, glass-lined reactor vessels, crystallizer vessels, dryers
and blenders.
AP is manufactured by electrochemical processes using the Company's
proprietary technology. The principal raw materials used in the manufacture of
AP (other than electrical energy) are salt, ammonia and hydrochloric acid. All
of the raw materials used in the AP manufacturing process are available in
commercial quantities and the Company has had no difficulty in obtaining
necessary raw materials. The Company is a party to an agreement with Utah Power
& Light Company for its electrical requirements at the AP manufacturing
facility. Prices paid by the Company for raw materials have been relatively
stable, with no discernible long-term price fluctuations. The Company's
agreement with Utah Power and Light provides for the supply of power for a
minimum ten-year period, which began in 1988, and obligates the Company to
purchase minimum amounts of power, while assuring the Company competitive
pricing for its electricity needs for the duration of the agreement. The Company
is in the process of negotiations for its
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expected power requirements beyond 1998. The Company's AP production requires
substantial amounts of electric power.
The AP manufacturing process is basically non-patentable. Certain of
its aspects are proprietary to the Company and knowledge of these aspects is
confined to a small number of personnel upon whose expertise the Company is
dependent. The Company has entered into appropriate agreements with such
personnel mandating non-disclosure and prohibiting competition with the Company,
but there can be no assurance that such provisions will be enforceable in all
events.
COMPETITION
Kerr-McGee is the only other manufacturer of AP in the United States,
and currently claims an annual capacity of approximately 36,000,000 pounds.
Kerr-McGee has in the past produced more AP than the Company and has
substantially greater financial resources. The pricing and procurement practices
of the principal AP customers that have been in effect for over 10 years were
formulated to support more than one United States producer of AP. These
practices have resulted in a negotiated price for the bulk of the Company's
product based on settled margins above fully allocated costs. The Company has
maintained close communication with its principal customers and with the
relevant governmental agencies for the purpose, among other things, of enabling
management to assess, on a continuing basis, future product demand and customer
satisfaction and to maintain the Company's market share. The Company has entered
into long-term pricing agreements for AP with its major customers that are
contingent upon the closing of the Agreement with Kerr-McGee and, on a
continuing basis, that will be contingent upon agreement on the terms of
specific purchase orders.
AGREEMENT WITH KERR-MCGEE
On October 10, 1997, the Company, through AMPAC, Inc., a wholly owned
subsidiary, entered into the Agreement with Kerr-McGee, pursuant to which the
Company agreed to acquire and Kerr-McGee agreed to sell certain process data,
technical information, customer lists, marketing contacts and related expertise
of Kerr-McGee related to its production of AP (the "Assets") and substantially
all the business of Kerr-McGee relating to the Assets and to the manufacture and
sale of AP (the "Acquisition") for a purchase price of $39,000,000. Under the
Agreement, the Company will also acquire 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 of the Acquisition (the "Closing Date") and not owned by, or
identified to a firm order from, a Kerr-McGee customer (the "Inventory"). The
Option is exercisable from time to time within the 12 month period commencing on
the Closing Date (the "Option Period"). The Acquisition does not include
Kerr-McGee's production facilities (the "Production Facilities"), and certain
related water and power supply agreements used by Kerr-McGee in the production
of AP. Under the Agreement, Kerr-McGee has agreed to cease the production and
sale of AP, except under certain limited circumstances provided for in the
Agreement. The Production Facilities may continue to be used by Kerr-McGee for
production of AP under such circumstances. Under the Agreement, Kerr-McGee has
reserved a perpetual, royalty free, nonexclusive license to use any of the
technology forming part of the Assets as may be necessary or useful to use,
repair or sell the Production Facilities (the "Reserved License").
Under the Agreement, Kerr-McGee also reserves the right (the "Reserved
Rights") 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 Agreement, and (ii) in certain other limited
circumstances, including the Company's inability to meet customer demand or
requirements, failure to exercise the Option in full or breach of the Agreement.
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The Agreement provides that, together with the Reserved License,
Kerr-McGee is freely 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.
The Company's obligation to close under the Agreement is conditioned
upon: the accuracy of Kerr-McGee's representations therein; compliance by
Kerr-McGee with its obligations thereunder; the absence of material adverse
change impairing the Assets or Kerr-McGee's AP Business; the closing of a
financing in an amount at least equal to the purchase price for the Assets of
$39,000,000; and the conclusion by the Company of a long-term supply agreement
with its major customers for the sale and purchase of AP, if the existence of
such an agreement is determined by the Company in good faith to be necessary to
obtain customer acquiescence to the Acquisition.
Kerr-McGee's obligation to close under the Agreement is conditioned
upon: the accuracy of the Company's representations therein; compliance by the
Company with its obligations thereunder; receipt of a guaranty by the Company of
its subsidiary's obligations under the Agreement; and the conclusion by
Kerr-McGee of an agreement with NASA and/or Thiokol to hold the Production
Facilities in a standby status for production of AP, if the existence of such an
agreement is determined by Kerr-McGee in good faith to be necessary to obtain
their acquiescence or to facilitate a favorable review of the Acquisition by the
Federal Trade Commission ("FTC") or Department of Justice under the
Hart-Scott-Rodino Antitrust Improvements Act (the "H-S-R Act") or other
applicable law.
The obligation of each of the parties to close under the Agreement is
further conditioned upon: submission by both parties of notification under the
H-S-R Act and either the waiting period under the Act having expired with no
adverse action having been taken or requests for further information having been
received, or action on the notification deemed satisfactory by each of the
parties having been received; the Closing of the Acquisition not constituting or
causing a violation of any applicable covenant or condition contained in any
contract to which either party is bound; approval of the Closing and all related
actions by the board of directors of each party, and by the respective
managements and boards of directors of their parent companies; conclusion of a
long-term supply agreement between the parties whereby Kerr-McGee would provide
sodium chlorate as a raw material to the Company, if the parties mutually agree
that such long-term supply agreement is necessary for successful completion of
the transactions contemplated by the Agreement; absence of any suit or
proceeding threatened or pending which seeks to restrain, prohibit, challenge or
obtain damages or other relief in connection with the Agreement or consummation
of the Acquisition; and receipt by each party of an opinion from its respective
counsel that consummation of the Acquisition will not result in violation of any
applicable law.
In December 1997, the Company received notification that the FTC had
determined to grant early termination of the waiting period relating to the
Company's and Kerr-McGee's premerger notification filings with the FTC and
Department of Justice.
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SODIUM AZIDE
SODIUM AZIDE FACILITY
In July 1990, the Company entered into agreements (the "Azide
Agreements") pursuant to which Dynamit Nobel has licensed to the Company on an
exclusive basis for the North American market its most advanced technology and
know-how for the production of sodium azide, the principal component of the gas
generant used in certain automotive airbag safety systems. In addition, Dynamit
Nobel has provided technical support for the design, construction and startup of
the facility. The facility was constructed on land owned by the Company in Iron
County, Utah for its owner and operator, American Azide Corporation ("AAC"), a
wholly-owned indirect subsidiary of the Company, and has an annual design
capacity of 6,000,000 pounds.
Dynamit Nobel is an established German firm engaged in the manufacture
of explosives and detonators, specialty chemicals, defense technologies,
ammunition, plastics and composites. It is the developer of the sodium
metal-based process used in the manufacture of sodium azide, and has
successfully utilized the process on a commercial basis for over 80 years,
although on a much smaller scale than as practiced by the Company.
FINANCING
On February 21, 1992, the Company concluded a $40,000,000 financing for
the design, construction and startup of the sodium azide facility through the
sale of the Azide Notes. The funds were provided by a major state public
retirement fund and an investment management company. The Azide Notes provide
for the semi-annual payment in arrears of interest at the rate of 11% per annum.
Principal is to be amortized to the extent of $5,000,000 on each of the fourth
through ninth anniversary dates of funding, with the remaining $10,000,000
principal amount to be repaid on the tenth anniversary date. At September 30,
1997, $10,000,000 principal amount of the Azide Notes had been repaid. The Azide
Notes are secured by the fixed assets and stock of AAC as well as by a deed of
trust on certain land in Clark County, Nevada being developed by the Company.
The Company issued Warrants ("the Warrants") to the purchasers of the Azide
Notes, which are exercisable for a 10-year period on or after December 31, 1993,
to purchase shares of the Company's Common Stock. The exercise price of the
Warrants is $14.00 per share. At a $14.00 per share exercise price, 2,857,000
shares could be purchased under the Warrants. The Warrants contain additional
provisions for a reduction in exercise price in the event that the Company
issues or is deemed to issue stock, rights to stock or convertible debt at a
price less than the exercise price in effect, or in the event of certain stock
dividends or in the event of stock splits, mergers or similar transactions. The
terms of the Warrants permit their exercise by delivery to the Company for
cancellation of a principal amount of the Azide Notes equivalent to the exercise
price of the Warrants being exercised. The Warrants are exercisable, at the
option of their holders, to purchase up to 20% of the Common Stock of AAC,
rather than the Company's Common Stock. In the event of such an election, the
exercise price of the Warrants will be based upon a pro rata share of AAC's
capital, adjusted for earnings and losses, plus interest from the date of
contribution.
The Indenture under which the Azide Notes were issued imposes various
operating restrictions upon the Company, including restrictions on (i) the
incurrence of debt; (ii) the declaration of dividends and the purchase and
repurchase of stock; (iii) certain mergers and consolidations, and (iv) certain
dispositions of assets. Management believes the Company has complied with these
operating restrictions.
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On each of December 31, 1995, 1997 and 1999, holders of the Warrants
have the right to put to the Company as much as one-third thereof at prices
determined by the Company's fully diluted earnings per share and multiples of
13, 12 and 11 respectively, but the Company's obligation in such respect is
limited to $5,000,000 on each of such dates and to $15,000,000 in the aggregate.
Such put rights may not be exercised if the Company's Common Stock has traded at
values during the preceding 90-day period that would yield to the warrant
holders a 25% per annum internal rate of return to the date of the put
(inclusive of the Azide Notes' yield). On or after December 31 of each of the
years 1995 through 1999, the Company may call up to 10% of the Warrants (but no
more than 50% in the aggregate) at prices that would provide a 30% internal rate
of return to the holders thereof through the date of call (inclusive of the
Azide Notes' yield). The holders of the Warrants were also granted the right to
require that the Common Stock underlying the Warrants be registered under the
Securities Act of 1933, as amended, on one occasion, as well as certain
incidental registration rights.
MARKET
A number of firms have devoted extensive efforts for at least 25 years
to the development of automotive airbag safety systems. These efforts have
resulted in the acceptance by the automobile industry and the consuming public
of an inflator for automotive airbags that historically has been based
principally upon sodium azide, combined in tablet or granule form with limited
amounts of other materials. Therefore, the majority of all commercially
developed automotive airbag systems installed to date incorporate inflation
technology based on the use of the sodium azide. Other inflator technologies
have been developed and are achieving market acceptance.
The Company expects demand for airbag systems in North America and
worldwide to increase significantly over the next 10 years. However, the level
of demand for sodium azide will depend, in part, upon the penetration of
competing inflator technologies that are not based upon the use of sodium azide.
Based principally upon market information received from inflator manufacturers,
the Company expects sodium azide use to decline and that inflators using sodium
azide will ultimately be phased out.
The Company previously believed that demand for sodium azide in North
America and the world would substantially exceed existing manufacturing capacity
and announced expansions or new facilities (including the AAC plant) by the 1994
model year (which for sodium azide sales purposes was the period June 1993
through May 1994). Currently, demand for sodium azide is substantially less than
supply on a worldwide basis. The Company believes this is the result of capacity
expansions by existing producers, although the Company's information with
respect to competitors' existing and planned capacity is limited. There can be
no assurance that other manufacturing capacities not now known to the Company
will not be established. By reason of this highly competitive market
environment, and other factors discussed below, sodium azide prices have
decreased significantly over the past several years.
The Company believes that the price erosion of sodium azide over the
past few years has been due, in part, to unlawful pricing procedures of Japanese
sodium azide producers. In response to such practices, in January 1996, the
Company filed an antidumping petition with the International Trade Commission
("ITC") and the Department of Commerce ("Commerce"). In August 1996, Commerce
issued a preliminary determination that Japanese imports of sodium azide have
been sold in the United States at prices that are significantly below fair
value. Commerce's preliminary dumping determination applied to all Japanese
imports of sodium azide, regardless of end-use. Commerce's preliminary
determination followed a March 1996 preliminary determination by ITC that dumped
Japanese imports have caused material injury to the U.S. sodium azide industry.
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On January 7, 1997 the anti-dumping investigation initiated by
Commerce, based upon the Company's petition, against the three Japanese
producers of sodium azide was suspended by agreement. It is the Company's
understanding that, by reason of the Suspension Agreement, two of the three
Japanese sodium azide producers have ceased their exports of sodium azide to the
United States for the time being. As to the third and largest Japanese sodium
azide producer, which has not admitted any prior unlawful conduct, the
Suspension Agreement requires that it make all necessary price revisions to
eliminate all United States sales at below "Normal Value," and that it conform
to the requirements of sections 732 and 733 of the Tariff Act of 1930, as
amended, in connection with its future sales of sodium azide in the United
States.
The Suspension Agreement contemplates a cost-based determination of
"Normal Value" and establishes reporting and verification procedures to assure
compliance. Accordingly, the minimum pricing for sodium azide sold in the United
States by the remaining Japanese producer will be based primarily on its actual
costs, and may be affected by changes in the relevant exchange rates.
Finally, the Suspension Agreement provides that it may be terminated by
any party on 60 days' notice, in which event the anti-dumping proceeding would
be re-instituted at the stage to which it had advanced at the time the
Suspension Agreement became effective.
CUSTOMERS
The two major suppliers of airbag inflators in the United States are
TRW and Autoliv ASP, Inc. ("Autoliv") (formerly Morton International Automotive
Safety Products). AAC has received notification that sodium azide produced at
its Utah plant is qualified for use in most sodium azide based airbag inflator
products of Autoliv and TRW. In May 1997, the Company entered into a three-year
agreement with Autoliv which provides for the Company to supply sodium azide
used by Autoliv in the manufacture of automotive airbags. Deliveries under the
agreement commenced in July 1997. The estimated sales value of the agreement is
approximately $45 - $55 million over the three-year period. The actual sales
value, however, will depend upon many factors beyond the control of the Company,
such as the number of automobiles and light trucks manufactured and competitive
conditions in the airbag market, that will influence the actual magnitude of
Autoliv's sodium azide requirements, and there can therefore be no assurance as
to the actual sales value of the contract.
COMPETITION
The Company believes that a Canadian facility is currently the sole
competing producer of sodium azide in commercial quantities in North America.
Dynamit Nobel in Germany, one producer in Japan and two producers in India also
currently produce sodium azide. It is possible that domestic or foreign entities
will seek to develop additional sodium azide production facilities in North
America. It is also possible that other inflator technologies, either existing
or not yet fully developed or identified, will achieve significant market share
and consequently reduce demand for sodium azide. The Company's plans with
respect to its sodium azide project continue to be grounded in the Company's
objective to become the major supplier to the North American airbag inflator
market, but there can be no assurance of its ability to achieve this goal or of
future levels of demand for sodium azide.
The Company has incurred significant operating losses in its sodium
azide operation during the last three fiscal years. Sodium azide performance
improved in the fourth quarter of fiscal 1997, principally as
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a result of additional sodium azide deliveries under the Autoliv agreement
referred to above, and the operations were cash flow positive during the year
ended September 30, 1997. However, even though performance improved,
Management's view of the economics of the sodium azide market changed during the
fourth quarter of fiscal 1997. One major inflator manufacturer announced the
acquisition of non-azide based inflator technology and that they intended to be
in the market with this new technology by model year 1999. In addition, although
the Company has achieved significant gains in market share that appear to relate
to the Company's anti-dumping petition and the Suspension Agreement, Management
believes that the effects of the anti-dumping petition were likely fully
incorporated into the sodium azide market by the end of fiscal 1997. Recognizing
that the uncertainties respecting the market and discussed above continue to
exist, during the fourth quarter of fiscal 1997, Management concluded that the
cash flows associated with sodium azide operations would not be sufficient to
recover the Company's investment in sodium azide related fixed assets. As quoted
market prices were not available, the present value of estimated future cash
flows was used to estimate the fair value of sodium azide fixed assets. Under
the requirements of Statement of Financial Accounting Standards ("SFAS") No.
121, and as a result of this valuation technique, an impairment charge of
$52,605,000 was recognized in the fourth quarter of fiscal 1997.
AZIDE AGREEMENTS
Under the Azide Agreements, Dynamit Nobel was to receive, for the use
of its technology and know-how relating to its batch production process of
manufacturing sodium azide, quarterly royalty payments of 5% of the quarterly
net sales of sodium azide by AAC for a period of 15 years from the date the
Company begins to produce sodium azide in commercial quantities. In July 1996,
the Company and Dynamit Nobel agreed to suspend the royalty payment effective as
of July 1, 1995. As a result, in the third quarter of fiscal 1996, the Company
recognized an increase in sodium azide sales of approximately $600,000. This
amount had previously been recognized as a reduction of net sodium azide sales
during the period July 1, 1995 through June 30, 1996.
HALOTRON
Halotron is a fire suppression system, including a series of chemical
compounds and application technologies, designed to replace halons, chemicals
presently in wide use as fire suppression agents in military, industrial, and
commercial applications. The impetus for the invention of Halotron was provided
by the discovery during the 1980s that halons are highly destructive to the
stratospheric ozone layer, which acts as a shield against harmful solar
ultraviolet radiation. A reduction in stratospheric ozone is believed to have
the potential to result in long-term increases in skin cancer and cataracts,
suppression of the human immune system and damage to crops and natural
ecosystems. As a result of disclosures concerning the various halon compounds in
use, the Montreal Protocol on Substances that Deplete the Ozone Layer, which
became effective in 1989 and was strengthened in 1992 and 1996, froze at 1986
levels the production of halons, imposed a phase-out of the production of
halons, and completely banned production of halons as of December 31, 1995.
USE OF HALONS
Halons are used throughout the world in modalities that range from
hand-held fire extinguishers to extensively engineered aircraft installations,
but which are generally of two types, streaming and flooding systems. Streaming
systems rely upon the focused projection of a slowly gasifying liquid over
distances of up to 50 feet from the point of projection. Flooding systems
release a quickly gasifying liquid into a confined space, rendering inert a
combustible atmosphere and extinguishing any ongoing combustion.
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Halon 1211, principally a streaming agent, is used on aircraft and aircraft
flightlines, on small boats and ships and in chemically clean rooms and
laboratories, other commercial and industrial facilities, including those in the
lumber and petroleum industries, offices and residences. Its worldwide
production peaked in 1988 at 19,000 metric tons. Halon 1301, principally a
flooding agent, protects such installations as computer, electronic and
equipment rooms, ship and other engine room spaces, petroleum handling stations
and repositories of literature and cultural heritage. Its worldwide production
peaked in 1988 at 12,500 metric tons.
POTENTIAL CUSTOMERS
The end-user market for halons and consequently, Halotron, is divided
into several segments. The government segment consists of the armed services and
other agencies, including the Department of Energy, NASA and governmental
offices, laboratories and data processing centers. Historically, military
applications have predominated in this segment, and it is the military that has
taken the lead in research for halon replacements, both in streaming and in
flooding applications. It will be critical to the Company's efforts to market
Halotron to the military that military specifications for the procurement of
halon replacements include Halotron. The Company is not aware of any military
specifications for halon replacements that have been issued to date.
Commercial market segments include fire critical industries such as
utilities, telecommunications firms, the oil and gas exploration and production
industry, lumbering, ocean transport and commercial aviation. Other market
segments include other business organizations and small users that typically
follow selections made by the industry users described above.
Halotron I, the first phase of Halotron, has been extensively and
successfully tested. Halotron I is designed to replace halons in streaming and
in limited flooding applications. Halotron II is intended to replace halons in
flooding applications. Succeeding Halotron phases, if designed, will be intended
to supersede earlier Halotron phases, generally on an optimized application by
application basis, and will be intended to meet more strict environmental
constraints expected to be applied in the future.
The Company's efforts to produce, market and sell Halotron I and
Halotron II are dependent upon the political climate and environmental
regulations that exist and may vary from country to country. The magnitude of
future orders received, if any, will be dependent to a large degree upon
political issues and environmental regulations that are not within the Company's
control, as well as additional testing and qualification in certain
jurisdictions, governmental budgetary constraints and the ultimate market
acceptance of these new products.
MARKET FOR HALOTRON
In 1993, Halotron I was approved by the Environmental Protection Agency
("EPA") as a halon 1211 replacement agent in connection with the EPA's
Significant New Alternatives Policy ("SNAP"). During 1995 the Federal Aviation
Administration ("FAA") approved Halotron I as an acceptable airport firefighting
agent. The FAA concluded that Halotron I will suppress or extinguish fire in the
same manner as halon.
In addition, the Company, in concert with Buckeye Fire Equipment
Company, has successfully completed Underwriters Laboratories (UL) fire tests
for six sizes of portable fire extinguishers using Halotron I. Domestic
distribution of the Buckeye Halotron extinguisher line began in early 1996.
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In September 1997, the Company and Badger Fire Protection, Inc.
("Badger") began UL fire tests of a line of portable fire extinguishers using
Halotron I. Assuming final UL certifications are received, it is the Company's
understanding that Badger expects to begin distribution of this line during the
first half of calendar 1998. The Company is also marketing Halotron I to other
fire extinguisher manufacturers.
In August 1997, the Company completed a study which concluded that the
market for halon substitutes anticipated by the Company when it entered into the
Halotron business in 1992 has not materialized and that the market for "clean
gas" substitutes for Halon 1211 would remain substantially smaller than the peak
use in 1988. Although the study also concluded that the Company's Halotron
product could command a significant percentage of this smaller than anticipated
market there can be no assurance in that regard. In order for the Company to
achieve and maintain market share for Halotron, and a long term presence in the
industry, it may be necessary for the Company to expend considerable additional
funds and effort in research and development. Although current Halotron phases
have an Ozone Depletion Potential ("ODP") that is significantly lower than that
of halons and meets current environmental standards, potential users of halon
replacements may eventually require a product with zero ODP. Environmental
standards may also be expected to mandate this result. Accordingly, the product
life of current Halotron phases may be limited and the Company may be required
to produce succeeding Halotron phases that can meet increasingly stringent
standards. There can be no assurance that such phases will be capable of
production or that a competitor or competitors will not develop fire suppression
agents with comparable or superior qualities.
COMPETITION
Potential halon alternatives and substitutes will compete as to
performance characteristics, environmental effects and cost. Performance
characteristics include throw ability, visibility after application, after-fire
damage, equipment portability and versatility, low temperature performance,
corrosion probability, shelf life and efficiency. The environmental effects
include ODP, GWP (global warming potential) and toxicity. Potential halon
substitutes include water, carbon dioxide and a variety of chemicals in liquid,
foam and powder form. It is likely that competitors producing alternatives and
substitutes will be larger, will have experience in the production of fire
suppressing chemicals and systems and will have greater financial resources than
those available to the Company. In 1996 Dupont introduced a new alternative fire
extinguishing agent called FE-36(TM), which is intended to replace Halon 1211.
The Company has limited information with respect to this agent, but understands
that SNAP approval is currently pending. Dupont claims that FE-36(TM) meets
application, performance, toxicity and environmental standards as a Halon 1211
replacement. The Company expects that there will be several competitive products
in the same market as Halotron II.
HALOTRON AGREEMENT
On August 30, 1991, the Company entered into an agreement (the
"Halotron Agreement") with Jan Andersson and AB-Bejaro Product, granting the
Company the option (which was exercised in February, 1992) to acquire the
exclusive worldwide rights to manufacture and sell Halotron. The Halotron
Agreement provides for disclosure to the Company of all confidential and
proprietary information concerning Halotron I (see below), which, together with
testing performed at independent laboratories in Sweden and the United States
and consulting services that have been provided by its inventors, was intended
to enable the Company to evaluate Halotron I's commercial utility and
feasibility. In February 1992, the Company announced that a series of technical
evaluations and field tests conducted at the
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University of New Mexico had been positive and equivalent to the performance
previously reported in testing at the Swedish National Institute of Testing and
Standards and the University of Lund in Sweden. On February 26, 1992, the
Company acquired the rights provided for in the Halotron Agreement, gave notice
to that effect to the inventors, and exercised its option. In addition to the
exclusive license to manufacture and sell Halotron I, the rights acquired by the
Company include rights under all present and future patents relating to Halotron
I throughout the world, rights to related and follow-on products and
technologies and product and technology improvements, rights to reclaim, store
and distribute halon and rights to utilize the productive capacity of the
inventors' Swedish manufacturing facility. Upon exercise of the option, the
Company paid the sum of $700,000 (the exercise price of $1,000,000, less advance
payments previously made) and became obligated to pay the further sum of
$1,500,000 in monthly installments of $82,000, commencing in March 1992. The
license agreement between the Company and the inventors of Halotron I provide
for a royalty to the inventors of 5% of the Company's net sales of Halotron I
over a period of 15 years (however, see below for a discussion of certain
litigation that terminated the inventors' rights to royalties). In addition, the
Company entered into employment and consulting agreements with Mr. Andersson and
AB-Bejaro Product under which, among other things, Halotron II (see below) has
been developed.
See Note 14 to the Notes to Consolidated Financial Statements of the
Company for a discussion of litigation associated with the Halotron Agreement.
HALOTRON FACILITY
The Company has designed and constructed a Halotron facility that has
an annual capacity of at least 6,000,000 pounds, located on land owned by the
Company in Iron Country, Utah. Under the Halotron Agreement, the Company
received the technical support of the inventors for the design, construction and
operation of the new facility.
REAL ESTATE DEVELOPMENT
The Company owns a 320-acre tract in Clark County, Nevada, and about
4,700 acres in Iron County, Utah. The Nevada tract is the site of the Gibson
Business Park and the Company's Ventana Canyon joint venture residential project
(see below). The 4,700 acre Utah site is primarily dedicated to the Company's
growth and diversification.
The Company maintains close ties with the Nevada Development Authority,
the regional agency primarily responsible for economic development and
diversification in Southern Nevada. Local marketing is done through real estate
professionals and through business and organizational ties. The Gibson Business
Park competes with several other industrial parks in the Las Vegas Valley, some
of which offer comparable sites and amenities. It also competes with industrial
parks in the Phoenix, Reno and Salt Lake City areas.
During fiscal 1993, the Company contributed approximately 240 acres of
its Clark County development property to Gibson Ranch Limited Liability Company
("GRLLC"), the developers of Ventana Canyon, a master-planned community
primarily residential in character. The development property contributed had a
carrying value of approximately $12,300,000 at the date of contribution which
was transferred to Real Estate Equity Investments. The Company's interest in
GRLLC is assigned to secure the Azide Notes. An unrelated local real estate
development group (the "Developer") contributed an adjacent 80 acre parcel to
GRLLC. GRLLC is developing the 320-acre parcel as primarily a residential real
estate
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development. Developer is the managing member of GRLLC and manages the business
conducted by GRLLC. Certain major decisions, such as increasing debt and changes
in the development plan or budget may be made only by a management committee on
which the Company is equally represented. The profits and losses of GRLLC will
be split equally between the Company and Developer after the return of advances
and agreed upon values for initial contributions. Ventana Canyon is being
constructed and sold on a residential phase basis. Developer expects the project
to be completed and sold by the end of calendar year 2000.
Each of the Company and Developer is obligated to loan to GRLLC, under
a revolving line of credit, up to $2,400,000 at an annual interest rate of 10
percent. However, Developer will not be required to advance funds under its
revolving line of credit until the Company's line is exhausted. At September 30,
1996, the Company had advanced all of its committed amount under this line. In
November, 1995, the Company committed to advance an additional $1,700,000 to
Developer. Developer is required to advance any funds received to GRLLC. Funds
advanced under this additional commitment bear annual interest of 12 percent.
Total advances under these commitments were $3,171,000 and $2,828,000 at
September 30, 1997 and 1996. Although additional advances under these
commitments are not currently contemplated, the Company expects to fund any such
advances through existing cash balances.
ENVIRONMENTAL PROTECTION EQUIPMENT
The Company designs, manufactures and markets systems for the control
of noxious odors, the disinfection of waste water streams and the treatment of
sea water. Its OdorMaster(TM) systems eliminate odors from gases at sewage
treatment plants, composting sites and pumping stations and at chemical, food
processing and other industrial plants. These systems, which use electrochemical
technology developed in the Company's specialty chemical operations, chemically
deodorize malodorous compounds in contaminated air. Sodium hypochlorite is
generated on-site from salt brine or sea water by circulation through
electrolytic cells. Once generated, it is utilized within a scrubber tower
containing both a spray area and a packing section to maximize contact between
the scrubbing solution and the contaminated air. Sodium hypochlorite reacts
chemically with the two most common air stream contaminants, hydrogen sulfide
and ammonia, to produce non-noxious gases, water and salts. The salts, a
by-product of the process, are then used to produce additional sodium
hypochlorite which is then used for further odor treatment. Advanced
OdorMaster(TM) systems place two or three scrubber towers in series to treat
complex odors, such as those produced at sewage composting sites or in sewage
sludge conditioning systems. ChlorMaster(TM) Brine and Sea water systems utilize
a similar process to disinfect effluent at inland sewage treatment and
industrial plants and to control marine growths in condenser cooling and service
water at power and desalination plants and at oil drilling production facilities
on seacoasts and offshore.
The Company's customers for its OdorMaster(TM)System are municipalities
and special authorities (and the contractors who build the sewage systems for
such municipalities and authorities) and plant owners. Oil and other industrial
companies are customers of its ChlorMaster(TM)systems. Its systems are marketed
domestically by sales representatives and overseas by sales representatives and
licensees. The Company competes both with companies that utilize other
decontamination processes and those that utilize technology similar to the
Company's. All are substantially larger than the Company. The Company's success
to date is derived from the ability of its products both to generate sodium
hypochlorite on site and to decontaminate effectively. Its future success will
depend upon the competitiveness of its technology and the success of its sales
representatives and licensees.
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The backlog for environmental protection equipment at the end of the fiscal
years ending September 30, 1997, 1996 and 1995 was $2,400,000, $1,800,000 and
$2,500,000, respectively.
INSURANCE
The Company's insurance currently includes property insurance at
estimated replacement value on all of its facilities and business interruption
insurance. The Company also maintains liability insurance. Management believes
that the nature and extent of the Company's current insurance coverages are
adequate. The Company has not experienced difficulty obtaining the types and
amounts of insurance it has sought.
15-A
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GOVERNMENT REGULATION
As a supplier to United States government projects, the Company is
subject to audit and review by the government of the negotiation and performance
of, and of the accounting and general practice relating to, government
contracts. Most of the Company's contracts for the sale of AP are in whole or in
part subject to the Federal Acquisition Regulations ("FARS"). The Company's AP
costs are audited by its customers and by government audit agencies such as the
United States Defense Contract Audit Agency. To date, such audits have not had a
material effect on the Company's results of operations or financial position.
ENVIRONMENT AND SAFETY
In the operation of its chemical plants, the Company is subject to a
number of environmental constraints relating to atmospheric emissions,
industrial effluent and operating conditions. The Company has thus far met
successfully all requirements imposed, and does not anticipate any adverse
effects from existing or presently foreseeable statutes and regulations,
although there can be no assurance in this regard, particularly since the
Company's plants are subject to continued compliance with the changing
requirements of federal and state occupational safety and health administration
regulations. The costs of compliance with applicable requirements were a
component of the AP and sodium azide plant financings.
The imposition of environmental constraints is a positive factor in the
development of the Company's environmental protection activities. As
environmental awareness continues to increase, the Company anticipates that
these business activities will be enhanced.
Although a number of states have adopted laws and regulations that
place environmental controls and zoning restrictions on real estate, such
regulations have not had a significant effect on the Company.
Trace amounts of perchlorate chemicals were recently found in Lake
Mead. Clark County, Nevada, where Lake Mead is situated, is the location of
Kerr-McGee's AP operations, and was the location of the Company's AP operations
until May 1988. The Company is cooperating with State and local agencies, and
with Kerr-McGee and other interested firms, in the investigation and evaluation
of the source or sources of these trace amounts, possible environmental impacts,
and potential remediation methods. Until these investigations and evaluations
have reached appropriate 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 or assist with future remediation efforts, or the financial impacts,
if any, of such contributions or assistance.
The Company has one major operating facility (producing perchlorate
chemicals, sodium azide, Halotron and environmental protection equipment)
located in Iron County, Utah. The loss or shutdown of operations over an
extended period of time at all or part of such facility would have a material
adverse effect on the Company. The Company's operations are subject to the usual
hazards associated with chemical manufacturing and the related storage and
transportation of products and wastes, including explosions, fires, inclement
weather and natural disasters, mechanical failure, unscheduled downtime,
transportation interruptions, chemical spills, discharges or releases of toxic
or hazardous substances or gases and other environmental risks, such as required
mediation of contamination. These hazards can cause personal injury and loss of
life, severe damage to or destruction of property and equipment and
environmental damage, and may result in suspension of operations and the
imposition of civil or criminal penalties. The Company maintains property,
business interruption and casualty insurance at levels which it
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believes are in accordance with customary industry practice, but there can be no
assurance that the Company will not incur losses beyond the limits or outside
the coverage of its insurance.
On May 4, 1988, the former manufacturing and office facilities of the
Company in Henderson, Nevada were destroyed by a series of massive explosions
and associated fires (the "May 1988 Incident"). Extensive property damage
occurred both at the Company's facilities and in immediately adjacent areas, the
principal damage occurring within a three-mile radius. Production of AP, the
Company's principal business, ceased for a 15-month period. Significant
interruptions were also experienced in the Company's other businesses, which
occupied the same or adjacent sites. While the Company's current facility is
designed to site particular components of the manufacturing process in discrete
areas of the facility and incorporates modern equipment and materials handling
systems designed, constructed and operated in accordance with the operating and
safety requirements of the Company's customers, insurance carriers and
governmental authorities, there can be no assurance that another incident could
not interrupt some or all of the activities carried on at the Company's current
manufacturing site.
EMPLOYEES
At September 30, 1997, the Company employed approximately 200 persons
in executive, administrative, sales and manufacturing capacities. The Company
considers relationships with its employees to be satisfactory.
ITEM 2. PROPERTIES
The following table sets forth certain information regarding the
Company's properties at September 30, 1997.
<TABLE>
<CAPTION>
Approximate
Area or Approximate
Location Principal USe Floor Space Status Annual Rent
-------- ------------- ----------- ------ -----------
<S> <C> <C> <C> <C>
Iron County, UT AP Manufacturing 217 acres Owned ___
Facility (1)
Iron County, UT Sodium Azide 41 Acres Owned(3) ___
Manufacturing Facility (2)
Iron County, UT Halotron Manufacturing(5) 6,720 sq. ft. Owned ___
Facility
Las Vegas, NV Executive Offices: 22,262 sq. ft. Leased(4) $550,000
American Pacific
Corporation, Real Estate
Division
</TABLE>
(1) This facility, used for the production of perchlorate products,
consists of approximately 112,000 sq. ft. of enclosed manufacturing
space, a 12,000 sq. ft. administration building and a 3,200 sq. ft.
laboratory building. Capacity utilization rates for the production
facility were approximately 34%, 38% and 60% during the fiscal years
ended September 30, 1997, 1996 and 1995, respectively.
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(2) This facility is used for the production of sodium azide and consists
of approximately 34,600 sq. ft. of enclosed manufacturing and
laboratory space.
(3) The sodium azide manufacturing facility and land upon which it is
situated is subject to a deed of trust in favor of the holders of the
Azide Notes. Capacity utilization rates for this facility were 45%, 39%
and 15% during the fiscal years ended September 30, 1997, 1996 and
1995, respectively.
(4) These facilities are leased from 3770 Howard Hughes Parkway Associates
Limited Partnership for an initial term of 10 years which began on
March 1, 1991 at a current annual rental of $550,000.
(5) Capacity utilization rates for the Halotron production facility were
approximately 4% during the fiscal year ended September 30, 1997 and
less than 1% during the fiscal years ended September 30, 1996 and 1995.
The Company's facilities are considered by it to be adequate for its
present needs and suitable for their current use.
For information with respect to real estate division properties owned
by the Company see "Business - Real Estate Development." Substantially
all land in Clark County, Nevada owned by the Company secures the Azide
Notes and is subject to a mortgage and deed of trust in favor of the
Azide Note holders.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is principally engaged in the production of AP for the
aerospace and national defense industries. In addition, the Company produces and
sells sodium azide, the primary component of a gas generant used in automotive
airbag safety systems, and Halotron, 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 has incurred net losses during the last three fiscal years
and operating losses during the fiscal year ended September 30, 1997 and 1995.
As a result, pre-tax income has not been sufficient to recover interest charges.
The Company believes that North American AP demand is currently
approximately 22 to 24 million pounds annually. However, supply capacity is
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 Agreement with Kerr-McGee. The Agreement contemplates that the Company will
acquire certain process data, technical information, customer lists, marketing
contracts, and related expertise used by Kerr-McGee primarily in the AP
industry. The Agreement calls for a purchase price of $39 million, and grants
the Company the option to purchase limited AP inventory of Kerr-McGee for
additional consideration.
Closing of the transaction is subject to a number of conditions,
including the Company's securing of financing of 100 percent of the purchase
price and Board of Directors approvals by both parties. In December 1997, the
Company received notification that the FTC had determined to grant early
termination of the waiting period relating to the Company's and Kerr-McGee's
premerger notification filings with the FTC and the Department of Justice. The
Company has entered into long-term pricing agreements for AP with its major
customers that are contingent upon the closing of the transaction and, on a
continuing basis, that will be contingent upon agreement on terms of specific
purchase orders.
There can be no assurance that the conditions to closing of the
transaction will be satisfied, or that the transaction will close.
Sales and Operating Revenues. Sales of the Company's perchlorate
chemical products, consisting almost entirely of AP sales, accounted for
approximately 52%, 51% and 75% of revenues during the fiscal years ended
September 30, 1997, 1996 and 1995, respectively. In general, demand for AP is
driven by a relatively small number of DOD and NASA contractors; as a result,
any one individual AP customer usually accounts for a significant portion of the
revenues of AP manufacturers. For example, Thiokol accounted for approximately
35%, 47% and 71% of the Company's revenues during the fiscal years ended
September 30, 1997, 1996 and 1995, respectively.
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Sodium azide sales accounted for approximately 30%, 28% and 12% of
sales during fiscal years ended September 30, 1997, 1996 and 1995, respectively.
Despite these relative increases in revenue, the Company has incurred
significant operating losses in its sodium azide operation during the last three
fiscal years. Sodium azide performance improved in the fourth quarter of fiscal
1997, principally as a result of additional sodium azide deliveries under the
Autoliv agreement referred to below, and the operations were cash flow positive
during the year ended September 30, 1997. However, even though performance
improved, Management's view of the economics of the sodium azide market changed
during the fourth quarter of fiscal 1997. One major inflator manufacturer
announced the acquisition of non-azide based inflator technology and that they
intended to be in the market with this new technology by model year 1999. In
addition, although the Company has achieved significant gains in market share
that appear to relate to the Company's anti-dumping petition and the Suspension
Agreement, Management believes that the effects of the anti-dumping petition
were likely fully incorporated into the sodium azide market by the end of fiscal
1997. Recognizing that the uncertainties respecting the market and discussed
above continue to exist, during the fourth quarter of fiscal 1997, Management
concluded that the cash flows associated with sodium azide operations would not
be sufficient to recover the Company's investment in sodium azide related fixed
assets. As quoted market prices were not available, the present value of
estimated future cash flows was used to estimate the fair value of sodium azide
fixed assets. Under the requirements of SFAS No. 121, and as a result of this
valuation technique, an impairment charge of $52.6 million was recognized in the
fourth quarter of fiscal 1997.
Sales of Halotron amounted to approximately 4% of revenues during the
fiscal year ended September 30, 1997 and less than 1% during the fiscal years
ended September 30, 1996 and 1995. 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 8%, 12% and 9%
of revenues during the fiscal years ended September 30, 1997, 1996 and 1995,
respectively. The nature of real estate development and sales is such that the
Company is unable reliably to predict any pattern of future real estate sales or
recognition of the equity in earnings of real estate ventures.
Environmental protection equipment sales accounted for approximately
6%, 7% and 4% of revenues during the fiscal years ended September 30, 1997, 1996
and 1995, respectively.
Cost of Sales. The principal elements comprising the Company's cost of
sales are raw materials, electric power, labor, manufacturing overhead and the
basis in the real estate sold. The major raw materials used by the Company in
its production processes are graphite, sodium chlorate, ammonia, hydrochloric
acid, sodium metal, and nitrous oxide. Significant increases in the cost of raw
materials may have an adverse impact on margins if the Company is unable to pass
along such increases to its customers, although all the raw materials used in
the Company's manufacturing processes have historically been available in
commercial quantities, and the Company has had no difficulty obtaining necessary
raw materials.
Raw material, electric power and labor costs have not changed
significantly in the past three fiscal years. The costs of operating the
Company's specialty chemical plants are, however, largely fixed. Accordingly,
the Company believes that the potential additional AP sales volume resulting
from the acquisition from Kerr-McGee should generate significant incremental
cash flow because of the operating leverage associated with the perchlorate
plant. However, amortization of the costs associated with the acquisition are
expected to amount to approximately $4.0 million annually.
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Operating Expenses. Operating (selling, general and administrative)
expenses were $9.5 million, $9.4 million and $11.2 million during the fiscal
years ended September 30, 1997, 1996 and 1995, respectively. The decrease in
1996 is primarily due to the Company's implementation of certain cost control,
containment and reduction measures.
Income Taxes. The Company's effective income tax rates were
approximately 17% in fiscal 1997 and 34% during each of the fiscal years ended
September 30, 1996 and 1995. The Company's effective income tax rate decreased
to 17% in fiscal 1997 as a result of the establishment of a $10.1 million
deferred tax valuation allowance. The Company's effective tax rate will be 0%
until the Company's net operating losses expire or the Company has taxable
income necessary to eliminate the need for the valuation allowance. See Note 7
to the Consolidated Financial Statements of the Company.
Net Income (Loss). Although the Company's net income (loss) and diluted
net income (loss) per common share have not been subject to seasonal
fluctuations, they have been and are expected to continue to be subject to
variations from quarter to quarter and year to year due to the following
factors, among others: (i) as discussed in Note 10 to the Consolidated Financial
Statements of the Company, the Company may incur material legal and other costs
associated with certain litigation and contingencies; (ii) the timing of real
estate and related sales and equity earnings of real estate ventures is not
predictable; (iii) the recognition of revenues from environmental protection
equipment orders not accounted for as long-term contracts depends upon orders
generated and the timing of shipment of the equipment; (iv) weighted average
common and common equivalent shares for purposes of calculating diluted net
income (loss) per common share are subject to significant fluctuations based
upon changed 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
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996
Sales and Operating Revenues. Sales increased $1.6 million, or 4%, to
$44 million in fiscal 1997 from $42.4 million in fiscal 1996. This increase was
attributable to increased sales in the Company's specialty chemical operations.
The increase in specialty chemical sales was partially offset by decreases in
environmental protection equipment and real estate sales.
Specialty chemical sales increased $3.9 million, or 11.5%, to $40.0
million in fiscal 1997 from $34.1 million in fiscal 1996. This increase was
attributable to increases in perchlorate, sodium azide and Halotron sales of
$1.4 million, $1.3 million and $1.2 million, respectively.
The increase in perchlorate sales was primarily attributable to sales
of AP to Alliant, for use in solid rocket boosters related to the Delta launch
vehicle program.
Sodium azide sales increased $1.3 million, or 11%, to $13.3 million in
fiscal 1997 from $12.0 million in fiscal 1996 due principally to an increase in
shipments to Autoliv resulting from the three-year agreement referred to below.
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<PAGE>
In May 1997, the Company entered into a three-year agreement with
Autoliv. The contract provides for the Company to supply sodium azide used by
Autoliv in the manufacture of automotive airbags. Deliveries under the contract
commenced in July 1997. The estimated sales value of the contract is
approximately $45.0-55.0 million over the three-year period. The actual sales
value, however, will depend upon many factors beyond the control of the Company,
such as the number of automobiles and light trucks manufactured and competitive
conditions in the airbag market, which will influence the actual magnitude of
Autoliv's sodium azide requirements, and there can therefore be no assurance as
to the actual sales value of the contract.
Halotron sales increased $1.2 million, or 24%, to $1.7 million in
fiscal 1997 from $0.5 million in fiscal 1996 due primarily to increased sales to
original equipment manufacturers as a result of the continued acceptance of
Halotron in the market.
Environmental protection sales decreased $0.7 million, or 21.6%, to
$2.4 million in fiscal 1997 from $3.1 million in fiscal 1996 as a result of a
decrease in spare part sales.
Real estate sales decreased in $1.6 million, or 30.2%, to $3.6 million
in fiscal 1997 from $5.2 million in fiscal 1996 due to a decrease in land sales
from fiscal 1996. In the third quarter of fiscal 1996, the Company closed a land
sale in the amount of $1.7 million.
Cost of Sales. Cost of sales increased $3.8 million, or 12%, in fiscal
1997 to $36.4 million from $32.6 million in fiscal 1996. This increase was
primarily due to increases in specialty chemical sales volumes. As a percentage
of sales, cost of sales increased to 83% as compared to 77% in fiscal 1996.
24-A
<PAGE>
This relative increase was principally due to the decreases in average prices
for sodium azide and Halotron in response to competitive factors. Depreciation
expense is expected to decrease by approximately $3.5 million in fiscal 1998 as
a result of the impairment charge described above.
Operating Expenses. Operating (selling, general and administrative)
expenses increased $0.1 million, or 1%, in fiscal 1997 to $9.5 million from $9.4
million in fiscal 1996.
Fixed Asset Impairment Charge. The Company has incurred significant
operating losses in its sodium azide operations during the last three fiscal
years. Sodium azide performance improved in the fourth quarter of fiscal 1997,
principally as a result of additional sodium azide deliveries under the Autoliv
agreement referred to above, and the operations were cash flow positive during
the fiscal year ended September 30, 1997. However, management's view of the
economics 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. Because quoted market prices
were not available, the present value of estimated future cash flows was used to
estimate the fair value of sodium azide related fixed assets. Under the
requirements of SFAS No. 121, and as a result of this valuation technique, an
impairment charge of $52.6 million was recognized in the fourth quarter of
fiscal 1997.
Employee Separation and Management Reorganization Costs. During the
fourth quarter of fiscal 1997, the Company recognized a charge of $3.6 million
associated with employee separations and management reorganization costs. In
addition, relocation costs of approximately $0.4 million were incurred in the
fourth quarter of fiscal 1997. The Company expects operating expenses to be
approximately $0.8 million to $1.0 million lower in fiscal 1998 as a result of
these separations and relocations.
Equity in Earnings of Real Estate Venture. During fiscal 1997 and 1996,
the Company recognized its share of the equity in the Company's Ventana Canyon
joint venture. The Company's equity in the earnings of the project amounted to
approximately $0.2 million and $0.7 million, respectively. Profits and losses
are split equally between the Company and its venture partner, a local real
estate development company. The venture's profits decreased during fiscal 1997
principally as a result of the sale of improved land zoned for an apartment site
to an outside developer during fiscal 1996.
Segment Operating Income (Loss). Operating income (loss) of the
Company's industry segments during the fiscal years ended September 30, 1997 and
1996 was as follows:
1997 1996
---- ----
Specialty chemicals $(55,227,000) $ (879,000)
Environmental protection equipment (659) (249,000)
Real Estate 1,624,000 2,069,000
------------ -----------
Total $(54,262,000) $ 941,000
============ ===========
The increase in operating loss of the specialty chemical segment relates
principally to the fixed asset impairment charge of $52.6 million discussed
above. The increase in operating loss of the environmental protection equipment
was primarily due to a reduction in revenues from $3.1 million in fiscal 1996 to
$2.4 million in fiscal 1997. The decrease in operating income of the real estate
segment was attributable to a decrease in revenues from $5.2 million in fiscal
1996 to $3.6 million in fiscal 1997.
25
<PAGE>
Interest and Other Income. Interest and other income decreased to $1.1
million in fiscal 1997 from $1.4 million in 1996. The decrease was principally
due to lower average cash and cash equivalent balances.
Interest and Other Expense. Interest and other expense decreased to
$2.0 million in fiscal 1997 from $2.8 million in fiscal 1996. The decrease is
primarily due to a reduction in debt balances.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1995
Sales. Sales increased $3.2 million, or 8%, in fiscal 1996 to $42.4
million from $39.2 million in fiscal 1995. This increase was attributable to
increased environmental protection and real estate sales.
Specialty chemical sales decreased $0.2 million, or 0.5%, to $34.1
million in fiscal 1996 from $34.2 million in fiscal 1995. This decrease was
primarily attributable to a decrease of $7.8 million in AP sales. Such decrease
was offset by an increase of $7.4 million in sodium azide sales. The decrease in
AP sales was primarily due to an amendment to certain agreements between the
Company and Thiokol referred to below. Sodium azide sales increased $7.4 million
to $12.0 million in fiscal 1996 from $4.6 million in fiscal 1995 due to the
Company's continued penetration of the sodium azide market.
Under certain agreements with Dynamit Nobel (see Note 13 to the
Consolidated Financial Statements of the Company), Dynamit Nobel was to receive,
for the use of its technology and know-how relating to its batch production
process of manufacturing sodium azide, quarterly royalty payments of 5% of the
quarterly net sales of sodium azide by the Company for a period of 15 years from
the date the Company begins to produce sodium azide in commercial quantities. In
July 1996, the Company and
25-A
<PAGE>
Dynamit Nobel agreed to suspend the royalty agreement effective as of July 1,
1995. As a result, in third quarter of fiscal 1996, the Company recognized an
increase in sodium azide sales of approximately $0.6 million. This amount had
previously been recognized as a reduction of net sodium azide sales during the
period of July 1, 1995 through June 30, 1996.
In 1994, the Company and Thiokol executed an amendment to certain
agreements that provided for the any to receive revenues from sales of AP of
approximately $28.0 million and $20.0 million during the fiscal years ended
September 30, 1995 and 1996, respectively. See Note 9 to the Consolidated
Financial Statements of the Company.
Environmental protection sales increased $1.4 million, or 87.1%, to
$3.1 million in fiscal 1996 from $1.7 million in fiscal 1995 primarily due to a
$1.7 million sale in the fourth quarter of fiscal 1996.
Real estate sales increased $1.8 million, or 54.7%, to $5.2 million in
fiscal 1996 from $3.4 million in fiscal 1995 due to an increase in land sales in
fiscal 1996. During the third quarter of fiscal 1996 the Company closed a land
sale in the amount of $1.7 million.
Cost of Sales. Cost of sales increased $2.7 million, or 9%, in fiscal
1996 to $32.6 million from $29.9 million in fiscal 1995. This increase was
principally due to increased sodium azide sales volume and real estate sales. As
a percentage of sales, cost of sales increased in fiscal 1996 to 77% as compared
to 76% in the corresponding period of 1995. This increase was due to increased
depreciation expense associated with sodium azide operations. Depreciation
expense increased in the third quarter of fiscal 1995 as the sodium azide
facility completed its transition from construction to production activities. On
an annualized basis, cost of sales associated with sodium azide activities
increased by approximately $3.0 million beginning April 1, 1995 as a result of
this increase in depreciation expense.
Operating Expenses. Operating (selling, general and administrative)
expenses decreased $1.8 million, or 16%, in fiscal 1996 to $9.4 million from
$11.2 million in fiscal 1995. The decrease is primarily due to the Company's
implementation of certain cost control, containment and reduction measures. In
addition, during the third quarter of fiscal 1996, the Company settled certain
matters with its insurance carrier relating to legal fees and other costs
associated with the successful defense of certain shareholder lawsuits. Under
this settlement, the Company was reimbursed for approximately $0.5 million in
costs that had previously been expensed and incurred in connection with such
defense. Such amount was recognized as a reduction in operating expenses in the
third quarter of fiscal 1996. See Note 10 to the Consolidated Financial
Statements of the Company.
During the third quarter of fiscal 1995, the Company reduced total
full-time employee equivalents by approximately 10% through involuntary
terminations and an offering of enhanced retirement benefits to certain
employees. The Company recognized a charge to operating expense of approximately
$0.2 million as a result of these terminations and the acceptance of the offer
of enhanced retirement benefits by certain employees.
Equity in Earnings of Real Estate Venture. The Company's equity in
earnings of real estate venture amounted to $0 and $0.7 million for the fiscal
years ended 1995 and 1996, respectively.
26
<PAGE>
Segment Operating Income (Loss). Operating income (loss) of the
Company's industry segments during the fiscal years ended September 30, 1996 and
1995 was as follows:
1997 1996
---- ----
Specialty chemicals $ (879,000) $(2,150,000)
Environmental protection equipment (249,000) (640,000)
Real Estate 2,069,000 1,356,000
------------ -----------
Total $ 941,000 $(1,434,000)
============ ===========
The increase in operating loss of the specialty chemical segment was primarily
attributable to an increase in sodium azide sales as discussed above. Such
decrease was partially offset by the increase in depreciation expense associated
with sodium azide operations referred to above. The decrease in operating loss
of the environmental protection equipment segment was primarily due to an
increase in revenues from $1.7 million in fiscal 1995 to $3.1 million in fiscal
1996. The increase in operating income of the real estate segment was
attributable to an increase in sales from $3.4 million in fiscal 1995 to $5.2
million in fiscal 1996.
Interest and Other Income. Interest and other income was $1.4 million
in fiscal 1996 and 1995.
Interest and Other Expense. Interest and other expense increased to
$2.8 million in fiscal 1996 from $1.7 million in fiscal 1995. The increase is
principally due to the cessation of interest capitalization on the Company's
sodium azide facility.
INFLATION
Inflation did not have a significant effect on the Company's sales and
operating revenues or costs during the three-year period ended September 30,
1997. The Company does not expect inflation to have a material effect on gross
profit in the future, because any increases in production costs should be
recovered through increases in product prices, although there can be no
assurance in that regard.
26-A
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $9.6 million, $4.4
million and $10.0 million during the fiscal years ended September 30, 1997, 1996
and 1995, respectively. Cash flows from operating activities declined in fiscal
1996 and increased in fiscal 1997 principally as a result of changes in certain
working capital balances. The Company believes that its cash flows from
operations and existing cash balances will be adequate for the foreseeable
future to satisfy the needs of its operations. However, the resolution of
litigation and 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 condition of the Agreement with Kerr-McGee, the Company will be
required to obtain financing for 100 percent of the purchase price. The Company
currently expects that such financing will be available on customary commercial
terms, although there can be no assurance given with respect thereto.
Capital expenditures were $1.6 million, $3.2 million and $4.5 million
during the fiscal years ended September 30, 1997, 1996 and 1995, respectively.
Capital expenditures are expected to amount to approximately $2.5 million in
fiscal 1998 and relate principally to specialty chemical segment capital
improvement projects. Capital expenditures are expected to be funded from
existing cash balances and operating cash flow.
During the three-year period ended September 30, 1997 the Company
repaid $12.2 million of debt, repurchased $1.0 million in treasury stock and
issued $0.4 million in common stock as a result of the exercise of outstanding
stock options. The Azide Notes require annual principal payments of $5.0 million
through fiscal 2001 and a balloon payment of $10.0 million in fiscal 2002.
As a result of the litigation and contingencies discussed in Note 10 to
the Consolidated Financial Statements of the Company, the Company has incurred
legal and other costs and may incur material legal and other costs associated
with the resolution of these matters in future periods. Certain of the costs, if
any, may be reimbursable under policies providing for insurance coverage. The
Company has adopted certain policies in its Restated Certificate of
Incorporation , as amended, and By-laws as a result of which the Company may be
required to indemnify its affected officers and directors to the extent, if at
all, that existing insurance coverages relating to the shareholder lawsuits are
insufficient. The Company has in force substantial insurance covering this risk.
The Company's insurance carriers have reserved the right to exclude or disclaim
coverage under certain circumstances. Defense costs and any potential settlement
or judgment costs associated with litigation, 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 that litigation related 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 the Year 2000 problems will
have a material impact on operations, although there can be no assurance given
with respect thereto.
27
<PAGE>
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
important risk factors, among others, may cause the Company's operating results
and/or financial position to be adversely affected from time to time:
1. Declining demand or downward pricing pressure for the Company's
products as a result of general or specific economic conditions,
further governmental budget decreases affecting the Department of
Defense or NASA which would cause a continued decrease in demand for
AP, the results achieved by the Suspension Agreement resulting from
the Company's anti-dumping petition and the possible termination of
such agreement, technological advances and improvements or new
competitive products causing a reduction or elimination of demand of
AP, sodium azide or Halotron, 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 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. Difficulties in procuring raw materials, supplies, power and
natural gas used in the production of perchlorates, sodium azide and
Halotron products and used in the engineering and assembly process
for environmental protection equipment products.
5. The Company's ability to control the amount of operating expenses
and/or the impact of any non-recurring or unusual items resulting
from the Company's continuing evaluation of its strategies, plans,
organizational structure and asset valuations.
6. 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 GRLLC (Ventana Canyon Joint Venture) and
regulatory and environmental matters that may have a negative impact
on sales or costs.
7. 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.
8. The cost and effects of legal and administrative proceedings,
settlements and investigations, particularly those described in Note
10 to the Notes to Consolidated Financial Statements of the Company
and claims made by or against the Company relative to patents or
property rights.
28
<PAGE>
9. The adoption of new, or changes in existing, accounting policies
and practices.
10. Closing of the Agreement with Kerr-McGee.
11. The dependence upon a single facility for the production of most
of the Company's products.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements called for hereunder are included herein on the
following pages:
Page(s)
Independent Auditors' Report 37
Consolidated Balance Sheets 38
Consolidated Statements of Operations 39
Consolidated Statements of Cash Flows 40
Consolidated Statements of Changes in Shareholders' Equity 41
Notes to Consolidated Financial Statements 42-60
28-A
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
(a) See Part II, Item 8 for index to the Registrant's
financial statements and supplementary data.
(b) Separate audited financial statements of Gibson Ranch
Limited Liability Company as required under Regulation S-X
210. 3-09. See pages 61-69 herein.
(2) FINANCIAL STATEMENT SCHEDULES
None applicable.
(3) EXHIBITS
(a) The following Exhibits are filed as part of this Report
(references are to Regulation S-K Exhibit Numbers):
3.1 Registrant's Restated Certificate of Incorporation,
incorporated by reference to Exhibit 3A to Registrant's
Registration Statement on Form S-14 (File No. 2-70830), (the
"Form S-14").
3.2 Registrant's By-Laws, incorporated by reference to Exhibit 3B
to the Form S-14.
3.3 Articles of Amendment to the Restated Certificate of
Incorporation, as filed with the Secretary of State, State of
Delaware, on October 7, 1991, incorporated by reference to
Exhibit 4.3 to Registrant's Registration Statement on Form S-3
(File No. 33-52196) (the "Form S-3").
3.4 Articles of Amendment to the Restated Certificate of
Incorporation as filed with the Secretary of State, State of
Delaware, on April 21, 1992, incorporated by reference to
Exhibit 4.4 to the Form S-3.
10.1 Employment agreement dated November 7, 1994 between the
Registrant and David N. Keys, incorporated by reference to
Exhibit 10.22 of the 1994 10-K.
10.2 Form of American Pacific Corporation Defined Benefit Pension
Plan, incorporated by reference to Exhibit 10.21 to the
Registrant's Registration Statement on Form S-2 (File No.
33-36664) (the "1990 S-2").
10.3 Lease Agreement between 3770 Hughes Parkway Associates Limited
Partnership and the Registrant, dated July 31, 1990,
incorporated by reference to Exhibit 10.22 to the 1990 S-2.
10.4 Limited Partnership Agreement of 3770 Hughes Parkway
Associates, Limited Partnership, incorporated by reference to
Exhibit 10.23 to the 1990 S-2.
31
<PAGE>
10.5 Cooperation and Stock Option Agreement dated as of July 4,
1990 by and between Dynamit Nobel AG and the Registrant,
including exhibits thereto, incorporated by reference to
Exhibit 10.24 to the 1990 S-2.
10.6 Stock Option Agreement between the Registrant and David N.
Keys dated November 12, 1990 incorporated by reference to
Exhibit 19 to the Registrant's quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1990.
10.7 American Pacific Corporation 1991 Nonqualified Stock Option
Plan, incorporated by reference to Exhibit 10.26 to the 1990
S-2.
10.8 Indenture dated February 21, 1992, between the Registrant and
American Azide Corporation, a Nevada corporation, and Security
Pacific National Bank, Trustee, relating to the Registrant's
outstanding 11% Subordinated Secured Term Notes, incorporated
by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated February 28, 1992 (the "Form 8-K").
10.9 Form of Subordinated Secured Term Note dated February 21,
1992, made by Registrant Incorporated by reference to Exhibit
10.2 to the Form 8-K.
10.10 Form of Note and Warrants Purchase Agreement dated February
21, 1992, relating to the Registrant's Subordinated Secured
Term Notes, incorporated by reference to Exhibit 10.3 to the
Form 8-K.
10.11 Form of Warrant to purchase Common Stock of the Registrant
dated February 21, 1992, incorporated by reference to Exhibit
10.4 to the Form 8-K.
10.12 Form of Warrant to purchase Common Stock of American Azide
Corporation dated February 21, 1992, incorporated by reference
to Exhibit 10.5 to the Form 8-K.
10.13 Stock Option Agreement between Registrant and Joseph W.
Cuzzupoli dated January 30, 1992, incorporated by reference to
Exhibit 4.6 of Registrant's Registration Statement on Form S-8
(File No. 33-52898).
10.14 Articles of organization of Gibson Ranch Limited - Liability
Company dated August 25, 1993, incorporated by reference to
Exhibit 10.33 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993 (the "1993
10-K").
10.15 Operating agreement of Gibson Ranch Limited - Liability
Company, a Nevada Limited - Liability Company, incorporated by
reference to Exhibit 10.34 to the 1993 10-K.
10.16 American Pacific Corporation 1994 Directors' Stock Option Plan
incorporated by reference to Exhibit 10.34 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September
30, 1995 (the "1995 10-K").
10.17 Stock Option Agreement between Registrant and General
Technical Services, Inc. dated July 11, 1995 incorporated by
reference to Exhibit 10.35 to the 1995 10-K.
32
<PAGE>
10.18 Stock Option Agreement between Registrant and John R. Gibson
dated July 8, 1997 incorporated by reference to Exhibit 10.18
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 (the "1997 10-K").
10.19 Stock Option Agreement between Registrant and David N. Keys
dated July 8, 1997 incorporated by reference to Exhibit 10.19
to the 1997 10-K.
10.20 Settlement Agreement between Registrant and C. Keith Rooker
dated July 17, 1997 incorporated by reference to Exhibit 10.20
to the 1997 10-K.
10.21 Form of Stock Option Agreement between Registrant and certain
Directors dated May 21, 1997 incorporated by reference to
Exhibit 10.21 to the 1997 10-K.
22 Subsidiaries of the Registrant incorporated by reference to
Exhibit 22 to the 1997 10-K.
*23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule (previously filed electronically with
the 1997 10-K)
* FILED HEREWITH.
(b) REPORTS ON FORM 8-K.
None.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: July 9, 1998 AMERICAN PACIFIC CORPORATION
(Registrant)
By:/s/ John R. Gibson
-------------------------------------------
John R. Gibson
President & Chief Executive Officer
By:/s/ David N. Keys
-------------------------------------------
David N. Keys
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer, Principal
Financial and Accounting Officer
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
American Pacific Corporation:
We have audited the accompanying consolidated balance sheets of American Pacific
Corporation and its Subsidiaries (the "Company") as of September 30, 1997 and
1996, and the related consolidated statements of operations, cash flows and
changes in shareholders' equity for each of the three years in the period ended
September 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1997 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
November 14, 1997
37
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Notes 1997 1996
-----------------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents 1 $18,881,000 $ 18,501,000
Short-term investments 1 2,000,000
Accounts and notes receivable 5,551,000 4,165,000
Related party notes receivable 1 637,000 737,000
Inventories 1,2 11,116,000 11,297,000
Prepaid expenses and other assets 979,000 946,000
------------------------------------
Total current assets 37,164,000 37,646,000
PROPERTY, PLANT AND EQUIPMENT, NET 1,4,6,13,15 19,314,000 77,217,000
DEVELOPMENT PROPERTY 1,5,6 7,362,000 8,631,000
RESTRICTED CASH 3,6 3,580,000 4,969,000
REAL ESTATE EQUITY INVESTMENTS 5,6 20,248,000 18,698,000
DEBT ISSUE COSTS 1 785,000 965,000
INTANGIBLE ASSETS 14 1,540,000 1,760,000
OTHER ASSETS 88,000 133,000
------------------------------------
TOTAL ASSETS $90,081,000 $150,019,000
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 7,519,000 $ 5,407,000
Notes payable and current portion of
long-term debt 3,6,9 6,166,000 7,334,000
------------------------------------
Total current liabilities 13,685,000 12,741,000
LONG-TERM PAYABLES 16 2,376,000
LONG-TERM DEBT 3,6,9 24,900,000 29,452,000
DEFERRED INCOME TAXES 1,7 10,101,000
------------------------------------
TOTAL LIABILITIES 40,961,000 52,294,000
------------------------------------
COMMITMENTS AND CONTINGENCIES 5,10,15
WARRANTS TO PURCHASE COMMON STOCK 6,11 3,569,000 3,569,000
SHAREHOLDERS' EQUITY: 6,11
Common stock - $.10 par value, 20,000,000 authorized:
issued - 8,289,791 in 1997 and 8,228,791 in 1996 829,000 823,000
Capital in excess of par value 1 78,561,000 78,331,000
Retained earnings (accumulated deficit) 1 (32,707,000) 15,978,000
Treasury stock (152,254 shares in 1997 and 130,170 shares in 1996) 1 (1,035,000) (879,000)
Note receivable from the sale of stock 1,11 (97,000) (97,000)
------------------------------------
Total shareholders' equity 45,551,000 94,156,000
------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $90,081,000 $150,019,000
====================================
</TABLE>
See Notes to Consolidated Financial Statements.
38
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Notes 1997 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES AND OPERATING REVENUES 1,9,12,13,15 $44,050,000 $42,381,000 $ 39,250,000
COST OF SALES 1,9,13,14 36,420,000 32,579,000 29,861,000
------------------------------------------------------
GROSS PROFIT 7,630,000 9,802,000 9,389,000
OPERATING EXPENSES 1,8,10,12,13,14,16 9,509,000 9,367,000 11,210,000
FIXED ASSET IMPAIRMENT CHARGE 13 52,605,000
EMPLOYEE SEPARATION AND MANAGEMENT
REORGANIZATION COSTS 16 3,616,000 226,000
------------------------------------------------------
OPERATING INCOME (LOSS) (58,100,000) 435,000 (2,047,000)
EQUITY IN EARNINGS OF REAL ESTATE VENTURE 5 200,000 700,000
INTEREST AND OTHER INCOME 1,3,5,11 1,115,000 1,381,000 1,429,000
INTEREST AND OTHER EXPENSE 1,5,6 2,001,000 2,836,000 1,709,000
------------------------------------------------------
LOSS BEFORE CREDIT FOR INCOME TAXES (58,786,000) (320,000) (2,327,000)
CREDIT FOR INCOME TAXES 1,7 (10,101,000) (109,000) (791,000)
------------------------------------------------------
NET LOSS $ (48,685,000) $ (211,000) $ (1,536,000)
======================================================
NET LOSS PER COMMON SHARE $ (6.01) $ (.03) $ (.19)
======================================================
</TABLE>
See Notes to Consolidated Financial Statements.
39
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(48,685,000) $ (211,000) $ (1,536,000)
--------------------------------------------------------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 7,685,000 7,810,000 5,883,000
Fixed asset impairment charge 52,605,000
Employee separation and management reorganization costs 3,616,000
Basis in development property sold 1,498,000 2,449,000 1,614,000
Development property additions (229,000) (784,000) (384,000)
Equity in real estate venture (200,000) (700,000)
Cash received on equity interest estate venture 200,000 700,000
Changes in assets and liabilities:
Decrease in short-term investments 2,000,000
(Increase) decrease in accounts and notes receivable (1,286,000) (1,480,000) 5,525,000
(Increase) decrease in income tax receivable 2,570,000 (2,570,000)
(Increase) decrease in inventories 181,000 (4,203,000) (1,411,000)
(Increase) decrease in restricted cash 1,389,000 (1,226,000) (2,159,000)
(Increase) decrease in prepaid expenses and other 32,000 198,000 (133,000)
Increase (decrease) in accounts payable and accrued liabilities 870,000 (265,000) (17,000)
Increase (decrease) in deferred income taxes (10,101,000) (467,000) 5,170,000
----------------------------------------------------
Total adjustments 58,260,000 4,602,000 11,518,000
----------------------------------------------------
Net cash provided by operating activities 9,575,000 4,391,000 9,982,000
----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,557,000) (3,248,000) (4,462,000)
Real estate equity advances (2,680,000) (2,946,000) (3,199,000)
----------------------------------------------------
Return of capital on real estate equity advances 1,130,000 1,973,000
Net cash used for investing activities (3,107,000) (4,221,000) (7,661,000)
----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (6,168,000) (6,166,000)
Issuance of common stock 236,000 47,000 82,000
Treasury stock acquired (156,000) (90,000) (747,000)
----------------------------------------------------
Net cash used for financing activities (6,088,000) (6,209,000) (665,000)
----------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 380,000 (6,039,000) 1,656,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,501,000 24,540,000 22,884,000
----------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $18,881,000 $18,501,000 $ 24,540,000
====================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest (net of amounts capitalized) $ 1,427,000 $ 2,197,000 $ 1,700,000
==========================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Excess additional pension liability $ 1,175,000 $ 606,000
==============================================================
</TABLE>
See Notes to Consolidated Financial Statements.
40
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Retained Note Excess
Number of Par Value of Capital in Earnings Receivable Additional
Common Shares excess of (Accumulated Treasury from the Sale Pension
Notes Shares Issued Par Value Deficit) Stock of Stock Liability
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, 8,190,691 $820,000 $78,205,000 $17,725,000 $(42,000) $(97,000) (765,000)
OCTOBER 1, 1994 (1,536,000)
Net loss
Issuance of common
stock 11 21,400 2,000 80,000
Treasury stock acquired (111,300) (747,000)
Excess additional
pension liability 8 606,000
----------------------------------------------------------------------------------------------------
BALANCES, 8,100,791 822,000 78,285,000 16,189,000 (789,000) (97,000) (159,000)
SEPTEMBER 30, 1995 (211,000)
Net loss
Issuance of common stock 11 12,000 1,000 46,000
Treasury stock acquired (14,170) (90,000)
Excess additional
pension liability 8 159,000
---------------------------------------------------------------------------------------------------
BALANCES,
SEPTEMBER 30, 1996 8,098,621 823,000 78,331,000 15,978,000 (879,000) (97,000)
---------------------------------------------------------------------------------------------------
Net loss (48,685,000)
Issuance of common stock
11 61,000 6,000 230,000
Treasury stock acquired (22,084) (156,000)
----------------------------------------------------------------------------------------------------
BALANCES,
SEPTEMBER 30, 1997 8,137,537 $829,000 $78,561,000 $(32,707,000) $(1,035,000) $(97,000)
====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of American Pacific Corporation and Subsidiaries
(the "Company"). All significant intercompany accounts and transactions
have been eliminated.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - All highly liquid
investment securities with a maturity of three months or less when
acquired are considered to be cash equivalents. Short-term investments
consist of investment securities with maturities, when acquired, greater
than three months but less than one year. The Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," during fiscal 1995.
In accordance with SFAS No. 115, prior year's financial statements have
not been restated to reflect the change in accounting method. There was
no cumulative effect as a result of adopting SFAS No. 115 in 1995.
The Company's investment securities, along with certain cash and cash
equivalents that are not deemed securities under SFAS No. 115, are
carried on the consolidated balance sheets in the cash and cash
equivalents and short-term investments categories. SFAS No. 115 requires
all securities to be classified as either held-to-maturity, trading or
available-for-sale. Management determines the appropriate classification
of its investment securities at the time of purchase and re-evaluates
such determination at each balance sheet date. Pursuant to the criteria
that are prescribed by SFAS No. 115, the Company has classified its
investment securities as available-for-sale. Available-for-sale
securities are required to be carried at fair value, with material
unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. Realized gains and losses are taken
into income in the period of realization. The estimated fair value of
the Company's portfolio of investment securities at September 30, 1997
and 1996 closely approximated amortized cost. There were no material
unrealized gains or losses on investment securities and no recorded
adjustments to amortized cost at September 30, 1997 or 1996.
RELATED PARTY NOTES RECEIVABLE - Related party notes receivable
represent demand notes bearing interest at a bank's prime rate from the
Chairman and two officers of the Company.
INVENTORIES - Inventories are stated at the lower of cost or market.
Cost of the specialty chemicals segment inventories is determined
principally on a moving average basis and cost of the environmental
protection equipment segment inventories is determined principally on
the specific identification basis.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
carried at cost less accumulated depreciation. The Company periodically
assesses the recoverability of property, plant and equipment and
evaluates such assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Asset impairment is determined to exist if estimated future
cash
42
<PAGE>
flows, undiscounted and without interest charges, are less than the
carrying amount. Depreciation is computed on the straight line method
over the estimated productive lives of the assets (3 to 12 years for
machinery and equipment and 15 to 31 years for buildings and
42-A
<PAGE>
improvements). An impairment charge of $52,605,000 relating to certain
specialty chemical assets was recognized in fiscal 1997. (See Note 13.)
DEVELOPMENT PROPERTY - Development property consists of commercial and
industrial land (principally improved land). During fiscal 1993,
approximately 240 acres, representing $12,300,000 in carrying value of
development property, was contributed to a real estate limited-liability
company (see Note 5). Development property is carried at cost not in
excess of estimated net realizable value. Estimated net realizable value
is based upon the net sales proceeds anticipated in the normal course of
business, less estimated costs to complete or improve the property to
the condition used in determining the estimated selling price, including
future interest and property taxes through the point of substantial
completion. Cost includes the cost of land, initial planning,
development costs and carrying costs. Carrying costs include interest
and property taxes until projects are substantially complete. Interest
capitalized is the amount of interest on the Company's net investment in
property under development limited to total interest expense incurred in
a period. No interest was capitalized on development property during the
three-year period ended September 30, 1997. Certain development property
in Nevada is pledged to secure debt. (See Note 6.)
DEBT ISSUE COSTS - Debt issue costs represent costs associated with debt
and are amortized on the effective interest method over the terms of the
related indebtedness.
FAIR VALUE DISCLOSURE AS OF SEPTEMBER 30, 1997:
Cash and cash equivalents, accounts and notes receivable, restricted
cash, and accounts payable and accrued liabilities - The carrying value
of these items is a reasonable estimate of their fair value.
Notes payable, current portion of long-term debt and warrants - Market
quotations are not available for any of the Company's notes payable,
long-term debt or warrants. See Note 6 for a description of these
instruments. Approximately $40 million of notes and related warrants
were issued in February 1992. The Company believes that similar terms
would be available at September 30, 1997.
SALES AND REVENUE RECOGNITION - Sales of the specialty chemicals segment
are recognized as the product is shipped and billed pursuant to
outstanding purchase orders. Sales of the environmental protection
equipment segment are recognized on the percentage of completion method
for long-term contracts and when the product is shipped for other
contracts. Profit from sales of development property and the Company's
equity in real estate equity investments is recognized when and to the
extent permitted by SFAS No. 66, "Accounting for Sales of Real Estate".
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
operations as incurred. These costs are for proprietary research and
development activities that are expected to contribute to the future
profitability of the Company.
NET LOSS PER COMMON SHARE - Net loss per common share is determined
based on the weighted average number of common shares outstanding
(8,105,000, 8,104,000 and 8,177,000 for the years ended September 30,
1997, 1996 and 1995). Common share equivalents, although not considered
during net loss years, consist of outstanding stock
43
<PAGE>
options and warrants. See Note 6 for a description of the potential
effects on net income per common share of warrants issued in connection
with the issuance of certain notes.
The Company has adopted the disclosures-only provision of SFAS 123,
"Accounting for Stock-Based Compensation". The Company applies APB
Opinion No. 25 and related interpretations in accounting for its stock
options. Under APB 25, no compensation cost has been recognized in the
financial statements for stock options granted. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. Had compensation cost for the stock option grants
been determined based on the fair value at the date of grant for awards
consistent with the provision of SFAS 123, the Company's net loss per
common share would have been decreased to the pro forma amounts
indicated below for the year ended September 30:
1997
Net loss-as reported $ (48,685,000)
Net loss-pro forma (49,791,000)
Net loss per common share-as reported $ (6.01)
Net loss per common share-pro forma (6.14)
The fair value of each option granted in fiscal year 1997 was estimated
using the following assumptions for the Black-Scholes options pricing
model: (i) no dividends; (ii) expected volatility of 55%, (iii) risk
free interest rates averaging 6.1% and (iv) the expected average life of
3.3 years. The weighted average fair value of the options granted in
1997 was $2.97. Because the SFAS 123 method of accounting has not been
applied to options granted prior to October 1, 1995, the resulting pro
forma net income may not be representative of that to be expected in
future years.
INCOME TAXES - The Company accounts for income taxes under the
provisions of SFAS No. 109, "Accounting for Income Taxes".
ESTIMATES AND ASSUMPTIONS - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Significant estimates used by the Company include estimated useful lives
for depreciable and amortizable assets, the estimated valuation
allowance for deferred tax assets, and estimated cash flows in assessing
the recoverability of long-lived assets. Actual results may differ from
estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS - The Financial Accounting
Standards Board ("FASB") recently issued SFAS No. 128 "Earnings per
Share." This statement establishes standards for computing and
presenting earnings per share and is effective for financial statements
issued for periods ending after December 15, 1997. Earlier application
of this statement is not permitted. Upon adoption, the Company will be
required to restate (as applicable) all prior-period earnings per share
data presented. Management believes that the implementation of this
statement will not have a significant impact on earnings per share.
44
<PAGE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires companies to classify items of other
comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity
section of a balance sheet, and is effective for financial statements
issued for fiscal years beginning after December 15, 1997. Management
does not believe this statement will have material impact on the
Company's financial statements.
The FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement redefines how
operating segments are determined and requires qualitative disclosure of
certain financial and descriptive information about a company's
operating segments. The Company will adopt SFAS No. 131 in the year
ending September 30, 1999. Management has not yet completed its analysis
of which operating segments it will report on to comply with SFAS No.
131.
In November 1996, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued Statement
of Position ("SOP") 96-1, "Environmental Remediation Liabilities." This
SOP provides guidance on accounting for environmental remediation
liabilities. This SOP discusses when an environmental liability should
be recognized in the financial statements and provides guidance in
measuring the liability by discussing the types of costs to be included
in the liability. This SOP is effective for fiscal years beginning after
December 15, 1996. Management does not believe that the implementation
of this SOP in fiscal 1998 will have a material impact on the Company's
financial statements.
RECLASSIFICATION - Certain reclassifications have been made in the 1996
and 1995 consolidated financial statements in order to conform to the
presentation used in 1997.
2. INVENTORIES
Inventories consist of the following:
-------------------------------
September 30,
-------------------------------
1997 1996
---- ----
Work-in-process $ 3,349,000 $ 5,011,000
Raw material and supplies 7,767,000 6,286,000
-------------------------------
Total $11,116,000 $ 11,297,000
===============================
3. RESTRICTED CASH
At September 30, 1997, restricted cash consists, in part, of $1,160,000
held in a cash collateral account by Seafirst Bank, the lender which
provided a term loan (the "AP Facility Loan") as the principal financing
for an ammonium perchlorate ("AP") manufacturing facility erected and
operated by the Company. Funds in the cash collateral account are
restricted for future indemnity payments (if any) relating to the AP
Facility Loan. The AP Facility Loan was repaid in 1994. The $1,160,000
will be retained in the cash collateral account until May 11, 1999, at
which time the balance remaining after indemnity payments (if any) will
be returned to Thiokol Corporation ("Thiokol"). The
45
<PAGE>
Company's obligation to return such funds is included in long-term debt
at September 30, 1997. Any indemnity payments made will serve to reduce
the cash collateral account and the Company's obligation to Thiokol.
Restricted cash at September 30, 1997 also includes $2,420,000 held in a
trust account by the Trustee under the indenture relating to $40,000,000
of notes (the "Azide Notes") sold in a financing concluded in February
1992. (See Note 6.)
45-A
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
--------------------------------------
September 30,
--------------------------------------
1997 1996
---- ----
Land $ 309,000 $ 305,000
Buildings and improvements 1,753,000 13,865,000
Machinery and equipment 20,759,000 76,935,000
Construction in progress 380,000 139,000
----------------------------------------
Total 23,201,000 91,244,000
Less: accumulated depreciation 3,887,000 14,027,000
----------------------------------------
Property, plant and equipment, net $19,314,000 $77,217,000
========================================
In 1995, approximately $1,800,000 in interest costs were capitalized on
assets constructed for the Company's own use. Certain of the Company's
property, plant and equipment is pledged as collateral to secure debt.
(See Note 6.) A fixed asset impairment charge was recognized in 1997.
(See Note 13.)
5. REAL ESTATE EQUITY INVESTMENTS
During fiscal 1993, the Company contributed approximately 240 acres of
development property to Gibson Ranch Limited Liability Company
("GRLLC"). The development property contributed had a carrying value of
approximately $12,300,000 at the date of contribution, which was
transferred to Real Estate Equity Investments on the accompanying
consolidated balance sheets. The Company's interest in GRLLC is assigned
to secure the Azide Notes. A local real estate development group
("Developer") contributed an adjacent 80-acre parcel to GRLLC. GRLLC is
developing the 320-acre parcel principally as a residential real estate
development.
Each of The Company and Developer is obligated to loan to GRLLC, under a
revolving line of credit, up to $2,400,000 at an annual interest rate of
10 percent. However, Developer will not be required to advance funds
under its revolving line of credit until the Company's line is
exhausted. At September 30, 1996, the Company had advanced all of its
committed amount under this line. In November, 1995, the Company
committed to advance an additional $1,700,000 to Developer. Developer is
required to advance any funds received to GRLLC. Funds advanced under
this additional commitment bear annual interest of 12 percent. Total
advances under these commitments were $3,171,000 and $2,828,000 at
September 30, 1997 and 1996.
Developer is the managing member of GRLLC and is managing the business
conducted by GRLLC. Certain major decisions, such as incurring debt and
changes in the development plan or budget may be made only by a
management committee on which the Company is equally represented. The
profits and losses of GRLLC will be split equally between the Company
and Developer after the return of advances and agreed upon values for
initial contributions.
46
<PAGE>
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 years ended December 31, 1996
and 1995 and as of and for the nine-month period ended September 30,
1997 was as follows:
September 30, December 31, December 31,
1997 1996 1995
------------- ----------- -------------
Income Statement:
Revenues $13,776,000 $18,602,000 $ 2,712,000
Gross Profit 1,557,000 3,983,000 560,000
Operating Expenses 829,000 1,555,000 875,000
Net Income $ 733,000 $ 2,428,000 $ (315,000)
Balance Sheet:
Assets $26,840,000 $23,233,000 $22,554,000
Liabilities 12,273,000 9,554,000 9,205,000
Equity $14,568,000 $13,679,000 $13,349,000
The Company has applied the provisions of SFAS No. 58 "Capitalization
of Interest Cost of Financial Statements that Include Investments
Accounted for by the Equity Method" to its investment in GRLLC. As of
September 30, 1997, the Company has capitalized approximately $6.2
million of interest since the joint venture began undergoing activities
to start its planned principal operations of real estate development
and sale of such real estate. Capitalization of interest on the joint
venture ceased in September 1997 since the Company's recorded
investment in GRLLC approximates the amount of cash flow that is
estimated to be generated from the project
The Company amortizes the difference resulting from the application of
SFAS No. 58 on a current quarterly basis based upon the ratio of acres
sold to total salable acres in the joint venture. Such difference will
be completely amortized upon the build-out and sale of the joint
venture's real estate project which is estimated to occur in calendar
2001. As of September 30, 1997, approximately $1.0 million of the $6.2
million in capitalized interest resulting from the application of SFAS
No. 58 had been amortized against the equity in earnings of GRLLC.
GRLLC's balance sheet is not classified. Assets consist principally of
inventories and liabilities consist principally of Notes and accounts
payable. Inventories were $24,308,000, $21,659,000 and $21,738,000 at
September 30, 1997, December 31, 1996 and December 31, 1995,
respectively.
In July 1990, the Company contributed $725,000 to Gibson Business Park
Associates 1986-I, a real estate development limited partnership (the
"Partnership"), in return for a 70% interest as a general and limited
partner, and other limited partners contributed $315,000 in return for a
30% interest as limited partners. Such other limited partners included
the Company's Chairman and a former Executive Vice-President and certain
members of the Company's Board of Directors. The Partnership, in turn,
contributed $1,040,000 to 3770 Hughes Parkway Associates Limited
Partnership, a Nevada limited partnership ("Hughes Parkway"), in return
for a 33% interest as a limited partner in Hughes Parkway. The Company
entered into an agreement with Hughes Parkway pursuant to which the
Company leases office space in a building in Las Vegas, Nevada (see Note
10).
47
<PAGE>
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt, collateralized by property, plant and
equipment used in the production of sodium azide, and collateralized by
substantially all development property and real estate equity
investments of the Company, is summarized as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------
September 30,
-----------------------------------------------------
1997 1996
---- ----
Subordinated secured term notes
<S> <C> <C>
(interest at 11%) $ 28,740,000 $ 33,310,000
Obligation to deliver AP (see Note 9) 1,166,000 2,334,000
Indemnity obligation (see Notes 3 and 9) 1,160,000 1,142,000
--------------------------------------------------------
Total 31,066,000 36,786,000
Less current portion 6,166,000 7,334,000
--------------------------------------------------------
Total $ 24,900,000 $ 29,452,000
========================================================
</TABLE>
In February 1992, the Company concluded the issuance of the Azide Notes
financing for the design, construction and start-up of a sodium azide
facility. The funds were provided by a major state public employee
retirement fund and a leading investment management company. The
financing was in the form of $40,000,000 principal amount of
noncallable subordinated secured notes issued at par, providing for the
semi-annual payment in arrears of interest at the rate of 11% per
annum. Principal is to be amortized to the extent of $5,000,000 on each
of the fourth (February 1996) through ninth (February 2001) anniversary
dates of the funding, with the remaining $10,000,000 principal amount
to be repaid on the tenth anniversary date. The Azide Notes are secured
by the fixed assets and stock of American Azide Corporation ("AAC"), an
indirect wholly-owned subsidiary of the Company, as well as by a
mortgage on land in Clark County, Nevada being developed by the Company
and by certain restricted cash (see Note 3). Approximately 240 acres of
such land has been contributed to GRLLC subject to certain conditions.
The Company's interest in GRLLC has been assigned to secure the Azide
47-A
<PAGE>
Notes (see Note 5). The Company issued to the purchasers of the Notes
warrants (the "Warrants"), exercisable for a ten-year period commencing
on December 31, 1993, to purchase shares of Common Stock at an exercise
price of $14.00 per share. The maximum number of shares purchasable upon
exercise of the Warrants is 2,857,000 shares. The Warrants are
exercisable, at the option of their holders, to purchase up to 20
percent of the common stock of AAC, rather than the Company's Common
Stock. In the event of such an election, the exercise price of the
Warrants will be based upon a pro rata share of AAC's capital, adjusted
for earnings and losses, plus interest from the date of contribution. At
the option of the Warrant holders, the exercise price of the Warrants
may be paid by delivering an equal amount of Azide Notes.
The indenture imposes various operating restrictions upon the Company
including restrictions on (i) the incurrence of debt; (ii) the
declaration of dividends and the purchase and repurchase of stock; (iii)
certain mergers and consolidations, and (iv) certain dispositions of
assets. Management believes the Company has complied with these
operating restrictions.
On each of December 31, 1995, 1997 and 1999, holders of the Warrants
have or will have the right to put to the Company as much as one-third
thereof based upon the differences between the Warrant exercise price
and prices determined by multiplying the Company's fully diluted
earnings per share at multiples of 13, 12 and 11, respectively, but the
Company's obligation in such respect is limited to $5,000,000 on each
of such dates and to $15,000,000 in the aggregate. Such put rights may
not be exercised if the Company's Common Stock has traded at values
during the preceding 90-day period that would yield to the warrant
holders a 25% internal rate of return to the date of the put (inclusive
of the 11% Azide Notes' yield). At September 30, 1997, it is not
probable that the remaining put rights will be exercised since the
Company believes, based on current market conditions, that its stock
will trade at a higher multiple of fully diluted earnings per share
than the 11 multiple used to determine the put value, if any, at
December 31, 1999, thereby making exercise of the Warrants more
valuable to the holders thereof than exercise of the put rights. On or
after December 31 of each of the years 1995 through 1999, the Company
may call up to 10% of the Warrants (but no more than 50% in the
aggregate) at prices that would provide a 30% internal rate of return
to the holders thereof through the date of call (inclusive of the 11%
Azide Notes' yield). The holders of the Warrants were also granted the
right to require that the Common Stock underlying the Warrants be
registered on one occasion, as well as certain incidental registration
rights.
The Company has accounted for the proceeds of the financing applicable
to the Warrants (and the potential put right) as temporary capital. Any
adjustment of the value assigned at the date of issuance will be
reported as an adjustment to retained earnings. The value assigned to
the Warrants was determined in accordance with Accounting Principle
Board Opinion No. 14 "Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants" and was based upon the relative fair value
of the Warrants and indebtedness at the time of issuance. Although not
applicable for the fiscal years ended September 30, 1997, 1996 and 1995,
net income per common share will be calculated on an "equity" basis or a
"debt" basis using the more dilutive of the two methods. The "equity"
basis assumes the Warrants will be exercised and the effect of the put
feature adjustment, if any, on earnings available to common shareholders
will be reversed. The treasury stock method will then be used to
calculate net additional shares. The "debt" basis assumes that any
remaining puts will be exercised (if the rights are available) and the
Warrants will not be considered common stock equivalents.
48
<PAGE>
Notes payable and long-term debt maturities are as follows:
- ---------------------------------------
For the Years Ending
September 30,
- ---------------------------------------
1998 $ 6,166,000
1999 6,160,000
2000 5,000,000
2001 5,000,000
2002 8,740,000
-----------
Total $31,066,000
===========
7. INCOME TAXES
The Company accounts for income taxes using the asset and liability
approach required by SFAS 109. The asset and liability approach
requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of the Company's assets and
liabilities. Future tax benefits attributable to temporary differences
are recognized to the extent that realization of such benefits are more
likely than not. These future tax benefits are measured by applying
currently enacted tax rates.
The following table provides an analysis of the Company's credit for
income taxes for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ -------------- --------------
<S> <C>
Current $ $(1,349,000) $(4,888,000)
Deferred (federal and state) (10,101,000) 1,240,000 4,097,000
------------------ -------------- --------------
Credit for income taxes $(10,101,000) $ (109,000) $ (791,000)
================== ============== ==============
</TABLE>
A valuation allowance for the deferred tax asset was established in the
amount of $10,431,000 in 1997. The valuation allowance is necessary due
to the uncertainty related to the realizability of future tax benefits.
The deferred tax assets are composed, for the most part, of alternative
minimum tax credits and net operating losses. The alternative minimum
tax credit carryforward, valued at approximately $1,233,000, may be
carried forward indefinitely as a credit against regular tax. The net
operating loss carryforwards, valued at approximately $16,278,000, will
begin to expire for tax purposes in 2008 as follows:
<TABLE>
<CAPTION>
NOL DEDUCTION Tax Rate NOL Asset
-------------- ----------- -------------
Expiration of net operating losses
<S> <C> <C> <C> <C>
2008 $ 3,398,000 34.0% $1,155,000
2009 25,607,000 34.0% 8,706,000
2010 14,080,000 34.0% 4,787,000
2011 and thereafter 4,791,000 34.0% 1,630,000
------------ ------------
TOTAL $47,876,000 $16,278,000
============ ============
</TABLE>
49
<PAGE>
The Company's effective tax rate declined to 16.7% with the
establishment of the valuation allowance. The Company's effective tax
rate will be 0% until the net operating losses expire or the Company has
taxable income necessary to eliminate the need for the valuation
allowance. The credit for income taxes for the years ended September 30,
1997, 1996 and 1995, differs from the amount computed at the federal
income tax statutory rate as a result of the following:
<TABLE>
<CAPTION>
1997 % 1996 % 1995 %
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected credit for income taxes $(20,591,000) 34.0% $ (109,000) 34.0% $ (814,000) 35.0%
Adjustment:
Nondeductible expenses 59,000 (0.1%)
Surtax benefit 23,000 (1.0%)
Tax credit limitation due to the
valuation allowance 10,431,000 (17.2%)
---------------- --------------------- --------------
Credit for income taxes $(10,101,000) 16.7% $ (109,000) 34.0% $ (791,000) 34.0%
================ ===================== ==============
</TABLE>
The components of the net deferred taxes at September 30, 1997, 1996 and
1995 consisted of the following:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS:
Non-current:
<S> <C> <C> <C>
Net operating losses $16,278,000 $16,618,000 $14,353,000
Alternative minimum tax credits 1,233,000 1,395,000 1,354,000
Employee separation and management
reorganization costs 1,172,000
Inventory capitalization 436,000 349,000 269,000
Accruals 408,000 127,000
Other 250,000
----------- ----------- -----------
Total deferred tax assets: $19,777,000 $18,489,000 $15,976,000
----------- ------------ -----------
DEFERRED TAX LIABILITIES:
Non-current:
Property (includes azide impairment
in 1997) $(4,350,000) $(23,711,000) $ (25,394,000)
Accrued income and expenses (653,000) (412,000) (569,000)
State Taxes (600,000) (600,000) (575,000)
Other taxes payable (1,251,000) (1,945,000) --
Amortization (1,020,000) (737,000) --
Other (1,472,000) (1,185,000) (6,000)
----------- ------------ -------------
Total deferred tax liabilities: (9,346,000) (28,590,000) (26,544,000)
----------- ------------ -------------
Preliminary net deferred tax asset 10,431,000 (10,101,000) (10,568,000)
Valuation allowance for deferred tax asset (10,431,000)
------------ ------------ -------------
Net deferred tax credit: $ 0 $(10,101,000) $(10,568,000)
============ ============ =============
</TABLE>
50
<PAGE>
8. EMPLOYEE BENEFIT PLANS
The Company maintains, for the benefit of its employees, a group health
and life benefit plan, an employee stock ownership plan ("ESOP") that
includes a Section 401(k) feature,
50-A
<PAGE>
and a defined benefit pension plan (the "Plan"). The ESOP permits
employees to make contributions. The Company does not presently match
any portion of employee ESOP contributions.
All full-time employees age 21 and over with one year of service are
eligible to participate in the Plan. Benefits are paid based on an
average of earnings, retirement age, and length of service, among other
factors.
The discount rate was 7.5% in 1997 and 1996 and 7% in 1995. The rate of
salary progression used to determine the projected benefit obligations
was 5% in 1997, 1996 and 1995. The expected long-term rate of return on
plan assets was 8% in 1997 and 1996 and 7% in 1995. The following table
reconciles the Plan's funded status and summarizes amounts recognized in
the Company's consolidated financial statements for the years ended
September 30, 1997 and 1996.
<TABLE>
<CAPTION>
-----------------------------------------------------
1997 1996
-----------------------------------------------------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefits $ 7,758,000 $ 6,524,000
Nonvested benefits 1,219,000 1,254,000
-----------------------------------------------------
Accumulated benefit $ 8,977,000 $ 7,778,000
=====================================================
Projected benefit obligation $11,275,000 $ 9,754,000
Plan assets at fair value 9,937,000 8,459,000
-----------------------------------------------------
Projected benefit obligation in excess of
Plan assets 1,338,000 1,295,000
Unrecognized net transition obligation
amortized over fifteen years (764,000) (916,000)
Unrecognized net loss and prior service cost (174,000) (499,000)
-----------------------------------------------------
Accrued (Prepaid) pension $ 400,000 $ (120,000)
=====================================================
</TABLE>
Net periodic pension cost was $986,000, $1,187,000 and $1,295,000,
respectively, for the years ended September 30, 1997, 1996 and 1995, and
consists of the following:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 687,000 $ 765,000 $ 787,000
Interest cost 772,000 696,000 620,000
Return on Plan assets (1,415,000) (519,000) (708,000)
Net total of other components 942,000 245,000 596,000
----------------------------------------------------------------------------
Net periodic pension cost $ 986,000 $ 1,187,000 $ 1,295,000
============================================================================
</TABLE>
See Note 16 for a discussion of the Company's Supplemental Retirement
Plan.
9. AGREEMENTS WITH THIOKOL CORPORATION
In 1989, the Company entered into an Advance Agreement and Surcharge
Agreement and certain other agreements (collectively the "NASA/Thiokol
Agreements") with Thiokol. Under the Advance and Surcharge Agreements
Thiokol was required to place sufficient orders for AP such that,
combined with orders from other AP customers, the Company
51
<PAGE>
would receive revenues in respect of at least 20 million pounds per
year, 5 million per quarter, over seven years (140 million pounds in
the aggregate), beginning with initial production. The Company was
required to impose a surcharge on all sales of AP sufficient to
amortize the AP Facility Loan over or during the period of such revenue
assurance.
On May 10, 1994, the Company and Thiokol executed an amendment to the
Advance Agreement (the "Amendment") and the AP Facility Loan was
repaid. Upon early repayment in full of the AP Facility Loan, the
Amendment provided for the termination as fulfilled of the Surcharge
Agreement and termination of certain other agreements relating to the
repayment of advances (the Working Capital Agreement and the Repayment
Plan).
The Amendment provided for the Company to receive revenues, excluding
surcharge revenues, from sales of AP of approximately $33 million, $28
million and $20 million during the fiscal years ending September 30,
1994, 1995 and 1996, respectively. Prior to the effective date of the
Amendment, the Company was indebted to Thiokol for approximately
$10,208,000 under the Working Capital Agreement and Repayment Plan. The
Amendment required the Company to pay $750,000 of this amount ratably
as deliveries of AP were made over the remainder of the fiscal year
ended September 30, 1994. The remaining obligation under the Working
Capital Agreement and Repayment Plan has been and will continue to be
repaid by the Company through delivery of AP.
10. 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 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 District 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.
During the third quarter of fiscal 1996, the Company settled certain
matters with its insurance carrier relating to legal fees and other
costs associated with the successful
52
<PAGE>
defense of the shareholder lawsuits. Under this settlement, the Company
was reimbursed for approximately $450,000 in costs that had previously
been expensed and incurred in connection with the defense. Such amount
was recognized as a reduction in operating expenses in the third quarter
of fiscal 1996. The insurance carrier agreed to and has paid attorneys
fees and other defense costs related to the plaintiffs' unsuccessful
appeals referred to above.
The Company was served with a complaint on December 10, 1993 in a
lawsuit brought by limited partners in a partnership of which one of the
Company's former subsidiaries, divested in 1985, was a general partner.
The plaintiffs alleged that the Company was liable to them in the amount
of approximately $5.9 million, plus interest, on a guarantee executed in
1982. In August 1996, the Company's cross-motion for summary judgment
was granted by the Superior Court of the State of Delaware in and for
New Castle County. The plaintiffs filed an appeal with the Supreme Court
of the State of Delaware in January 1997. In October 1997, the Delaware
Supreme Court affirmed the Superior Court's judgment.
Trace amounts of perchlorate chemicals were recently found in Lake Mead.
Clark County, Nevada, where Lake Mead is situated, is the location of
Kerr-McGee Chemical Corporation's ("Kerr-McGee") 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 appropriate conclusions, it will not be
possible for the Company to determine the extent to which, if at all,
the Company may be called upon to contribute to or assist with future
remediation efforts, or the financial impacts, if any, of such
contributions or assistance. Accordingly, no accrual for potential
losses has been made in the accompanying Consolidated Financial
Statements of the Company.
The Company is a party to an agreement with Utah Power and Light Company
for its electrical requirements. The agreement provides for the supply
of power for a minimum of a ten-year period, which began in 1988, and
obligates the Company to purchase minimum amounts of power, while
assuring the Company competitive pricing for its electricity needs for
the duration of the agreement. Under the terms of the agreement, the
Company's minimum monthly charge for firm and interruptible demand is
approximately $22,000.
See Note 14 for a discussion of certain litigation involving Halotron.
The Company and its subsidiaries are also involved in other lawsuits.
The Company believes that these other lawsuits, individually or in the
aggregate, will not have a material adverse effect on the Company or any
of its subsidiaries.
As discussed in Note 5, the Company entered into an agreement with
Hughes Parkway pursuant to which the Company leases office space. The
lease is for an initial term of 10 years and is subject to escalation
every three years based on changes in the consumer price index, and
provides for the Company to occupy 22,262 square feet of office space.
53
<PAGE>
Rent expense was approximately $550,000 during the fiscal years ended
September 30, 1997, 1996 and 1995. Future minimum rental payments under
this lease for the years ending September 30, are as follows:
1998 550,000
1999 550,000
2000 275,000
----------
Total $1,375,000
==========
53-A
<PAGE>
11. SHAREHOLDERS' EQUITY
The Company has authorized the issuance of 3,000,000 shares of preferred
stock, of which 125,000 shares have been designated as Series A, 125,000
shares have been designated as Series B and 15,340 shares have been
designated as Series C redeemable convertible preferred stock. The
Series C redeemable convertible preferred stock was outstanding at
September 30, 1989, was redeemed in December 1989, and is no longer
authorized for issuance. No preferred stock is issued or outstanding.
The Company has granted options and warrants to purchase shares of the
Company's common stock at prices at or in excess of market value at the
date of grant. The options and warrants were granted under various plans
or by specific grants approved by the Company's Board of Directors. In
1994, the former Executive Vice President of the Company exercised
options for 45,000 shares of the Company's common stock by executing
demand notes bearing interest at a bank's prime rate for the total
option price of $174,000. Approximately $97,000 of this amount remains
outstanding at September 30, 1997. Interest income of $8,000, $7,000 and
$8,000 was recorded on these notes in fiscal 1997, 1996 and 1995.
Option and warrant transactions are summarized as follows:
--------------------------------------------
Shares Under
Options and
Warrants Option Price
--------------------------------------------
October 1, 1994 3,153,450 3.88 - 30.50
Granted 281,000 4.88 - 7.50
Exercised, expired or canceled (104,400) 3.88 - 30.50
--------------------------------------------
September 30, 1995 3,330,050 3.88 - 21.50
Exercised, expired or canceled (35,000) 3.88 - 12.50
--------------------------------------------
September 30, 1996 3,295,050 $3.88 - $21.50
Granted 587,000 6.38 - 7.13
Exercised, expired or canceled 75,050 3.88 - 12.63
--------------------------------------------
September 30, 1997 3,807,000 $4.88 - $21.50
--------------------------------------------
In February 1992, the Company issued $40,000,000 in Azide Notes with
Warrants. See Note 6 for a description of the Warrants. Shares under
options and warrants at September 30, 1997 include approximately
2,857,000 Warrants at a price of $14 per Warrant.
The following table summarizes information about stock options and
warrants outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Options and Warrants Outstanding Options Exercisable
----------------------------------------------------------- -----------------------------------------
Weighted Average Weighted
Remaining Weighted Average
Range of Number Contractual Average Number Exercise
Exercise Price Outstanding Life (Years) Exercise Price Exercisable Price
----------------- -------------- -------------------- ---------------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 4.88 40,000 2.5 $ 4.88 40,000 $ 4.88
5.63 - 7.50 860,000 4.1 6.97 569,000 7.07
21.50 50,000 1.0 21.50 50,000 21.50
14.00 2,857,000 6.0 14.00 2,857,000 14.00
--------- --------------------- ---------------------- ----------------- ---------------
3,807,000 5.49 $ 13.23 3,516,000 $ 13.60
========= ===================== ====================== ================= ===============
</TABLE>
54
<PAGE>
12. SEGMENT INFORMATION
The Company's principal business segments are specialty chemicals,
environmental protection equipment and technology, and
industrial/commercial and residential real estate development. Products
of the specialty chemicals segment include AP used in the solid rocket
propellant for the space shuttle and defense programs, other perchlorate
chemicals, sodium azide, and Halotron.
Information about the Company's industry segments is as follows:
<TABLE>
<CAPTION>
---------------------------------------------
Years ended September 30,
---------------------------------------------
1997 1996 1995
---- ---- ----
Revenues:
<S> <C> <C> <C>
Specialty chemicals $ 37,976,000 $ 34,061,000 $ 34,219,000
Environmental protection 2,429,000 3,099,000 1,656,000
Real estate 3,645,000 5,221,000 3,375,000
------------ ------------ ------------
Total $ 44,050,000 $ 42,381,000 $ 39,250,000
============ ============ ============
Operating income (loss) before
unallocated income and expenses:
Specialty chemicals $(55,227,000) $ (879,000) $ (2,150,000)
Environmental protection (659,000) (249,000) (640,000)
Real estate 1,624,000 2,069,000 1,356,000
------------ ------------ ------------
Total (54,262,000) 941,000 (1,434,000)
------------ ------------ ------------
Deduct (add) unallocated expense (income):
General corporate(1) 3,838,000 506,000 613,000
Equity in earnings of real estate venture (200,000) (700,000)
Interest and other income (1,115,000) (1,381,000) (1,429,000)
Interest and other expense 2,001,000 2,836,000 1,709,000
Income tax credit (10,101,000) (109,000) (791,000)
------------ ------------ ------------
Net loss $(48,685,000) $ (211,000) $ (1,538,000)
============ ============ ============
Specialty chemicals $ 32,166,000 $ 91,869,000 $ 95,845,000
Environmental protection 1,667,000 1,476,000 1,087,000
Real estate 29,215,000 28,996,000 29,827,000
Corporate 27,033,000 27,678,000 28,460,000
------------ ------------ ------------
Total $ 90,081,000 $150,019,000 $155,219,000
------------ ------------ ------------
Financial information relating to domestic
and export sales (domestic operations):
Domestic revenues $ 42,723,000 $ 40,029,000 $ 38,857,000
Export revenues 1,327,000 2,784,000 393,000
------------ ------------ ------------
Total $ 44,050,000 $ 42,381,000 $ 39,250,000
============ ============ ============
</TABLE>
(1) The increase in general corporate expenses in fiscal 1997 relates to
employee separation and management reorganization costs recognized in
the fourth quarter. (See Note 16.)
55
<PAGE>
The Company's operations are located in the United States. It is not
practicable to compute a measure of profitability for domestic and
export sales or for sales by geographic location. Substantially all
export revenues relate to environmental protection equipment sales in
the Far and Middle East.
55-A
<PAGE>
The majority of depreciation and amortization expense and capital
expenditures relate to the Company's specialty chemicals segment.
Depreciation and amortization expenses for the years ended September 30
are as follows:
----------------------------------------------
1997 1996 1995
----------------------------------------------
Specialty chemicals $ 6,749,000 $6,899,000 $4,824,000
All other segments 936,000 911,000 1,059,000
----------------------------------------------
Total $ 7,685,000 $7,810,000 $5,883,000
==============================================
Capital expenditures for the years ended September 30 are as follows:
---------------------------------------------
1997 1996
---------------------------------------------
Specialty chemicals $ 1,524,000 $ 3,157,000
All other segments 33,000 91,000
----------------------------------------------
Total $ 1,557,000 $ 3,248,000
=============================================
The Company had three customers that accounted for 10% or more of the
Company's revenues in one or more of fiscal 1997, 1996 and 1995. These
three customers accounted respectively for the following revenues during
the fiscal years ended September 30:
<TABLE>
<CAPTION>
-----------------------------------------------------
Customer Chemical Industry 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A Ammonium Perchlorate Space $15,661,000 $20,000,000 $27,963,000
B Ammonium Perchlorate Space 4,614,000
C Sodium Azide Airbag 11,715,000 9,378,000
-----------------------------------------------------
</TABLE>
13. SODIUM AZIDE
In July 1990, the Company entered into agreements (the "Azide
Agreements") pursuant to which Dynamit Nobel licensed to the Company on
an exclusive basis for the North American market its most advanced
technology and know-how for the production of sodium azide, the
principal component of the gas generant used in automotive airbag safety
systems. In addition, Dynamit Nobel has provided technical support for
the design, construction and start-up of the facility.
Under the Azide Agreements, Dynamit Nobel was to receive, for the use of
its technology and know-how relating to its batch production process of
manufacturing sodium azide, quarterly royalty payments of 5% of the
quarterly net sales of sodium azide by AAC for a period of 15 years from
the date the Company begins to produce sodium azide in commercial
quantities. In July 1996, the Company and Dynamit Nobel agreed to
suspend the royalty payment effective as of July 1, 1995. As a result,
in the third quarter of fiscal 1996, the Company recognized an increase
in sodium azide sales of approximately $600,000. This amount had
previously been recognized as a reduction of net sodium azide sales
during the period July 1, 1995 through June 30, 1996.
In May 1997, the Company entered into a three-year agreement with
Autoliv ASP, Inc. ("Autoliv") (formerly Morton International Automotive
Safety Products). The agreement provides for the Company to supply
sodium azide used by Autoliv in the manufacture of automotive airbags.
Deliveries under the contract commenced in July 1997. The estimated
sales value of the agreement is approximately $45 - $55 million over the
three-
56
<PAGE>
year period. This actual sales value, however, will depend upon many
factors beyond the control of the Company, such as the number of
automobiles and light trucks manufactured and competitive conditions in
the airbag market, that will influence the actual magnitude of Autoliv's
sodium azide requirements, and there can therefore be no assurance as to
the actual sales value of the agreement.
The Company previously believed that demand for sodium azide in North
America and the world would substantially exceed existing manufacturing
capacity and announced expansions or new facilities (including the
Company's plant) by the 1994 model year (which for sodium azide sales
purposes is the period June 1993 through May 1994). Currently, demand for
sodium azide is substantially less than supply on a worldwide basis. The
Company believes this is the result of capacity expansions by existing
producers, although the Company's information with respect to
competitors' existing and planned capacity is limited. There can be no
assurance that other manufacturing capacities not now known to the
Company will not be established. By reason of this highly competitive
market environment, and other factors discussed below, there exists
considerable pressure on the price of sodium azide.
The Company believes that the price erosion of sodium azide over the
past few years has been due, in part, to unlawful pricing procedures of
Japanese sodium azide producers. In response to such practices, in
January 1996, the Company filed an antidumping petition with the
International Trade Commission ("ITC") and the Department of Commerce
("Commerce"). In August 1996, Commerce issued a preliminary
determination that Japanese imports of sodium azide have been sold in
the United States at prices that are significantly below fair value.
Commerce's preliminary dumping determination applied to all Japanese
imports of sodium azide, regardless of end-use. Commerce's preliminary
determination followed a March 1996 preliminary determination by ITC
that dumped Japanese imports have caused material injury to the U.S.
sodium azide industry.
On January 7, 1997 the anti-dumping investigation initiated by Commerce,
based upon the Company's petition, against the three Japanese producers
of sodium azide was suspended by agreement. It is the Company's
understanding that, by reason of the Suspension Agreement, two of the
three Japanese sodium azide producers have ceased their exports of
sodium azide to the United States for the time being. As to the third
and largest Japanese sodium azide producer, which has not admitted any
prior unlawful conduct, the Suspension Agreement requires that it make
all necessary price revisions to eliminate all United States sales at
below "Normal Value," and that it conform to the requirements of
sections 732 and 733 of the Tariff Act of 1930, as amended, in
connection with its future sales of sodium azide in the United States.
The Suspension Agreement contemplates a cost-based determination of
"Normal Value" and establishes reporting and verification procedures to
assure compliance. Accordingly, the minimum pricing for sodium azide
sold in the United States by the remaining Japanese producer will be
based primarily on its actual costs, and may be affected by changes in
the relevant exchange rates.
Finally, the Suspension Agreement provides that it may be terminated by
any party on 60 days' notice, in which event the anti-dumping proceeding
would be re-instituted at the stage to which it had advanced at the time
the Suspension Agreement became effective.
57
<PAGE>
The Company has incurred significant operating losses in its sodium
azide operation during the last three fiscal years. Such operating
history was partially expected by the Company as a result of the
generally lengthy process of qualification for use of new material in
automotive safety equipment. Sodium azide performance improved in the
fourth quarter of fiscal 1997, principally as a result of additional
sodium azide deliveries under the Autoliv agreement referred to above,
and the operations were cash flow positive during the year ended
September 30, 1997. Capacity utilization rates increased from
approximately 45% in the third quarter of fiscal 1997 to approximately
55% in the fourth quarter of 1997. However, even though performance
improved, Management's view of the economics of the sodium azide market
changed significantly during the fourth quarter of fiscal 1997. During
the late August, September, October and November of 1997 the following
events or developments occurred that changed the Company's view of the
economics of the sodium azide market.
o The Company was unsuccessful in its attempts to sell sodium azide to
major users other than Autoliv. With the procurement cycle for the
automotive model year beginning in July or August, the Company
previously believed it would be successful in achieving significant
sales to other major users.
o One major inflator manufacturer announced the acquisition of
non-azide based inflator technology and that they intended to be in
the market with this new technology by model year 1999. This
announcement, coupled with the fact that other inflator manufacturers
appear to be pursuing non-azide based inflator technology more
aggressively than before, caused a reduction in the Company's
estimates of annual sodium azide demand requirements and, possibly
more importantly, the duration that such requirements will exist.
o The effects of the antidumping petition appear to have been fully
incorporated into the sodium azide market by the end of fiscal 1997.
At September 30, 1997, Management believes that the antidumping
related environment will remain unchanged as a result of the
continued strength and outlook of the U.S. dollar relative to the
Japanese yen (the home country currency of the Company's major
competitor).
As a result of these events and developments, the Company's view of the
economics of the sodium azide market and the Company's future
participation in such market degraded substantially by October 30, 1997
and Management concluded that the cash flows associated with sodium
azide operations would not be sufficient to recover the Company's
investment in sodium azide operations would not be sufficient to
recover the Company's investment in sodium azide related fixed assets.
As quoted market prices were not available, the present value of
estimate future cash flows was used to estimate the value of sodium
azide fixed assets. Under the requirements of SFAS No. 121, and as a
result of this valuation technique, an impairment charge of $52,605,000
was recognized in the fourth quarter of fiscal 1997.
58
<PAGE>
This impairment charge was recorded as a reduction of the sodium azide
building and equipment and related accumulated depreciation in the
amounts of approximately $69,537,000 and $16,932,000, respectively, to
reduce the carrying value of these assets to $13,500,000 or the
estimate of their fair value.
The Company will continue to use the sodium azide assets in its
operations as long as the cash flows generated from the use of such
assets are positive. The Company estimates that cash flows will be
negligible around calendar 2005 and as such the sodium azide assets are
being depreciated over the lesser of their useful lives or seven years.
14. HALOTRON
On August 30, 1991, the Company entered into an agreement (the "Halotron
Agreement") granting the Company the option to acquire the exclusive
worldwide rights to manufacture and sell Halotron I (a replacement for
halon 1211). Halotron products are fire suppression systems, including a
series of chemical compounds and application technologies, designed to
replace halons, chemicals presently in wide use as a fire suppression
agent in military, industrial, commercial and residential applications.
The Halotron Agreement provides for disclosure to the Company of all
confidential and proprietary information concerning Halotron I, which
together with testing undergone by Halotron I at independent
laboratories in Sweden and the United States and consulting services
that were provided, was intended to enable the Company to evaluate
Halotron I's commercial utility and feasibility. In February 1992, the
Company announced that a series of technical evaluations and field tests
conducted at the University of New Mexico had been positive and
equivalent to the performance previously reported in testing at the
Swedish National Institute of Testing and Standards and the University
of Lund in Sweden.
In February 1992, the Company determined to acquire the rights provided
for in the Halotron Agreement, gave notice to that effect to the
inventors, and exercised its option. In addition to the exclusive
license to manufacture and sell Halotron I, the rights acquired by the
Company include rights under all present and future patents relating to
Halotron I throughout the world, rights to related and follow-on
products and technologies and product and technology improvements,
rights to reclaim, store and distribute halon and rights to utilize the
productive capacity of the inventors' Swedish manufacturing facility.
Upon exercise of the option, the Company paid the sum of $700,000 (the
exercise price of $1,000,000, less advance payments previously made) and
became obligated to pay the further sum of $1,500,000 in equal monthly
installments of $82,000, commencing in
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March 1992. The license agreement entered into between the Company and
the inventors of Halotron I provides for a royalty to the inventors of
5% of the Company's net sales of Halotron I over a period of 15 years.
The Company has designed and constructed a Halotron facility that has an
annual capacity of approximately 6,000,000 pounds, located on land owned
by the Company in Iron County, Utah.
As discussed above, in 1992, the Company purchased the rights to certain
fire suppression chemicals and delivery systems called Halotron from
their Swedish inventor, Jan Andersson and his corporation, AB Bejaro
Product. The Company claimed that Andersson and Bejaro breached the
contract in which they had sold the rights to Halotron. This alleged
breach resulted in litigation initiated by the Company. This initial
litigation was settled when Andersson and Bejaro promised to perform
faithfully their duties and to honor the terms of the contracts that,
among other things, gave the Company exclusive rights to the Halotron
chemicals and delivery systems.
Following the settlement of the initial litigation, however, Andersson
and Bejaro failed to perform the acts they had promised in order to
secure dismissal of that litigation. As a result, litigation was
initiated in the Utah state courts in March 1994, for the purpose of
establishing the Company's exclusive rights to the Halotron chemicals
and delivery systems. On August 15, 1994, the court entered a default
judgment ("Judgment") against Andersson and Bejaro granting the
injunctive relief requested by the Company and awarding damages in the
amount of $42,233,000.
The trial court further ordered Andersson and Bejaro to execute
documents required for patent registration of Halotron in various
countries. When Andersson and Bejaro ignored this order, the Court
directed the Clerk of the Court to execute these documents on behalf of
Andersson and Bejaro. Finally, the Court ordered that Andersson's and
Bejaro's rights to any future royalties from sales of Halotron were
terminated. The Company is exploring ways to collect the Judgment from
Andersson and Bejaro. It appears that Andersson and Bejaro have few
assets and those assets they do have appear to have been placed beyond
reach of the Judgment.
The Company has initiated arbitration proceedings against Jan Andersson
and Bejaro to enforce Halotron's patent rights to Halotron against
Andersson. The parties have each submitted statements of claims, with
supporting documents, affidavits and briefs to the arbitration panel.
Jan Andersson and Bejaro have also asserted a counterclaim against the
Company, alleging that the Company wrongfully deprived Andersson and
Bejaro of royalties due under the agreements with the Company. Andersson
and Bejaro seek $6,200,000, including damages for alleged physical
suffering and punitive damages. The Company has sought to strike the
counterclaim as having been filed untimely. If the counterclaim is not
stricken, the Company will vigorously contest claims asserted in the
counterclaim. The Company believes the counterclaim to be without merit.
No hearing has been set in the arbitration.
15. ASSET PURCHASE AGREEMENT
On October 10, 1997, the Company entered into an Asset Purchase
Agreement (the "Agreement") with Kerr-McGee. The Agreement contemplates
that the Company will acquire certain process data, technical
information, customer lists, marketing contacts,
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and related expertise used by Kerr-McGee primarily in the AP industry.
The Agreement calls for a purchase price of $39 million, and grants the
Company the option to purchase limited AP inventory of Kerr-McGee for
additional consideration.
Closing of the transaction is subject to a number of conditions,
including the Company's securing of financing for 100 percent of the
purchase price and Board of Director approvals by both parties. In
December 1997, the Company received notification that the Federal Trade
Commission ("FTC") had determined to grant early termination of the
waiting period relating to the Company's and Kerr-McGee's premerger
notifications filings with the FTC and the Department of Justice under
the Hart-Scott- Rodino Antitrust Improvements Act of 1976. The Company
has entered into long-term pricing agreements for AP with its major
customers that are contingent upon the closing of the transaction and,
on a continuing basis, that will be contingent upon agreement on the
terms of specific purchase orders.
There can be no assurance that the conditions to closing of the
transaction will be satisfied, or that the transaction will close. The
management of the Company will, however, make all reasonable efforts to
meet all conditions, and to conclude successfully this transaction.
16. EMPLOYEE SEPARATION AND MANAGEMENT REORGANIZATION COSTS
During the fourth quarter of fiscal 1997, the Company implemented a
management reorganization plan. As a result, the former Chief Executive
Officer, Executive Vice President and two other senior executives
separated their employment with the Company and the Company vacated
approximately one-half of its leased corporate office facilities space.
In addition, activities associated with the Company's environmental
protection equipment division were relocated to the Company's Utah
facilities.
The Company recognized a charge of $3,616,000 to account for the costs
associated with the employee separations and vacating leased space. The
charge consists principally of four years of salary and benefits payable
to the former Executive Vice President under the terms of an employment
agreement, the present value of the estimated amount payable to the
former Chief Executive Officer under the terms of the Company's
Supplemental Executive Retirement Plan ("SERP") and severance costs
payable to the two other former senior executives. The former Chief
Executive Officer is the only person currently covered under the SERP.
Relocation costs amounted to approximately $387,000 and are classified
in operating expenses in the accompanying consolidated statement of
operations.
In the third quarter of 1995, the Company reduced total full-time
employee equivalents by approximately ten percent through involuntary
terminations and an offering of enhanced retirement benefits to a
certain class of employees. The Company recognized a charge of
approximately $226,000 as a result of these terminations and the
acceptance of the offer of enhanced retirement benefits by certain
employees.
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INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Amendment No. 1 to Registration
Statement No. 33-15674 on Form S-3, Post-Effective Amendment No. 2 to
Registration Statement No, 33-21565 on Form S-8, Post-Effective Amendment No. 1
to Registration Statement No. 33-30321 on Form S-8, Registration Statement No.
33-36887 on Form S-8, Registration Statement No. 33-52898 on Form S-8, Amendment
No. 2 to Registration Statement No. 33-52196 on Form S-3, Registration Statement
No. 33-11467 on Form S-3 and Registration Statement No. 333-11469 on Form S-8 of
American Pacific Corporation of our report dated November 14, 1997, appearing in
this Annual Report on Form 10-K/A Amendment No. 3 of American Pacific
Corporation for the year ended September 30, 1997.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
July 9, 1998