<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15 (d)
---
of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 1999
Commission File Number 1-8137
OR
Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
AMERICAN PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 59-6490478
(State or other jurisdiction (IRS Employer
of incorporation or Identification No.)
organization)
3770 Howard Hughes Parkway, Suite 300
Las Vegas, NV 89109
(Address of principal executive offices) (Zip Code)
(702) 735-2200
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ No / /
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 8,135,037 as of July 31,
1999.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
-------------------------------------------
The information required by Rule 10-01 of Regulation S-X is
provided on pages 4 through 9 of this Report on Form 10-Q.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------
Results of Operations
---------------------
The information required by Item 303 of Regulation S-K is provided on
pages 10 through 15 of this Report on Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
None.
ITEM 2. Changes in Securities
---------------------
None.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
a) 10.1 Employment Agreement dated May 11, 1999 between the Registrant
and John R. Gibson.
27. Financial Data Schedules. This Exhibit is filed in connection
with the Registrant's electronic filing.
b) None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN PACIFIC CORPORATION
Date: August 2, 1999 /S/ JOHN R. GIBSON
------------------
John R. Gibson
Chief Executive Officer and President
Date: August 2, 1999 /S/ DAVID N. KEYS
-----------------
David N. Keys
Executive Vice President,
Chief Financial Officer, Secretary
and Treasurer; Principal Financial
and Accounting Officer
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<PAGE>
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
For the three months ended For the nine months
June 30, ended June 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales and Operating Revenues $ 18,659,000 $ 13,136,000 $ 54,404,000 $ 38,523,000
Cost of Sales 12,429,000 9,047,000 34,987,000 26,282,000
--------------- --------------- ------------ ------------
Gross Profit 6,230,000 4,089,000 19,417,000 12,241,000
Operating Expenses 2,548,000 2,361,000 7,505,000 6,791,000
--------------- --------------- ------------ ------------
Operating Income 3,682,000 1,728,000 11,912,000 5,450,000
Equity in Earnings of Real Estate Venture 300,000
Net Interest and Other Expense 1,326,000 1,514,000 4,191,000 2,977,000
--------------- --------------- ------------ ------------
Income Before Provision for Income Taxes 2,356,000 214,000 7,721,000 2,773,000
Provision for Income Taxes
--------------- --------------- ------------ ------------
Net Income Before Extraordinary Loss 2,356,000 214,000 7,721,000 2,773,000
Extraordinary Loss-Debt Extinguishment 174,000 174,000 5,005,000
--------------- --------------- ------------ ------------
Net Income (Loss) $ 2,182,000 $ 214,000 $ 7,547,000 $ (2,232,000)
--------------- --------------- ------------ ------------
Basic Net Income (Loss) Per Share:
Income Before Extraordinary Loss $ .29 $ .03 $ .95 $ .34
Extraordinary Loss (.02) (.02) (.61)
--------------- --------------- ------------ ------------
Net Income (Loss) $ .27 $ .03 $ .93 $ (.27)
--------------- --------------- ------------ ------------
Average Shares Outstanding 8,134,000 8,250,000 8,156,000 8,184,000
--------------- --------------- ------------ ------------
Diluted Net Income (Loss) Per Share:
Income Before Extraordinary Loss $ .28 $ .02 $ .93 $ .33
Extraordinary Loss (.02) (.02) (.60)
--------------- --------------- ------------ ------------
Net Income (Loss) $ .26 $ .02 $ .91 $ (.27)
--------------- --------------- ------------ ------------
Diluted Shares 8,272,000 8,563,000 8,269,000 8,384,000
--------------- --------------- ------------ ------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
June 30, September 30,
1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 35,924,000 $ 20,389,000
Accounts and Notes Receivable 11,667,000 8,927,000
Related Party Notes Receivable 458,000 536,000
Inventories 9,439,000 13,730,000
Prepaid Expenses and Other Assets 1,032,000 839,000
Restricted Cash 1,186,000 1,176,000
-------------- --------------
Total Current Assets 59,706,000 45,597,000
Property, Plant and Equipment, Net 18,484,000 19,529,000
Intangible Assets, Net 35,234,000 38,252,000
Development Property 6,569,000 7,036,000
Real Estate Equity Investments 12,543,000 17,112,000
Other Assets, Net 2,669,000 3,233,000
-------------- --------------
TOTAL ASSETS $135,205,000 $130,759,000
-------------- --------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
June 30, September 30,
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 10,718,000 $ 9,635,000
Current Portion of Long-Term Debt 1,186,000 1,176,000
--------------- --------------
Total Current Liabilities 11,904,000 10,811,000
Long-Term Debt 67,000,000 70,000,000
Long-Term Payables 1,799,000 2,350,000
--------------- --------------
TOTAL LIABILITIES 80,703,000 83,161,000
--------------- --------------
Commitments and Contingencies
Warrants to Purchase Common Stock 3,569,000 3,569,000
Shareholders' Equity:
Common Stock 843,000 842,000
Capital in Excess of Par Value 79,559,000 79,488,000
Accumulated Deficit (27,171,000) (34,718,000)
Treasury Stock (2,211,000) (1,486,000)
Receivable from the Sale of Stock (87,000) (97,000)
--------------- --------------
Total Shareholders' Equity 50,933,000 44,029,000
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
--------------- --------------
EQUITY $135,205,000 $130,759,000
--------------- --------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
For the three months For the nine months
ended June 30, ended June 30,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Provided by Operating Activities $ 6,507,000 $ 8,916,000 $ 17,177,000 $ 8,505,000
----------- ----------- ------------ ------------
Cash Flows Provided by (Used For) Investing
Activities:
Capital Expenditures (413,000) (406,000) (2,505,000) (2,054,000)
Payment for Acquisition of Intangible (39,000,000)
Real Estate Equity Investment
Capital Activity 3,189,000 360,000 4,569,000 3,091,000
----------- ----------- ------------ ------------
Net Cash Provided by (Used For) Investing
Activities 2,776,000 (46,000) 2,064,000 (37,963,000)
----------- ----------- ------------ ------------
Cash Flows from Financing Activities:
Debt Related Payments (3,053,000) (3,053,000) (34,416,00)
Issuance of Notes 75,000,000
Debt issue Costs (360,000) (3,067,000)
Issuance of Common Stock 27,000 192,000 72,000 791,000
Treasury Stock Acquired (725,000)
----------- ----------- ------------ ------------
Net Cash From Financing Activities (3,026,000) (168,000) (3,706,000) 38,308,000
----------- ----------- ------------ ------------
Net Increase in Cash and
Cash Equivalents 6,257,000 8,702,000 15,535,000 8,850,000
Cash and Cash Equivalents,
Beginning of Period 29,667,000 19,029,000 20,389,000 18,881,000
----------- ----------- ------------ ------------
Cash and Cash Equivalents,
End of Period $35,924,000 $27,731,000 $ 35,924,000 $ 27,731,000
----------- ----------- ------------ ------------
Supplemental Disclosure of Cash Flow
Information:
Interest Paid (Net of Amounts Capitalized) $ $ 3,238,000 $ 1,650,000
----------- ----------- ------------ ------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
1. BASIS OF REPORTING
The accompanying Condensed Consolidated Financial Statements are unaudited
and do not include certain information and disclosures included in the
Annual Report on Form 10-K of American Pacific Corporation (the "Company").
The Condensed Consolidated Balance Sheet as of September 30, 1998 was
derived from the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended September 30, 1998.
Such statements should therefore be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in the
Company's Annual Report on Form 10-K for the year ended September 30, 1998.
In the opinion of Management, however, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation have been
included. The operating results and cash flows for the three-month and
nine-month periods ended June 30, 1999 are not necessarily indicative of
the results that will be achieved for the full fiscal year or for future
periods.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates used by the Company
include estimated useful lives for depreciable and amortizable assets, the
estimated valuation allowance for deferred tax assets, and estimated cash
flows in assessing the recoverability of long-lived assets. Actual results
may differ from these and other estimates.
2. NET INCOME (LOSS) PER COMMON SHARE
Basic per share amounts are computed by dividing net income (loss) by
average shares outstanding during the period. Diluted per share amounts
are computed by dividing net income (loss) by average shares outstanding
plus the dilutive effect of common share equivalents. The effect of stock
options and warrants outstanding to purchase approximately 2.9 million
shares of common stock were not included in diluted per share calculations
during the three-month and nine-month periods ended June 30, 1999 and 1998,
since the average exercise price of such options and warrants was greater
than the average price of the Company's common stock during these periods.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---------- -----------
<S> <C> <C>
Work-in-process $6,533,000 $ 8,685,000
Raw materials and supplies 2,906,000 5,045,000
---------- -----------
Total $9,439,000 $13,730,000
---------- -----------
</TABLE>
-8-
<PAGE>
4. COMMITMENTS AND CONTINGENCIES
Trace amounts of perchlorate chemicals have been found in Lake Mead. Clark
County, Nevada, where Lake Mead is situated, is the location of Kerr-McGee
Chemical Corporation's ("Kerr-McGee") ammonium perchlorate ("AP")
operations, and was the location of the Company's AP operations until May
1988. The Company is cooperating with State and local agencies, and with
Kerr-McGee and other interested firms, in the investigation and evaluation
of the source or sources of these trace amounts, possible environmental
impacts, and potential remediation methods. Until these investigations
and evaluations have reached definitive conclusions, it will not be
possible for the Company to determine the extent to which, if at all, the
Company may be called upon to contribute to or assist with future
remediation efforts, or the financial impact, if any, of such cooperation,
contributions or assistance.
5. INCOME TAXES
The Company established a valuation allowance for deferred tax assets in
the amount of $10.4 million as of September 30, 1997. At September 30,
1998, the balance of the valuation allowance was $11.0 million. The
Company's effective tax rate will be 0% until its net operating losses
expire or the Company has taxable income in an amount sufficient to
eliminate the need for the valuation allowance.
6. REAL ESTATE EQUITY INVESTMENTS
The Company's interest in Gibson Ranch Limited Liability Company ("GRLLC")
is accounted for using the equity method. GRLLC operates on a calendar
year. The Company recognizes its share of the equity in GRLLC on a current
quarterly basis. Summarized financial information for GRLLC as of and for
the three-month and nine-month periods ended June 30, 1999 was as follows:
<TABLE>
<CAPTION>
Three-Month Period Ended Nine-Month Period Ended
June 30, 1999 June 30, 1999
-------------- --------------
<S> <C> <C>
Income Statement:
Revenues $ 8,430,000 $ 31,662,000
Gross Profit 2,921,000 4,955,000
Operating Expenses 380,000 1,136,000
Net Income 2,560,000 3,906,000
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company is principally engaged in the production of AP for the aerospace and
national defense industries. In addition, the Company produces and sells sodium
azide, the primary component of a gas generant used in certain automotive airbag
safety systems, and Halotron, a chemical used in fire suppression systems
ranging from portable fire extinguishers to airport firefighting vehicles. The
perchlorate, sodium azide and Halotron facilities are located on the Company's
property in Southern Utah and the chemicals produced and sold at these
facilities collectively represent the Company's specialty chemical segment. The
Company's other lines of business include the development of real estate in
Nevada and the production of environmental protection equipment, including waste
and seawater treatment systems.
The Company believes that North American AP demand is currently approximately 20
to 25 million pounds annually. However, supply capacity has historically been
substantially in excess of these estimated demand levels. In an effort to
rationalize the economics of the AP market, the Company entered into a Purchase
Agreement with Kerr-McGee. On March 12, 1998, the Company sold $75.0 million of
unsecured senior notes (the "Notes"), consummated an acquisition (the
"Acquisition") of certain assets from Kerr-McGee and purchased and retired the
remaining $25.0 million principal amount balance outstanding of subordinated
secured notes (the "Azide Notes"). Upon consummation of the Acquisition, the
Company effectively became the sole North American producer of AP.
Sales and Operating Revenues. Sales of the Company's perchlorate chemical
- ----------------------------
products, consisting almost entirely of AP sales, accounted for approximately
65% and 63% of revenues during the nine-month periods ended June 30, 1999 and
1998, respectively. In general, demand for AP is driven by a relatively small
number of DOD and NASA contractors; as a result, any one individual AP customer
usually accounts for a significant portion of the Company's revenues.
Sodium azide sales accounted for approximately 20% and 23% of revenues during
the nine-month periods ended June 30, 1999 and 1998, respectively. In the
summer of 1998, shipments of sodium azide were negatively impacted by a labor
strike at certain General Motor's ("GM") facilities. Shipments of sodium azide
increased significantly subsequent to the settlement of the strike.
Sales of Halotron amounted to approximately 2% and 3% of revenues during the
nine-month periods ended June 30, 1999 and 1998, respectively. Halotron is
designed to replace halon-based fire suppression systems. Accordingly, demand
for Halotron depends upon a number of factors including the willingness of
consumers to switch from halon-based systems, as well as existing and potential
governmental regulations.
Real estate and related sales amounted to approximately 10% and 6% of revenues
during the nine-month periods ended June 30, 1999 and 1998, respectively. The
nature of real estate development and sales is such that the Company is unable
reliably to predict any pattern of future real estate sales or the recognition
of the equity in earnings of real estate ventures.
Environmental protection equipment sales accounted for approximately 3% and 5%
of revenues during the nine-month periods ended June 30, 1999 and 1998,
respectively. It is currently anticipated that sales of this segment will be
adversely affected in fiscal 1999 and perhaps beyond by the adverse economic
developments and conditions in the Company's foreign markets (particularly Asian
markets).
Cost of Sales. The principal elements comprising the Company's cost of sales
- --------------
are raw materials, electric power, labor, manufacturing overhead and the basis
in real estate sold. The major raw materials used by the Company in its
production processes are graphite, sodium chlorate, ammonia, hydrochloric acid,
sodium metal, and nitrous oxide. Significant increases in the cost of raw
materials may have an adverse impact on margins if the Company is unable to pass
along such increases to its customers, although all of the raw materials used in
the Company's manufacturing processes have historically been available in
commercial quantities with relatively stable pricing, and the Company has had no
difficulty obtaining necessary raw materials.
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<PAGE>
The costs of operating the Company's specialty chemical plants are, however,
largely fixed.
Income Taxes. The Company's effective income tax rates were 0% during the nine-
- ------------
month periods ended June 30, 1999 and 1998. The Company's effective income tax
rate was 0% during these periods as a result of the establishment of a $10.4
million deferred tax valuation allowance in the fourth quarter of fiscal 1997.
The Company's effective tax rate will be 0% until the Company's net operating
losses expire or the Company has taxable income in an amount sufficient to
eliminate the need for the valuation allowance.
Net Income (Loss). Although the Company's net income (loss) and diluted net
- -----------------
income (loss) per share have not been subject to seasonal fluctuations, they
have been and are expected to continue to be subject to variations from quarter
to quarter and year to year due to the following factors, among others: (i) as
discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, the
Company may incur material costs associated with certain contingencies; (ii)
timing of real estate and related sales and the equity in earnings of real
estate ventures is not predictable; (iii) the recognition of revenues from
environmental protection equipment orders not accounted for as long-term
contracts depends upon orders generated and the timing of shipment of the
equipment; (iv) weighted average common and common equivalent shares for
purposes of calculating diluted net income per share are subject to significant
fluctuations based upon changes in the market price of the Company's Common
Stock due to outstanding warrants and options; and (v) the magnitude, pricing
and timing of AP, sodium azide, Halotron, and environmental protection equipment
sales in the future is uncertain. (See "Forward Looking Statements/Risk
Factors" below.)
Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Sales and Operating Revenues. Sales increased $5.6 million, or 43%, during the
- ----------------------------
three months ended June 30, 1999, to $18.7 million from $13.1 million in the
corresponding period of the prior year. This increase was principally
attributable to increased sales of specialty chemicals and real estate. Sodium
azide sales increased approximately $0.9 million due to increased shipments.
Real estate sales increased approximately $3.7 million as a result of increased
land sales.
Cost of Sales. Cost of sales increased $3.4 million, or 38%, in the three
- -------------
months ended June 30, 1999, to $12.4 million from $9.0 million in the
corresponding period of the prior year. Such increase was principally due to an
increase in costs associated with higher real estate and sodium azide sales.
The increase in sodium azide costs was primarily attributable to increased sales
volumes.
Operating Expenses. Operating (selling, general and administrative) expenses
- ------------------
increased $0.1 million, or 4%, in the three months ended June 30, 1999, to $2.5
million from $2.4 million in the corresponding period of 1998.
Net Interest Expense. Net interest and other expense decreased to $1.3 million
- --------------------
in the three months ended June 30, 1999, from $1.5 million in the corresponding
period of the prior year as a result of the early extinguishment of
approximately $8.0 million in Notes (see below).
Nine Months Ended June 30, 1999 Compared to Nine Months Ended June 30, 1998
Sales and Operating Revenues. Sales increased $15.9 million, or 41%, during the
- ----------------------------
nine months ended June 30, 1999, to $54.4 million from $38.5 million in the
corresponding period of the prior year. This increase was principally due to
increased sales of specialty chemicals and real estate. Perchlorate chemical
sales increased approximately $11.0 million during the nine months ended June
30, 1999, principally as a result of the consummation of the Acquisition.
Cost of Sales. Cost of sales increased $8.7 million, or 33%, in the nine months
- -------------
ended June 30, 1999, to $35.0 million from $26.3 million in the corresponding
period of the prior year. The increase in cost of sales was primarily due to
increases in perchlorate and sodium azide volume and the basis in real estate
sold. As a percentage of sales, costs of sales decreased in the nine months
ended June 30, 1999 to 64% as compared to 69% in the corresponding period of the
prior year. The decrease was attributable to the
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<PAGE>
increase in perchlorate and sodium azide sales volume. Such decrease was
partially offset by the amortization of capitalized Acquisition costs beginning
April 1, 1998.
Operating Expenses. Operating expenses were $7.5 million during the nine-month
- ------------------
period ended June 30, 1999 compared to $6.8 million in the corresponding period
of the prior year. The increase in operating expenses was primarily
attributable to increased costs associated with the Company's investigation and
evaluation of perchlorate chemicals found in Lake Mead (see Note 4 of Notes to
Condensed Consolidated Financial Statements) and costs related to the Company's
strategic review process.
Net Interest Expense. Net interest and other expense increased to $4.2 million
- --------------------
in the nine months ended June 30, 1999, from $3.0 million in the corresponding
period of the prior year principally as a result of the issuance of the Notes.
Equity in Earnings of Real Estate Venture. The Company's share of equity in its
- -----------------------------------------
Ventana Canyon joint venture was $0 million and $0.3 million during the nine-
month periods ended June 30, 1999 and 1998, respectively. The joint venture has
historically operated at or near a break-even point on residential activity and
has generated net income on sales of improved land.
Segment Operating Income (Loss). Operating income (loss) of the Company's
- -------------------------------
industry segments during the nine-month periods ended June 30, 1999 and 1998 was
as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Specialty chemicals $ 9,403,000 $ 3,882,000
Environmental protection equipment (239,000) 36,000
Real Estate 3,053,000 1,155,000
-------------- --------------
Total $ 12,217,000 $ 5,073,000
============== ==============
</TABLE>
The increase in operating income in the Company's specialty chemical industry
segment was attributable to the increase in perchlorate and sodium azide sales
referred to above. The decrease in operating performance of the environmental
protection equipment segment was primarily due to decreased sales. The increase
in real estate segment operating income was attributable to increased land
sales.
Inflation
Inflation did not have a significant effect on the Company's sales and operating
revenues or costs during the three-month or nine-month periods ended June 30,
1999 or 1998. Inflation may have an effect on gross profit in the future as
certain of the Company's agreements with AP and sodium azide customers require
fixed prices, although certain of such agreements contain escalation features
that should somewhat insulate the Company from increases in costs associated
with inflation.
Liquidity and Capital Resources
In March 1998, the Company sold Notes in the principal amount of $75.0 million,
acquired certain assets from Kerr-McGee for a cash purchase price of $39.0
million and paid $28.2 million to repurchase the remaining $25.0 million
principal amount outstanding of the Azide Notes. In June 1999 and September
1998, the Company purchased and retired $3.0 million and $5.0 million,
respectively, in principal amount of Notes. The Company incurred extraordinary
losses on debt extinguishment of approximately $0.2 million on each of these
transactions principally as a result of writing off costs associated with the
issuance of the Notes.
Cash flows provided by operating activities were $17.2 million and $8.5 million
during the nine-months ended June 30, 1999 and 1998, respectively. Cash flows
from operating activities increased principally as a result of increased sales
and margins in the Company's specialty chemicals and real estate operations and
a reduction of inventory balances. The Company believes that its cash flows
from operations and existing cash balances will be adequate for the foreseeable
future to satisfy the needs of its operations. However, the resolution of
contingencies, and the timing, pricing and magnitude of orders for AP, sodium
azide and Halotron, may have an effect on the use and availability of cash.
-12-
<PAGE>
Capital expenditures were $2.5 million during the nine months ended June 30,
1999, compared to $2.1 million during the same period last year. Capital
expenditures are budgeted to amount to approximately $3.5 million in fiscal 1999
and relate principally to specialty chemical segment capital improvement
projects.
During the nine-month period ended June 30, 1999, the Company received cash of
approximately $4.6 million relating to the return of capital invested in the
Ventana Canyon joint venture. The Company currently anticipates that cash
returns of invested capital and equity in earnings will continue through the
conclusion of the project currently projected to be the end of calendar 2001.
As a result of the contingencies discussed in Note 4 of Notes to Condensed
Consolidated Financial Statements, the Company has incurred legal and other
costs, and it may incur material legal and other costs associated with the
resolution of contingencies in future periods. Any such costs, to the extent
borne by the Company and not recovered through insurance, would adversely affect
the Company's liquidity. The Company is currently unable to predict or quantify
the amount or range of such costs, if any, or the period of time over which such
costs will be incurred.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations.
The Company has completed an evaluation and is in the process of resolving the
problems that might be associated with the Year 2000 issue. The Company's Year
2000 project has four major components:
1. Evaluation of all major manufacturing and business computing systems to
determine which systems are Year 2000 compliant.
2. For each computing system found not to be Year 2000 compliant, development
of a strategy to replace, modify or upgrade the system to a Year 2000
compliant system.
3. Evaluation of core vendors for Year 2000 compliance.
4. Preparation of contingency plans.
The Company's evaluation found that the most critical digital control system,
which is used in the manufacture of specialty chemical products, is Year 2000
compliant. The Company has received a letter of certification from its vendor,
and the Company has tested the system by turning the dates forward on the
computers to the year 2000, and all systems functioned normally.
The Company's accounting system is being upgraded to a Year 2000 compliant
version. This upgrade is in process, and should be completed in the fourth
quarter of fiscal 1999. New maintenance and manufacturing (MRP) software
packages have been implemented, and each is certified and tested as Year 2000
compliant.
The majority of PC computers used by the Company are Pentium class, running
Microsoft's Windows 95 operating system, and are Year 2000 compliant. The
Company's file servers are running on Pentium computers with Microsoft NT 4.0,
and each of these is also certified Year 2000 compliant. The Company also uses
Microsoft's office suite, which is Year 2000 compliant.
During the evaluation phase of its Year 2000 project, the Company identified
certain potential issues related to many of its programmable logic controller
units used in the manufacturing process and certain of the Company's laboratory
instruments and the computers and software with which they operate. The Company
is in the process of updating the equipment that is not Year 2000 compliant and
expects this to be completed by the fourth quarter of fiscal 1999.
The Company has identified all critical vendors of raw materials, supplies and
services. Each such vendor has been contacted and asked to describe to the
Company their year 2000 readiness program. All such
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<PAGE>
critical vendors have indicated to the Company that they are or will be prepared
for the Year 2000 issue. However, the Company can provide no assurance as to the
readiness of its critical vendors for the Year 2000 issue.
Plant personnel have completed a contingency plan for plant operations that is
currently being reviewed by senior management. The Company expects to have a
complete Company contingency plan in place by the fourth quarter of fiscal 1999.
The Year 2000 issue and related risks could potentially have a material impact
on the Company's operations, working capital, results of operations and
financial condition. In a worst case situation, long delays or interruptions in
deliveries of critical raw materials, supplies or services could materially
impact the Company's ability to produce and deliver products. In addition,
problems encountered by the Company's customers could cause delays or possibly
cancellations of shipments and billings of the Company's products. The Company
is considering these risks, among others, in the preparation of its contingency
plan.
The Company recently reevaluated its estimates and assumptions of the costs
directly associated with its Year 2000 project and currently estimates that
approximately $0.5 million in costs have been incurred that are directly
associated with the project. Through June 30, 1999, the Company had incurred
approximately $0.4 million in costs that were directly related to its Year 2000
project.
Given the inherent risks for a project of this nature, the timing and costs
involved could differ materially from those anticipated by the Company. There
can be no assurance that the Year 2000 project will be completed on schedule or
within budget.
Forward-Looking Statements/Risk Factors
Certain matters discussed in this Report may be forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, but are
not limited to, the risk factors set forth below.
The following risk factors, among others, may cause the Company's operating
results and/or financial position to be adversely affected from time to time:
1. (a) Declining demand or downward pricing pressure for the
Company's products as a result of general or specific economic
conditions, (b) governmental budget decreases affecting the DOD
or NASA that would cause a decrease in demand for AP, (c) the
results achieved by the Suspension Agreement resulting from the
Company's anti-dumping petition against foreign sodium azide
producers and the possible termination of such agreement, (d)
technological advances and improvements with respect to existing
or new competitive products causing a reduction or elimination of
demand for AP, sodium azide or Halotron, (e) the ability and
desire of purchasers to change existing products or substitute
other products for the Company's products based upon perceived
quality, environmental effects and pricing, and (f) the fact that
perchlorate chemicals, sodium azide, Halotron and the Company's
environmental products have limited applications and highly
concentrated customer bases.
2. Competitive factors including, but not limited to, the Company's
limitations respecting financial resources and its ability to
compete against companies with substantially greater resources,
significant excess market supply in the sodium azide market and
the development or penetration of competing new products,
particularly in the propulsion, airbag inflation and fire
suppression businesses.
3. Underutilization of the Company's manufacturing facilities
resulting in production inefficiencies and increased costs, the
inability to recover facility costs and reductions in margins.
-14-
<PAGE>
4. Risks associated with the Company's real estate activities,
including, but not limited to, dependence upon the Las Vegas
commercial, industrial and residential real estate markets,
changes in general or local economic conditions, interest rate
fluctuations affecting the availability and cost of financing,
the performance of the managing partner of its residential real
estate joint venture (GRLLC) and regulatory and environmental
matters that may have a negative impact on sales or costs.
5. The effects of, and changes in, trade, monetary and fiscal
policies, laws and regulations and other activities of
governments, agencies or similar organizations, including, but
not limited to, environmental, safety and transportation issues.
6. The cost and effects of legal and administrative proceedings,
settlements and investigations, particularly those investigations
described in Note 4 of Notes to Condensed Consolidated Financial
Statements and claims made by or against the Company relative to
patents or property rights.
7. Integration of new customers and the ability to meet additional
production and delivery requirements resulting from the
Acquisition.
8. The effects, if any, of problems associated with the Year 2000
issue.
9. The results of the Company's periodic review of impairment issues
under the provisions of SFAS No. 121.
10. The dependence upon a single facility for the production of most
of the Company's products.
-15-
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
(John R. Gibson)
This Employment Agreement (the "Agreement") is made and entered into this
11th day of May, 1999, by and between American Pacific Corporation, a Delaware
corporation having its principal place of business at 3770 Howard Hughes
Parkway, Suite 300, Las Vegas, Nevada 89109 (the "Company"), and John R. Gibson,
an individual residing in Clark County, Nevada (the "Executive").
RECITALS:
A. The Company, through its subsidiary corporations, is engaged in the
manufacture of specialty chemicals, including perchlorate chemicals, sodium
azide and Halotron(TM) fire suppression agents, and is engaged in the design
and manufacture of environmental protection products and real estate
development.
B. The Executive is serving as a President and Chief Executive Officer
of the Company since July 16, 1997, and as Chairman since March 12, 1998. The
Company desires to enter into this Agreement with the Executive in order to
assure the Company of the continued service of the Executive.
C. The Executive is willing to continue to provide services to the
Company, upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the promises and agreements herein
contained, and intending to be legally bound, the Company and the Executive
agree as follows:
1. Employment. The Company shall employ and retain the Executive as an
-----------
Executive, and the Executive agrees to work for the Company and to provide
services to the Company, for a term commencing on the Effective Date of this
Agreement, and continuing thereafter throughout the period or periods of time
provided in this Agreement, unless sooner terminated in accordance with the
provisions hereof.
2. Duties of Employment. As the Chairman, President and Chief Executive
--------------------
Officer of the Corporation, the Executive is to have generally the following
responsibilities and those related thereto:
The responsibility provided for in the By-Laws of the Corporation and the
responsibilities generally of the Chairman, President and Chief Executive
Officer of a publicly held corporation, including such responsibilities
as may be designated by the Board of Directors of the Corporation.
3. Full-Time Employment. The Executive agrees to devote substantially
--------------------
all of his full working time to the discharge of his duties as an employee of
the Company. Without
-1-
<PAGE>
limitation, the Executive shall not act in any advisory or other capacity for
any individual, firm, association or corporation other than the Company and its
subsidiary corporations in matters in any way pertaining to any business or
undertaking in any way similar to or competitive with the business or activities
of the Company and its subsidiary corporations.
4. Term of Employment. The Executive's employment commenced on February
-------------------
1, 1992, and has continued through the Effective Date of this Agreement. For
purposes of this Agreement, the term of the Executive's employment shall be
deemed to commence on February 1, 1992, and to continue throughout the term of
this Agreement. The initial term of this Agreement shall commence on the
Effective Date hereof, and, unless sooner terminated in accordance with the
provisions hereof shall continue thereafter for a period of three (3) years;
provided that the term of the Executive's employment shall be extended
automatically and without any action by the parties for one additional year on
each one-year anniversary of the Effective Date hereof, to and including the
year in which the Executive attains age seventy (70), unless either the Company
or the Executive shall, on or before the anniversary of the Effective Date
hereof, notify the other party of such party's intention to terminate this
Agreement on the expiration date hereof then in effect. The period of time
between February 1, 1992 and the expiration date or other termination of this
Agreement is hereinafter referred to as the "Term of Employment" or the "Term of
the Executive's Employment."
5. Duration of Agreement; Term of Employment. The Term of Employment
-----------------------------------------
of the Executive hereunder shall end upon the first to occur of the following
circumstances:
(a) The expiration of the Term of Employment pursuant to timely notice
given in accordance with Section 4, above;
(b) The death or total and permanent disability of the Executive;
(c) The Company's election to terminate the Executive's employment due to
the material breach by the Executive of any of the Executive's covenants under
this Agreement, including, but not limited to, those covenants set forth in
Sections 9 through 12 hereof; or
(d) The Company's election to terminate the Executive's employment for
"Cause." For purposes of this Agreement, "Cause" shall include, but shall not
be limited to, dishonesty, negligence, fraud, embezzlement, habitual insobriety,
conviction of a crime involving moral turpitude, willful destruction or
misappropriation of Company property, entry of an order by the Securities and
Exchange Commission or any state securities agency or regulatory body finding
the Executive guilty of negligence or misconduct under federal or state
securities laws, or willful commission of an act materially injurious to the
Company's business, or the Executive's failure to perform his responsibilities
in a competent, professional manner, as determined by the Company's Board of
Directors in the exercise of its reasonable discretion.
(e) The resignation of the Executive.
-2-
<PAGE>
Upon the occurrence of any of the events set forth in this Section 5, the
Executive shall be entitled to receive all compensation accrued hereunder to the
date of the termination, but shall not be entitled to any additional
compensation or benefits hereunder.
6. Termination of Agreement Upon Corporate Capital Transactions. In the
------------------------------------------------------------
event that the Company, its stockholders, or both, enter into a written
agreement to dispose of all or substantially all of the assets or stock of the
Company by means of a sale, merger, consolidation, reorganization, liquidation
or similar transaction (other than a reorganization, merger or consolidation
effected solely to change the Company's name or state of incorporation), then
unless the Executive accepts such transaction in writing, the Executive shall,
upon consummation of the transaction, be entitled to receive all compensation
that would be payable hereunder through and including the expiration date of
this Agreement then in effect. In the event that the Company's agreement to
enter into any such transaction is terminated before such transaction is
consummated, the status of this Agreement and the Executive's rights hereunder,
including the Executive's rights to compensation, shall be determined as if the
Company and its stockholders had not entered into the agreement to undertake the
transaction.
7. Compensation and Benefits.
--------------------------
(a) In consideration of the services to be provided by the Executive
pursuant to this Agreement, the Company shall pay to the Executive, at monthly
or more frequent intervals, an annual salary equal to the annual salary being
paid to the Executive on the Effective Date of this Agreement.
(b) The Company (or the employing subsidiary corporation) shall review
the above salary on or about June 1 of each calendar year, and may make any
increases it may deem appropriate. Any increases shall be made effective as
soon as may be practicable following each review.
(c) In addition to the salary referred to above, the Company (or the
employing subsidiary corporation) shall provide to the Executive such
supplemental benefits as the Company may from time to time provide to its
regular full-time employees having positions, salaries, capacities and lengths
of service with the Company comparable to the Executive's position, salary,
capacity and length of service with the Company.
8. Place for Performance of Services. The Executive shall perform his
---------------------------------
duties hereunder at such Company or subsidiary corporation office locations or
customer facilities as the Company may from time to time designate.
9. Noncompetition.
--------------
(a) The Executive shall not at any time during the Term of the
Executive's Employment with the Company or for a period of two years after the
termination of the Executive's Term of Employment render any services, directly
or indirectly for any Competitor.
-3-
<PAGE>
(b) The Executive shall not, at any time during the Term of the
Executive's Employment with the Company or for a period of two years after the
termination of the Executive's Term of Employment with the Company, influence or
attempt to influence, either directly or indirectly, any employee of the Company
or of any affiliated entity to leave or terminate such individual's employment
with the Company or with an affiliate of the Company.
(c) The Executive shall not, at any time during the Term of the
Executive's Employment with the Company or for a period of two years after the
termination of the Executive's Term of Employment with the Company, influence or
attempt to influence, either directly or indirectly, any customer or client of
the Company or of any affiliated entity to discontinue purchasing or using the
products or services of, or to cancel or fail to renew a contract with, the
Company or an affiliate of the Company.
(d) For purposes of this Agreement, the term "Competitor" shall mean
any individual (including the Executive) or entity that at any time is directly
or indirectly (for example, through an affiliated or controlled individual or
entity) engaged in or about to engage in the manufacture of perchlorate
chemicals, sodium azide, fire suppression agents competitive with Halotron fire
suppression agents, or environmental protection products competitive with those
designed or manufactured by the Company and its subsidiaries.
(e) The Executive agrees and acknowledges that the breach by the
Executive of any of the provisions of this Section will cause Company
irreparable damage, that the remedy at law for any such breach could be
inadequate, and that the Company, in addition to any other relief available to
it, shall be entitled to appropriate temporary and permanent injunctive relief
restraining Executive from committing or continuing such breach, without the
necessity of proving actual damages. The Executive agrees to pay all costs and
attorneys' fees incurred by the Company in obtaining such injunctive or other
relief.
10. Confidential Information.
------------------------
(a) The Executive shall never, either during the Term of the
Executive's Employment by the Company or thereafter, use or employ for any
purpose or disclose to any other individual or entity any Confidential
Information. The Executive acknowledges and agrees that all Confidential
Information is proprietary to the Company, is extremely important to the
Company's business, and that the use by or disclosure of such Confidential
Information to a Competitor could materially and adversely affect the Company,
its business and its customers.
(b) Upon any termination of the Executive's employment with the
Company, the Executive shall leave with or return immediately to the Company any
and all records and any and all compositions, articles, devices and other
similar or related items that disclose or contain any Confidential Information,
including all copies or specimens thereof, whether in the Executive's possession
or under the Executive's control, or whether prepared by the Executive or by
others.
-4-
<PAGE>
(c) For purposes of this Agreement, the term "Company" shall refer to
the Company and each of its subsidiary corporations, and any other corporation
or entity that is owned or controlled, directly or indirectly, by Company or
that is under common ownership or control with the Company.
(d) For purposes of this Agreement, the term "Confidential Information"
shall mean information in any form that is not generally known to the public
that relates to the Company's past, present or future operations, processes,
products or services, or to any research, development, manufacture, purchasing,
accounting, engineering, marketing, merchandising, advertising, selling,
leasing, financing or business methods or techniques (including without
limitation customer lists, records of customer services, usages and
requirements, sketches and diagrams of Company or customer facilities and like
and similar information relating to actual or prospective customers) that is or
may be related thereto. All information disclosed to the Executive or to which
the Executive obtains access during any Term of the Executive's Employment with
the Company, whether pursuant to this Agreement or otherwise, or to which the
Executive obtains access by reason of his employment by the Company, that the
Executive has a reasonable basis to believe is or may be Confidential
Information, shall be presumed for purposes of this Agreement to be Confidential
Information.
11. Subsequent Employment. For a period of five years after any
---------------------
termination of the Executive's employment with the Company, the Executive will
keep the Company advised in writing of the name and address of each of the
Executive's employers, will provide each employer with a copy of this Agreement,
and will provide the Company with evidence of the Executive's compliance with
the provision of this Section.
12. Inventions.
----------
(a) Immediately upon its discovery or completion, the Executive shall
promptly and fully disclose each Invention in writing to the Company. The
Executive shall make this disclosure regardless of whether an Invention is
discovered, conceived or completed by the Executive alone or jointly with
others, and regardless of whether or not the Invention is discovered, conceived
or completed in furtherance of the Executive's duties in the service of the
Company, whether pursuant to this Agreement or otherwise, and regardless of
whether or not the Invention was discovered, conceived or completed during
normal working hours or on the premises of Company.
(b) The Executive hereby assigns, and agrees to assign, to the Company
all of the Executive's rights in and to all Inventions and in and to any and all
letters patent or copyrights or applications therefor at any time granted or
made, whether in the United States of America or in any foreign nation, upon or
with respect to any Invention.
(c) The Executive shall from time to time execute, acknowledge and
deliver promptly to the Company (without charge to the Company but at the
expense of the Company) such written instruments and documents, and shall take
such other and further action with respect to any Invention, as may be necessary
or desirable in order to enable the Company to obtain and
-5-
<PAGE>
maintain patents and/or copyrights therein, or to vest the entire right title
and interest thereto in the Company.
(d) The Executive shall not assert any rights under any Inventions as
having been made or acquired by the Executive prior to the commencement of the
Executive's employment with the Company.
(e) For purposes of this Agreement, the term "Inventions" means
discoveries, developments, improvements and ideas (whether or not shown or
described in writing or reduced to practice) and works of authorship (including
computer software), whether or not patentable or copyrightable, (i) that are or
may be related to the manufacture of perchlorate chemicals, sodium azide, fire
suppression agents competitive with Halotron(TM) fire suppression agents, or
environmental protection products competitive with those designed or
manufactured by the Company and its subsidiaries, or to any research,
development, manufacture, purchasing, accounting, engineering, marketing,
merchandising, advertising, selling, leasing, financing or business methods or
techniques or any improvements to any of the foregoing; (ii) that relate to the
Company's actual or demonstrably anticipated research or development with
respect to any of the foregoing; (iii) that result from any services at any time
performed by the Executive for the Company, whether pursuant to this Agreement
or otherwise; (iv) for which equipment, supplies, facilities or trade secret
information of the Company is used; or (v) that are developed on any Company
time with respect to any activity referred to above.
13. Survival. The Executive's obligations set forth in Sections 9
--------
through 12 hereof shall survive the expiration or other termination of this
Agreement.
14. Effective Date. If this Agreement is approved by resolution of
--------------
the Company's Board of Directors before May 31, 1999, the Effective Date hereof
shall be May 1, 1999. Otherwise, the Effective Date hereof shall be the date as
of which the Company's Board of Directors approves the execution of this
Agreement by the Company.
15. Notices. Any notice permitted or required to be given pursuant to
--------
this Agreement shall deemed to have been given when appropriate notice thereof
has been be validly given or served in writing and delivered personally or sent
by registered or certified mail, postage prepaid, to the following address:
If to the Company or to any: American Pacific Corporation
subsidiary corporation 3770 Howard Hughes Parkway, Suite 300
Las Vegas, NV 89109
If to the Executive, to: The Executive's address as set forth
on the signature page to this Agreement
or to such other addresses as either party may hereafter designate to the other
in writing.
-6-
<PAGE>
16. Governing Law. This Agreement is made and entered into, and is
--------------
executed and delivered, in Clark County, Nevada, and shall be construed and
enforced in accordance with and shall be governed by the laws of the State of
Nevada.
17. Entire Understanding. This Agreement constitutes the entire
---------------------
understanding and agreement between the Company and the Executive with regard to
all matters herein, and there are no other agreements, conditions, or
representations, oral or written, expressed or implied, with regard thereto
other than as referred to herein. This Agreement may be amended only in
writing, signed by both parties hereto.
18. Severability. If any term or provision of this Agreement shall be
-------------
held to be invalid or unenforceable for any reason, such term or provision shall
be ineffective to the extent of such invalidity or unenforceability without
invalidating the remaining terms and provisions hereof, and this Agreement shall
be construed as if such invalid or unenforceable term or provision has not been
contained herein.
19. Successors. This Agreement shall be binding upon and inure to the
-----------
benefit of the parties hereto and their respective heirs, administrators,
executors, and successors. Neither party may assign any of its rights
hereunder, except that the Company and any subsidiary corporation may assign its
rights hereunder to the Company or to any subsidiary corporation.
20. Consent to Jurisdiction. The Executive agrees that any action or
-----------------------
proceeding to enforce, or that arises out of, this Agreement may be commenced
and maintained in the district courts of the State of Nevada, or in the United
States District Court for the District of Nevada, and Executive hereby waives
any objection to the jurisdiction of said courts in any litigation arising
hereunder on the basis that such court is an inconvenient forum or otherwise.
21. Attorneys' Fees. In the event that this Agreement is breached by
----------------
either party, the breaching party shall be liable for all costs and attorneys'
fees incurred by the non-breaching party as a result of the breach or in
enforcing the terms of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"Company"
AMERICAN PACIFIC CORPORATION, a Delaware
corporation
By /s/ David N. Keys
--------------------
Title EVP-CFO
-----------------
-7-
<PAGE>
"Executive"
/s/ John R. Gibson
------------------
John R. Gibson
Address:
7409 Doe Avenue
Las Vegas, Nevada 89117
-8-
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