<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-K

             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
                         COMMISSION FILE NUMBER 1-8137

                          AMERICAN PACIFIC CORPORATION
             (Exact name of registrant as specified in its charter)

              DELAWARE                                   59-6490478
     (State or other jurisdiction                      (IRS Employer
         of incorporation)                           Identification No.)

     3770 HOWARD HUGHES PARKWAY, SUITE 300,
     LAS VEGAS, NEVADA                                     89109
     (Address of principal executive office)               (Zip Code)

                                (702) 735-2200
              (Registrant's telephone number, including area code)

       Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.10
                                   par value)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

               YES   X                          NO 
                   -----                           -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.  [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 1, 1996, was approximately $52,622,000.  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, 1996 was 8,103,037.

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                      DOCUMENTS INCORPORATED BY REFERENCE

     Definitive Proxy Statement for 1997 Annual Meeting of Stockholders to be
filed not later than January 28, 1997 (Part III hereof).

     S-14 Registration Statement (2-70830); S-8 Registration Statement (33-
30321); Definitive Proxy Statement dated January 27, 1989; Annual Reports on
Forms 10-K for the years ended September 30, 1995, 1994, 1993, 1990, 1989 and
1988; S-2 Registration Statement (33-36664); Quarterly Reports on Form 10-Q for
the fiscal quarters ended March 31, 1994 and December 31, 1990; S-8 Registration
Statement (33-52898); S-3 Registration Statement (33-52196) and Current Report
on Form 8-K dated February 28, 1992; (all incorporated by reference in Part IV
hereof).

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                                     PART 1

ITEM 1. BUSINESS
----------------

     The Company, through its indirect subsidiary, Western Electrochemical
Company ("WECCO"), is engaged in the production of a specialty chemical,
ammonium perchlorate ("AP"), for the aerospace and national defense industries.
The Company is one of two domestic manufacturers of AP, which is used primarily
as an oxidizing agent in composite solid propellants for rockets, booster motors
and missiles. The Company's customers for AP are primarily contractors in
programs of the National Aeronautics and Space Administration ("NASA") and the
Department of Defense ("DOD"), and companies providing commercial satellite
launch services. These NASA and DOD contractors are engaged in space exploration
projects such as the Space Shuttle Program and in the production of defense
systems. Other customers for the Company's AP include aerospace and defense
agencies of foreign countries.

     In May 1994, the Company and its principal customer, Thiokol Corporation
("Thiokol"), executed an amendment ("the Amendment") to the 1989 Advance
Agreement. The 1989 Advance Agreement represents one of certain agreements
(collectively the "NASA/Thiokol Agreements") related to the sale of AP, which
agreements are described herein. The Company and Thiokol previously had a
dispute over the interpretation of these agreements. See Item 3. Legal
Proceedings and Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. As a result of a significant change in the
demand for AP, during the fiscal year ended September 30, 1994, the Company
recognized an impairment charge of $39,401,000 related to WECCOs fixed assets.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 11 of Notes to Consolidated Financial Statements.

     The Company is a party to agreements with Dynamit Nobel A.G., of Germany
("Dynamit Nobel") relating to the production and sale of sodium azide, the
principal component of 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.  See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.  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. See Note 14 of Notes to
Consolidated Financial Statements.

     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.  See Item 7.  Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 15 of Notes to Consolidated
Financial Statements.

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     The Company is also engaged in the development of real estate and in the
production of environmental protection and waste water treatment equipment.

     On May 4, 1988, the manufacturing and office facilities of the Company and
its subsidiaries were destroyed by a series of massive explosions and associated
fires (the "May 1988 Incident").  The May 1988 Incident resulted in the
institution of litigation against the Company and others alleging responsibility
for property damage and physical injury.  In September 1992, the Company settled
all claims arising out of the May 1988 Incident.  The total contribution to the
global settlement by the Company and its liability insurer was approximately
$15,600,000.  The liability insurer, with whom the Company had previously been
involved in a dispute as to the extent of coverage, paid the sum of $7,500,000
toward the settlement, and the Company paid approximately $8,100,000 in cash.
As a result of the cash settlement, the Company recognized a one-time pre-tax
charge to earnings in the amount of approximately $8,100,000 in its fourth
quarter ended September 30, 1992.

     In June 1993, three shareholder class action lawsuits, which have since
been consolidated, were filed in the United States District Court for the
District of Nevada against the Company and certain of its directors and
officers.  The complaints alleged that the Company's public statements violated
federal securities laws by inadequately disclosing certain information. On
November 27, 1995, the U.S. District Court granted in part the Company's motion
for summary judgment, ruling that the Company and its officers and directors had
not violated the federal securities laws in relation to disclosures concerning
the Company's long-term agreements for the sale of AP. The remaining claims,
which related to allegedly misleading or inadequate disclosures regarding
Halotron, were the subject of a jury trial that began in December 1995 and ended
on January 17, 1996. The jury reached a unanimous verdict that neither the
Company nor its directors and officers made misleading or inadequate statements
regarding Halotron. The plaintiffs have appealed the summary judgment ruling and
portions of the trial proceedings to the Ninth Circuit of the United States
District Court of Appeals. See Note 10 of Notes to Consolidated Financial
Statements.

     See Note 13 of Notes to Consolidated Financial Statements (pages 60 through
62 herein) for information concerning revenues, operating profits and
identifiable assets of the Company's industry segments and for financial
information about domestic operations and export sales.  The Company's
perchlorate chemical operations accounted for approximately 51%, 75% and 86% of
revenues during the years ended September 30, 1996, 1995 and 1994, respectively.
There were no significant sales of Halotron during these periods.  The term
Company used herein includes, where the context requires, one or more of the
direct and indirect subsidiaries of American Pacific Corporation.

SPECIALTY CHEMICALS

STRATEGY

     The Company's strategy is to maintain its status as one of two producers of
AP and to apply the technology and expertise gained over 30 years in the
production of AP to other activities, such as sodium azide and Halotron,
perchlorate chemicals other than AP, and additional specialty chemical business
opportunities, and to its environmental protection equipment business.  In view
of the decline in demand for AP as a consequence of declining national defense
needs and related budgetary constraints (see Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations), the Company's
strategy has been to use proven technologies and target growing markets to
produce and sell specialty chemicals for which there is perceived demand.  Where
feasible, the Company may endeavor to gain access 

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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. Most 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 upon AP.  A
significant number of the rockets and missiles used in national defense programs
are also powered by solid fuel.

     The Company has supplied AP for use in space exploration programs for
nearly 30 years, beginning with the Titan program in the early 1960s.  Today,
its principal space exploration customer is the Space Shuttle Program, for which
the Company supplies approximately one-half to substantially all of Program AP
requirements.  The Company's AP is also used in expendable rockets that launch
satellites for communications, navigation, intelligence gathering, space
exploration, weather forecasting and environmental monitoring.  The Company is a
qualified supplier of AP to a number of defense programs, including the Navy
Standard Missile, Patriot, and Multiple Launch Rocket System programs.

     See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations for additional information respecting the Company's
assessment of the AP market.

CUSTOMERS

     Prospective purchasers of AP consist principally of contractors in programs
of the DOD and NASA.  As a practical matter, the specialized nature of these
contractors' activities restricts entry by others into competition with them.
As a result, there are relatively few potential customers for AP, and individual
customers for AP typically account for a significant portion of the revenues of
AP manufacturers.  Prospective customers also include companies providing
commercial satellite launch services and agencies of foreign governments and
their contractors, although sales to foreign agencies and their contractors are
not expected to account for significant percentages of AP sales.  (See
Competition.)

     Thiokol Corporation - Space Operations accounted for 47%, 71% and 71% of
the Company's revenues during the fiscal years ended September 30, 1996, 1995
and 1994, respectively.  Substantially all of the revenues from AP production at
the WECCO facility have been derived from and in accordance with the
NASA/Thiokol Agreements.  (See NASA/Thiokol Agreements for information about the
identity of prospective purchasers of AP produced by WECCO.)  Atlantic Research
Corporation accounted for 11% of the Company's revenues during the fiscal year
ended September 30, 1994.

NASA/THIOKOL AGREEMENTS

     Following the May 1988 Incident, NASA issued Determinations and Findings
that included a determination that it was essential to planned space exploration
and to national security that the lost AP production capacity be replaced as
quickly as possible and that a reliable supply of AP again be available from two
domestic manufacturers.  The NASA/Thiokol Agreements implemented this
determination by 

                                       5
<PAGE>
 
providing for purchases of AP from WECCO to assure revenues in respect of sales
of not less than 140,000,000 pounds over a period of seven years commencing with
initial production. Under the NASA/Thiokol Agreements, which included an Advance
Agreement and a Surcharge Agreement, each dated as of March 3, 1989, WECCO
agreed to cause the construction of a facility capable of producing 30,000,000
pounds (expandable to 40,000,000 pounds) of AP annually. Most of the facility
cost (including loan fees and associated costs) in the aggregate amount of
$92,000,000 was borrowed by WECCO under a credit facility (the "WECCO loan")
(see AP Plant Financing) and was amortized under the NASA/Thiokol Agreements
through collection and application of a surcharge on all sales of AP by WECCO.
In this connection, Thiokol obligated itself, subject to the contingency
described below, to purchases of AP, which when aggregated with purchases of AP
made by others, would assure revenues in respect of sales of 5,000,000 pounds of
AP quarterly, 20,000,000 pounds annually and 140,000,000 pounds over the term of
the agreements. Under the Surcharge Agreement, the price of AP sold by WECCO was
adjusted at least quarterly, by way of a surcharge determined with reference to
costs incurred under the plant financing and periodically as required with
reference to costs of manufacture. The surcharge was intended to be sufficient
to amortize costs of the plant financing over a period of not more than seven
years. In addition to the surcharge, the NASA/Thiokol Agreements provided that
the selling price of AP was to cover all of the costs of production of AP and to
return a profit to WECCO. NASA/Thiokol agreed to provide funds to eliminate any
deficiency in the cash collateral account that was maintained under the plant
financing to assure timely debt servicing and to cover any costs of the facility
exceeding the amount of the plant financing.

     By memorandum of agreement, NASA and the DOD allocated between them, to the
extent of 45% of AP orders in the case of NASA and 55% of AP orders in the case
of the DOD, the responsibility for causing their respective contractors to place
orders for AP manufactured by WECCO in respect of revenues in the aggregate
amount of 140,000,000 pounds over a period of seven years.

     On May 10, 1994, WECCO and Thiokol finalized and signed the Amendment.  The
Amendment fully resolved all issues between Thiokol and WECCO relating to the
interpretation and application of the NASA/Thiokol agreements.  Under and
because of the resolution of its dispute with Thiokol completed by the
Amendment, on May 10, 1994, WECCO exercised the contractual right reserved
solely to it in the WECCO loan agreement to direct that the funds in the cash
collateral account and default account be used to repay the WECCO loan.  Upon
early repayment in full of the WECCO loan, the Amendment provided for the
termination as fulfilled of the Surcharge Agreement and termination of certain
other agreements relating to the repayment of advances (the Working Capital
Agreement and the Repayment Plan).

     The Amendment confirmed that the 1989 Advance Agreement had a continuous
term commencing with the first production of AP at the WECCO plant in August
1989 and ending September 30, 1996, (approximately two months subsequent to the
estimated original term of the Advance Agreement).  The Amendment provided for
WECCO to receive revenues from sales of AP of approximately $33 million, $28
million and $20 million during the fiscal years ending September 30, 1994, 1995
and 1996, respectively, excluding surcharge revenues received in 1994.  The
Amendment expired on September 30, 1996.

     Prior to the effective date of the Amendment, WECCO was indebted to Thiokol
for approximately $10,208,000 under the Working Capital Agreement and Repayment
Plan.  Under the terms of the Amendment, WECCO paid $750,000 of this amount
ratably as deliveries of AP were made over the remainder of the fiscal year
ended September 30, 1994.  The remaining obligation under the Working Capital
Agreement and Repayment Plan has partially been and will continue to be repaid
by WECCO through delivery of AP.

                                       6
<PAGE>
 
     Thiokol's obligations under the Advance Agreement, as amended, were
contingent upon adequate funding by NASA.  NASA and DOD have agreed to reimburse
Thiokol and all other contractors for all amounts paid by them to purchase AP
for which they are not otherwise reimbursed.  The funding obligation of NASA was
subject only to the adequacy of Congressional appropriations to NASA's overall
budget.

BACKLOG

     In September 1996, WECCO executed a purchase order for deliveries of AP to
Thiokol during the fiscal year ending September 30, 1997.  The purchase order
amounts to approximately $13.3 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.  This
contract includes options that could increase the order during the 1997-1999
period, and that could extend the contract to the year 2000.  As a result of the
above purchase orders, the Company has a backlog of approximately $17.5 million
for deliveries of AP in fiscal 1997.  Based upon this backlog and negotiations
currently in process, the Company estimates total perchlorate revenues,
including sodium perchlorate and potassium perchlorate, will range between $19
and $24 million during the fiscal year ended September 30, 1997.

AP PLANT FINANCING

     To finance construction of its AP facility, WECCO entered into a Loan
Agreement dated as of March 3, 1989, (the "Loan Agreement") with a bank
("Seafirst Bank"), under which WECCO borrowed $92,000,000. Such principal
balance was payable quarterly over a seven-year term commencing June 1, 1990,
together with interest at an annual rate of 13 1/2% (after giving effect to an
interest rate swap agreement). The terms of the Loan Agreement provided for
amortization in full over the seven-year loan term, although the Company
expected that the loan would be fully paid sooner. (See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.) The
WECCO loan was secured by liens on and security interests in all of the present
and future assets of WECCO, whether tangible or intangible, real or personal.
The WECCO loan was further secured by a pledge to Seafirst Bank by the parent
company of WECCO of all of the outstanding stock of WECCO. The NASA/Thiokol
Agreements were intended to ensure, through the commitments of Thiokol and NASA
and by imposition of the surcharge, the repayment of all obligations of WECCO
under the Loan Agreement. (See NASA/Thiokol Agreements.)

     The WECCO loan was prepaid on May 10, 1994.  See Notes 6 and 9 of Notes to
Consolidated Financial Statements and Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.

MANUFACTURING CAPACITY AND PROCESS

     The WECCO facility, as it currently exists, is capable of producing
30,000,000 pounds of AP annually.  The facility is expandable to enable
production of up to 40,000,000 pounds annually.  Production of AP commenced
there in July 1989.  In satisfaction of the sole condition to the NASA/Thiokol
purchase commitments in respect of revenues for a total of 140,000,000 pounds of
AP, on August 7, 1989 Thiokol completed testing of sample AP produced by WECCO
and certified that all of the properties of such AP fell within the limits of
the Space Shuttle AP specifications.  AP produced at the facility and
propellants incorporating such AP have qualified for use in all NASA and DOD
programs for which testing has been conducted.  Since the qualification process
was completed, AP produced at the WECCO facility 

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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.

     WECCO's AP facility is designed to site particular components of the
manufacturing process in discrete areas of the facility.  It incorporates modern
equipment and materials handling systems designed, constructed and operated in
accordance with the operating and safety requirements of WECCO's customers,
insurance carriers and governmental authorities.  Equipment required in the
manufacturing process includes storage tanks for use at various stages,
electrolytic cells, glass-lined reactor vessels, crystallizer vessels, dryers
and blenders.

     AP is manufactured by electrochemical processes using the Company's
proprietary technology.  The principal raw materials used in the manufacture of
AP (other than electrical energy) are salt, ammonia and hydrochloric acid.  All
of the raw materials used in the AP manufacturing process are available in
commercial quantities and the Company has had no difficulty in obtaining
necessary raw materials.  The Company is a party to an agreement with Utah Power
& Light Company for its electrical requirements at the WECCO facility.  Prices
paid by WECCO for raw materials have been relatively stable, with no discernible
long-term price fluctuations.  WECCO's agreement with Utah Power and Light
provides for the supply of power for a minimum ten-year period, which began in
1988, and obligates WECCO to purchase minimum amounts of power, while assuring
WECCO competitive pricing for its electricity needs for the duration of the
agreement.  WECCO's AP production requires substantial amounts of electric
power.

     The AP manufacturing process is basically non-patentable.  Certain of its
aspects are proprietary to the Company and knowledge of these aspects is
confined to a small number of personnel upon whose expertise the Company is
dependent.  The Company has entered into appropriate agreements with such
personnel mandating non-disclosure and prohibiting competition with the Company,
but there can be no assurance that such provisions will be enforceable in all
events.

     In addition to the manufacture of perchlorate chemicals, the Company's
business includes the design of, and the furnishing of technology and equipment
for, electrochemical plants.  The Company has previously provided such services
and materials to two foreign plants and may provide these services and materials
to others in the future, although the Company is not presently a party to
arrangements to provide such services.

COMPETITION

     Kerr McGee Chemical Corporation ("Kerr-McGee") is the only other
manufacturer of AP in the United States, and currently claims an annual capacity
of approximately 36,000,000 pounds. Kerr-McGee has in the past produced more AP
than the Company and has substantially greater financial resources. The pricing
and procurement practices of the principal AP customers that have been in effect
for over 10 years have thus far been formulated to support more than one United
States producer of AP. There is no assurance that this U.S. government-derived
dual source policy will continue. These practices result in a negotiated price
for the bulk of the Company's product based on settled margins above fully
allocated costs. As described above, the Advance Agreement, as amended,
effectively assured the Company a minimum level of revenues from the AP market
over a period of about seven years, beginning in August, 1989 and ending in
September, 1996. The Company maintains close communication with its principal
customers and with the relevant governmental agencies for the purpose, among
other things, of enabling management to assess, on a continuing basis, future
product demand and customer satisfaction and to maintain the Company's market
share.

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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 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.  Although the facility has not operated at design
capacity, the Company believes such capacity can be achieved.  There can be no
assurance in that regard, however, and as a consequence the Company cannot
predict over what period of time, if at all, its sodium azide plant will operate
at levels consistent with the above expectations.

     Dynamit Nobel is an established German firm engaged in the manufacture of
explosives and detonators, specialty chemicals, defense technologies,
ammunition, plastics and composites.  It is the developer of the sodium metal-
based process used in the manufacture of sodium azide, and has successfully
utilized the process on a commercial basis for over 80 years, although on a much
smaller scale than as practiced by the Company.

FINANCING

     On February 21, 1992, the Company concluded a $40,000,000 financing for the
design, construction and startup of the sodium azide facility through the sale
of noncallable subordinated secured notes (the "Azide Notes").  The funds were
provided by a major state public retirement fund and an investment management
company.  The Azide Notes provide for the semi-annual payment in arrears of
interest at the rate of 11% per annum.  Principal is to be amortized to the
extent of $5,000,000 on each of the fourth through ninth anniversary dates of
funding, with the remaining $10,000,000 principal amount to be repaid on the
tenth anniversary date.  The Azide Notes are secured by the fixed assets and
stock of AAC, the stock of the Company's principal real estate development
subsidiary, as well as by a deed of trust on certain land in Clark County,
Nevada being developed by the Company (see Notes 5 and 6 of Notes to
Consolidated Financial Statements). The Company issued Warrants ("the Warrants")
to the purchasers of the Azide Notes, which are exercisable for a 10-year period
on or after December 31, 1993, to purchase shares of the Company's Common Stock.
The exercise price of the Warrants is $14.00 per share. At a $14.00 per share
exercise price, 2,857,000 shares could be purchased under the Warrants. The
Warrants contain additional provisions for a reduction in exercise price in the
event that the Company issues or is deemed to issue stock, rights to stock or
convertible debt at a price less than the exercise price in effect, or in the
event of certain stock dividends or in the event of stock splits, mergers or
similar transactions. The terms of the Warrants permit their exercise by
delivery to the Company for cancellation of a principal amount of the Azide
Notes equivalent to the exercise price of the Warrants being exercised. The
Warrants are exercisable, at the option of their holders, to purchase up to 20%
of the Common Stock of AAC, rather than the Company's Common Stock. In the event
of such an election, the exercise price of the Warrants will be based upon a pro
rata share of AAC's capital, adjusted for earnings and losses, plus interest
from the date of contribution.

                                       9
<PAGE>
 
     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.

     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 on one occasion, as well as certain incidental registration
rights.

MARKET

     A number of firms have devoted extensive efforts for at least 20 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 to date 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, such as the
hybrid or heated-gas inflator, have recently been developed and appear to be
achieving some level of market acceptance. (See Competition).

     The Company expects demand for airbag systems in North America and
worldwide, to increase significantly over the next 10 years.  Changes in the
level of demand for sodium azide will depend in part, upon the penetration, if
any, of competing inflator technologies that are not based upon the use of
sodium azide.

     The Company believes that the primary factor now affecting demand for
airbag systems is consumer preference rather than governmental and regulatory
requirements.  Automobile manufacturers have responded by announcing plans for
general airbag system use in all passenger vehicles, and in light trucks and
vans.

     The amount of sodium azide required for the driver and passenger side
airbag inflators varies depending upon the size of the vehicle because the
airbag must, when deployed, fill the space on the driver or the passenger side.
In general, the amount of sodium azide used in each vehicle, with both a driver
and passenger side airbag system installed, ranges from about 400 grams (0.88
pounds) to about 572 grams (1.26 pounds).  In addition to the sodium azide that
is actually contained in the inflators, the inflator manufacturers purchase
additional amounts of sodium azide for testing and related purposes.

      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 

                                       10
<PAGE>
 
(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,
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 is due to the unlawful pricing procedures of Japanese sodium azide
producers.  In response to such practices, in January 1996, the Company filed an
antidumping petition with the ITC and the 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.  Specifically, Commerce calculated a dumping margin of 29.5 percent for
Masuda Chemical Industries Co., Ltd. ("Masuda"), the largest Japanese supplier
and a dumping margin of 65.8 percent for Toyo Kasei Koygo Co., Ltd. ("Toyo") and
Nippon Carbide Industries ("Nippon"), the other Japanese producers. Commerce's
preliminary dumping determination applies 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.

     Although Commerce's preliminary dumping calculations are subject to change,
the Company believes that its allegations of significant and injurious Japanese
dumping in the United States will be sustained in final determinations reached
by Commerce and the ITC.

CUSTOMERS

     The two major suppliers of airbag inflators in the United States are TRW
and Morton.  AAC has received notification that sodium azide produced at its
Utah plant is qualified for use in most sodium azide based airbag inflator
products of Morton and TRW.  The Company currently has no long-term contracts
with these suppliers.  The present selling price for sodium azide is in the
range of $4.00 to $6.00 per pound, although the price could be significantly
influenced by the outcome of the antidumping petition referred to earlier.

DEVELOPMENT AND OPERATION OF AIRBAGS

     In the 1960s, automotive airbag systems inflated by releasing nitrogen gas
stored under very high pressure.  This method entailed technical problems
relating to the reliability of the module that housed such gas and the variation
in nitrogen gas dynamics caused by the necessarily wide range of operating
temperatures in which automobiles operate.  Research and testing resulted in
sodium azide-based propellant.  This propellant eliminated the problems
associated with high-pressure storage because sodium azide is stored in solid
form and releases nitrogen gas only when ignited.  In a frontal impact of
sufficient severity, sensors in an airbag-equipped vehicle detect a sudden
deceleration and fire a pyrotechnic device called an initiator.  In the airbag
system, the initiator ignites the sodium azide-based propellant, which is
similar to solid propellants used in certain rocket engines.  The gas generant
or solid propellant includes a booster and a main propellant.  The booster,
which consists mainly of sodium azide, propagates the flame front, elevates the
combustion pressure and transfers heat to the main propellant.  The main
propellant is also composed of sodium azide and an oxidant.  As the propellant
burns over a period of approximately 50 milliseconds, it produces nitrogen gas.
The nitrogen gas passes through a filter, out through a nozzle and 

                                       11
<PAGE>
 
into a woven nylon bag, inflating the bag in less than one-tenth of a second.
The airbag absorbs the crash energy by cushioning forward movement and then
immediately deflates through exit holes in the airbag.

COMPETITION

     The Company believes that a Canadian facility is currently the sole
competing producer of sodium azide in commercial quantities in North America.
Dynamit Nobel in Germany, three producers in Japan and two producers in India
also produce sodium azide.  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, such as the
hybrid or heated gas inflator or technologies not yet either 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, although there can be no assurance
given with respect thereto.

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

     On August 30, 1991, the Company entered into an agreement (the "Halotron
Agreement") with Jan Andersson and AB-Bejaro Product, granting the Company the
option to acquire the exclusive worldwide rights to manufacture and sell
Halotron.  Halotron is a fire suppression system, including a series of chemical
compounds and application technologies, designed to replace halons, chemicals
presently in wide use as fire suppression agents in military, industrial, and
commercial applications.  This option was exercised in February 1992.

BACKGROUND

     The impetus for the invention of Halotron was provided by the discovery
during the 1980s that halons are highly destructive to the stratospheric ozone
layer, which acts as a shield against harmful solar ultraviolet radiation.  A
reduction in stratospheric ozone is believed to have the potential to result in
long-term increases in skin cancer and cataracts, suppression of the human
immune system and damage to crops and natural ecosystems.  As a result of
disclosures concerning the various halon compounds in use, the Montreal Protocol
on Substances that Deplete the Ozone Layer, which became effective in 1989 and
was strengthened in 1992, freezes at 1986 levels the production of halons and
mandates a phase-out of the production of halons by December 31, 1993.  To date,
the Montreal Protocol has been adopted by 59 nations, including the United
States.  Some of its signatories, such as Germany and Sweden, have already
banned the manufacture and general use of halons, and others, including the
United States, are considering bans earlier than those contained in the Montreal
Protocol.  The United States Air Force has banned the 

                                       12
<PAGE>
 
purchase of controlled ozone layer depleting substances, including halons. The
ban covers all Air Force, Air Force Reserve, Air National Guard and Air Force-
related government owned contractor operated activities. Certain exemptions from
the Air Force-related ban can be granted through a waiver process.

HALOTRON AGREEMENT

     The Halotron Agreement provides for disclosure to the Company of all
confidential and proprietary information concerning Halotron I (see below),
which, together with testing performed at independent laboratories in Sweden and
the United States and consulting services that have been provided by its
inventors, was intended to enable the Company to evaluate Halotron I's
commercial utility and feasibility.  In February 1992, the Company announced
that a series of technical evaluations and field tests conducted at the
University of New Mexico had been positive and equivalent to the performance
previously reported in testing at the Swedish National Institute of Testing and
Standards and the University of Lund in Sweden.  Additional testing is ongoing.
On February 26, 1992, the Company acquired the rights provided for in the
Halotron Agreement, gave notice to that effect to the inventors, and exercised
its option.  In addition to the exclusive license to manufacture and sell
Halotron I, the rights acquired by the Company include rights under all present
and future patents relating to Halotron I throughout the world, rights to
related and follow-on products and technologies and product and technology
improvements, rights to reclaim, store and distribute halon and rights to
utilize the productive capacity of the inventors' Swedish manufacturing
facility.  Upon exercise of the option, the Company paid the sum of $700,000
(the exercise price of $1,000,000, less advance payments previously made) and
became obligated to pay the further sum of $1,500,000 in monthly installments of
$82,000, commencing in March 1992.  The license agreement between the Company
and the inventors of Halotron I provide for a royalty to the inventors of 5% of
the Company's net sales of Halotron I over a period of 15 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.

     Andersson and Bejaro breached the contract under which they had sold the
rights to Halotron.  This breach resulted in litigation initiated by AmPac
Technologies, Inc. and Halotron, Inc., ( both wholly-owned subsidiaries of the
Company).  This initial litigation was settled when Andersson and Bejaro
promised to perform faithfully their duties and to honor the terms of the
contracts that, among other things, gave Halotron, Inc. exclusive rights to the
Halotron chemicals and delivery systems.

     Following the settlement of the initial litigation, however, Andersson and
Bejaro failed to perform the acts they had promised in order to secure dismissal
of that litigation.  As a result, litigation was initiated in the Utah state
courts in March 1994, for the purpose of establishing Halotron, Inc.'s and AmPac
Technologies, Inc.'s exclusive rights to the Halotron chemicals and delivery
systems.  On August 15, 1994, the court entered a default judgment ("Judgment")
against Andersson and Bejaro granting the injunctive relief requested by
Halotron, Inc. and AmPac Technologies, Inc. and awarding damages in the amount
of $42,233,000.

     The trial court further ordered Andersson and Bejaro to execute documents
required for patent registration of Halotron in various countries.  When
Andersson and Bejaro ignored this order, the Court directed the Clerk of the
Court to execute these documents on behalf of Andersson and Bejaro.  Finally,
the Court ordered that Andersson's and Bejaro's rights to any future royalties
from sales of Halotron were terminated.  AmPac Technologies, Inc. and Halotron,
Inc. are exploring ways to collect the Judgment from 

                                       13
<PAGE>
 
Andersson and Bejaro. It appears that Andersson and Bejaro have few assets and
those assets they do have appear to have been placed beyond reach of the
Judgment.

USE OF HALONS

     Halons are used throughout the world in modalities that range from hand-
held fire extinguishers to extensively engineered aircraft installations, but
which are generally of two types, streaming and flooding systems.  Streaming
systems rely upon the focused projection of a slowly gasifying liquid over
distances of up to 50 feet from the point of projection.  Flooding systems
release a quickly gasifying liquid into a confined space, rendering inert a
combustible atmosphere and extinguishing any ongoing combustion.  Halon 1211,
principally a streaming agent, is used on aircraft and aircraft flightlines, on
small boats and ships and in chemically clean rooms and laboratories, other
commercial and industrial facilities, including those in the lumber and
petroleum industries, offices and residences.  Its worldwide production peaked
in 1988 at 19,000 metric tons.  Halon 1301, principally a flooding agent,
protects such installations as computer, electronic and equipment rooms, ship
and other engine room spaces, petroleum handling stations and repositories of
literature and cultural heritage.  Its worldwide production peaked in 1988 at
12,500 metric tons.

POTENTIAL CUSTOMERS

     The end-user market for halons and consequently, Halotron, is divided into
several segments.  The government segment consists of the armed services and
other agencies, including the Department of Energy, NASA and governmental
offices, laboratories and data processing centers.  Historically, military
applications have predominated in this segment, and it is the military that has
taken the lead in research for halon replacements, both in streaming and in
flooding applications.  It will be critical to the Company's efforts to market
Halotron to the military that military specifications for the procurement of
halon replacements include Halotron.  The Company is not aware of any military
specifications for halon replacements that have been issued to date.

     Commercial market segments include fire critical industries such as
utilities, telecommunications firms, the oil and gas exploration and production
industry, lumbering, ocean transport and commercial aviation.  These industries
have indicated a desire to accept the data generated in accordance with the
military procurement evaluation programs and to consider carefully the
recommendations and determinations made by the military.  Other market segments
include other business organizations and small users that typically follow
selections made by the industry users described above.

     Halotron I, the first phase of Halotron, has been extensively and
successfully tested.  Application specific qualification testing is ongoing.
Halotron I is designed to replace halons in streaming and in limited flooding
applications.  Halotron II is intended to replace halons in flooding
applications.  Succeeding Halotron phases, to be designed, are intended to
supersede earlier Halotron phases, generally on an optimized application by
application basis, and are intended to meet more strict environmental
constraints expected to be applied in the future.

     The Company's efforts to produce, market and sell Halotron I and Halotron
II are dependent upon the political climate and environmental regulations that
exist and may vary from country to country.  The magnitude of future orders
received, if any, will be dependent to a large degree upon political issues and
environmental regulations that are not within the Company's control, as well as
additional testing and 

                                       14
<PAGE>
 
qualification in certain jurisdictions, governmental budgetary constraints and
the ultimate market acceptance of these new products.

MARKET FOR HALOTRON

     In 1992, the Company commissioned a market study by Easton Consultants,
Inc. ("Easton"). The Company was advised by Easton that the potential market for
Halotron products is both domestic and international, with the potential
international market significantly larger than the domestic. In 1990, worldwide
production and consumption of halons was approximately 12,600 metric tons of
streaming agent and approximately 9,000 metric tons of flooding agent,
representing an overall decline from 1986 halon production levels of
approximately 35%. This decline is primarily attributed to the imposition of
regulations restricting or banning entirely the manufacture and use of halons.
Future demand for halon replacements such as Halotron products is anticipated to
be initially great as halon is replaced in existing applications. Thereafter,
demand may decrease as sales may be limited to new applications, new
installations and replacement of materials consumed in training, demonstrations
and fire suppression. Further, demand may be negatively impacted by
technological improvements in fire prevention and detection, changes in the
cost, redundancy and survivability of equipment being protected and the
anticipated reduction of activities by the military, a key user of fire
suppression equipment.

     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.

     The Company and Buckeye signed an agreement that calls for the Company to
supply Buckeye's requirements of Halotron I during calendar 1996. This agreement
includes Buckeye's estimate of its requirements, which approximate sales of
Halotron I of $2.2 million per calendar quarter. Actual requirements to date
have been substantially less than those estimated in the agreement.

COMPETITION

     Potential halon alternatives and substitutes will compete as to performance
characteristics, environmental effects and cost.  Performance characteristics
include throw ability, visibility after application, after-fire damage,
equipment portability and versatility, low temperature performance, corrosion
probability, shelf life and efficiency.  The environmental effects include ODP
(ozone depletion potential), GWP (global warming potential) and toxicity.
Potential halon substitutes include water, carbon dioxide and a variety of
chemicals in liquid, foam and powder form.  It is likely that competitors
producing alternatives and substitutes will be larger, will have experience in
the production of fire suppressing chemicals and systems and will have greater
financial resources than those available to the Company.  Based upon Easton's
survey of potential competitors in 1992, no competitor had developed a halon
alternative that met the overall performance and environmental standards met by
Halotron I in streaming and limited flooding applications.  Dupont recently
introduced a new alternative fire extinguishing agent called FE-36/TM/, which is
intended to replace Halon 1211.  The Company has limited information with

                                       15
<PAGE>
 
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 FACILITY

     The Company has designed and constructed a Halotron facility that has an
annual capacity of at least 6,000,000 pounds, located on land owned by the
Company in Iron Country, Utah.  Under the Halotron Agreement, the Company
received the technical support of the inventors for the design, construction and
operation of the new facility.

REAL ESTATE DEVELOPMENT

     The Company's two real estate development subsidiaries (collectively
"AMDECO") own a 380-acre tract in Clark County, Nevada, and about 4,700 acres in
Iron County, Utah.  The Nevada tract, the site of the Gibson Business Park and
the Company's Ventana Canyon joint venture residential project (see below), is
located adjacent to the site of the May 1988 Incident.  Its development was
adversely affected by the May 1988 Incident, but the resumption of active
marketing efforts has resulted in land sales.

     AMDECO maintains close ties with the Nevada Development Authority, the
regional agency primarily responsible for economic development and
diversification in Southern Nevada.  Local marketing is done through real estate
professionals and through business and organizational ties.  The Gibson Business
Park competes with five to six other industrial parks in the Las Vegas Valley,
some of which offer comparable sites and amenities.  It also competes with
industrial parks in the Phoenix, Reno and Salt Lake City areas.

     During fiscal 1993, AMDECO contributed approximately 240 acres of its Clark
County development property to Gibson Ranch Limited Liability Company ("GRLLC"),
the developers of Ventana Canyon, a master-planned community primarily
residential in character.  The development property contributed had a carrying
value of approximately $12,300,000 at the date of contribution which was
transferred to Real Estate Equity Investments.  AMDECO's interest in GRLLC is
assigned to secure the Azide Notes.  An unrelated local real estate development
group ("D") contributed an adjacent 80 acre parcel to GRLLC. GRLLC is developing
the 320-acre parcel as primarily a residential real estate development. D is the
managing member of GRLLC and 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 AMDECO is equally
represented. The profits and losses of GRLLC will be split equally between
AMDECO and D after the return of advances and agreed upon values for initial
contributions. See Note 5 of Notes to Consolidated Financial Statements for
further information with respect to GRLLC.

     The 4,700 acre Utah site is primarily dedicated to the Company's growth and
diversification.

ENVIRONMENTAL PROTECTION EQUIPMENT

     The Company's subsidiary, PEPCON Systems, Inc. ("PSI") designs,
manufactures and markets systems for the control of noxious odors, the
disinfection of waste water streams and the treatment of sea water. Its
OdorMaster/TM/ systems eliminate odors from gases at sewage treatment plants,
composting sites and pumping stations and at chemical, food processing and other
industrial plants. These systems, which

                                       16
<PAGE>
 
use electrochemical technology developed in the Company's specialty chemical
operations, chemically deodorize malodorous compounds in contaminated air.
Sodium hypochlorite is generated on-site from salt brine or sea water by
circulation through electrolytic cells. Once generated, it is utilized within a
scrubber tower containing both a spray area and a packing section to maximize
contact between the scrubbing solution and the contaminated air. Sodium
hypochlorite reacts chemically with the two most common air stream contaminants,
hydrogen sulfide and ammonia, to produce non-noxious gases, water and salts. The
salts, a by-product of the process, are then used to produce additional sodium
hypochlorite which is then used for further odor treatment. Advanced
OdorMaster/TM/ systems place two or three scrubber towers in series to treat
complex odors, such as those produced at sewage composting sites or in sewage
sludge conditioning systems. ChlorMaster/TM/ Brine and Sea water systems utilize
a similar process to disinfect effluent at inland sewage treatment and
industrial plants and to control marine growths in condenser cooling and service
water at power and desalination plants and at oil drilling production facilities
on seacoasts and offshore.

     PSI's customers for its OdorMaster/TM/ 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. PSI competes both with companies that utilize other decontamination
processes and those that utilize technology similar to PSI's. All are
substantially larger than PSI. PSI's success to date is derived from the ability
of its products both to generate sodium hypochlorite on site and to
decontaminate effectively. Its future success will depend upon the
competitiveness of its technology and the success of its sales representatives
and licensees. The market for this type of environmental protection equipment is
estimated at several hundred million dollars annually and includes replacement
as well as new sales.

     PSI's backlog at the end of the fiscal years ending September 30, 1996,
1995 and 1994 was $1,800,000, $2,500,000 and $1,000,000, respectively.

RESEARCH AND DEVELOPMENT

     The Company's existing laboratory facilities are located on the premises of
WECCO and are used to support WECCO's perchlorate production activities and to
support its sodium azide and Halotron production activities.  The Company
conducts research and development programs directed towards enhancement of
product quality and performance and the development of complementary or related
products at these facilities.

     The Company's diversification efforts may create the need for an
additional, centralized research and development facility that would be used to
support not only perchlorate, sodium azide and Halotron production, but also any
future business opportunities that may become available to the Company.  Subject
to improvement in its Halotron business, since phases of Halotron are still in
the research and testing phase, and because Halotron may require a substantial
research and development effort on an on-going basis, the Company may maintain a
research and development facility for its Halotron operations.

INSURANCE

     The Company's insurance currently includes property insurance at 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 

                                       17
<PAGE>
 
adequate. The Company has not experienced difficulty obtaining the types of
insurance in the amounts it has sought.

GOVERNMENT REGULATION

     As a supplier to United States government projects, the Company is subject
to audit and review by the government of the negotiation and performance of, and
of the accounting and general practice relating to, government contracts.  Most
of the Company's contracts for the sale of AP are in whole or in part subject to
the Federal Acquisition Regulations ("FARS"). The Company's AP costs are audited
by its customers and by government audit agencies such as the United States
Defense Contract Audit Agency. To date, such audits have not had a material
effect on the Company's results of operations or financial position.

ENVIRONMENT

     In the operation of its chemical plants, the Company is subject to a number
of environmental constraints relating to atmospheric emissions, industrial
effluent and operating conditions.  The Company has thus far met successfully
all requirements imposed, and does not anticipate any adverse effects from
existing or presently foreseeable statutes and regulations, although there can
be no assurance in this regard, particularly since the Company's plants are
subject to continued compliance with the changing requirements of federal and
state occupational safety and health administration regulations.  The costs of
compliance with applicable requirements were a component of the AP and sodium
azide plant financings.

     The imposition of environmental constraints is a positive factor in the
development of the Company's environmental protection activities. As
environmental awareness continues to increase, the Company anticipates that
these business activities will be enhanced.

     Although a number of states have adopted laws and regulations that place
environmental controls and zoning restrictions on real estate, such regulations
have not had a significant effect on the Company.  The Company does not
anticipate that its real estate development activities will be adversely
affected by such regulations.

     The May 1988 Incident released certain materials in the area of the former
AP plant.  The Company has expended substantial amounts of time and effort on
cleanup activities, and has filed final reports with state and federal
environmental protection agencies.  The Company has been notified that its
reports have been accepted and that no further action will be taken by these
agencies.  Accordingly, management does not believe that the Company has any
further material environmental liability resulting from the May 1988 Incident.

EMPLOYEES

     At September 30, 1996, the Company employed approximately 212 persons in
executive, administrative, sales and manufacturing capacities.  The Company
considers relationships with its employees to be satisfactory.

                                       18
<PAGE>
 
ITEM 2. PROPERTIES
------------------

     The following table sets forth certain information regarding the Company's
properties at September 30, 1996.

<TABLE>
<CAPTION>
                                                     Approximate
                                                       Area or                     Approximate
   Location               Principal Use              Floor Space       Status      Annual Rent
   --------               -------------              -----------       ------      -----------
<S>                  <C>                            <C>               <C>            <C> 
Iron County, UT      WECCO Manufacturing               217 acres      Owned            ___
                     Facility/(1)/                                                          
Iron County, UT      AAC Manufacturing                  41 Acres      Owned/(3)/       ___
                     Facility/(2)/                                                          
Iron County, UT      Halotron, Inc.                  6,720 sq. ft.    Owned            ___ 
                     Manufacturing Facility         
Las Vegas, NV        Executive Offices:             22,262 sq. ft.    Leased/(4)/    $550,000 
                     AMDECO, American 
                     Pacific Corporation, PSI       
</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.

     (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 AAC manufacturing facility and land upon which it is situated is
          subject to a deed of trust in favor of the holders of the Azide Notes.

     (4)  These facilities are leased from 3770 Howard Hughes Parkway Associates
          Limited Partnership for an initial term of 10 years which began on
          March 1, 1991.  (See Note 11 of Notes to Consolidated Financial
          Statements.)

     The Company's facilities are considered by it to be adequate for its
     present needs and suitable for their current use.

     For information with respect to properties owned by AMDECO see Item 1.
     Business - Real Estate Development.  Substantially all land in Clark
     County, Nevada owned by AMDECO secure the Azide Notes and is subject to a
     mortgage and deed of trust in favor of the Azide Note holders.  (See Notes
     5 and 6 of Notes to Consolidated Financial Statements.)


ITEM 3. LEGAL PROCEEDINGS
-------------------------

         The Company previously had a dispute with Thiokol with respect to the
interpretation of the NASA/Thiokol Agreements.  Certain shareholder lawsuits
have been filed against the Company and certain of its directors and officers.
Such lawsuits were resolved in favor of the Company during 1996, although 

                                       19
<PAGE>
 
the plaintiffs have appealed a summary judgment ruling and portions of the trial
proceedings to the Ninth Circuit of the United States District Court of Appeals.
On December 10, 1993, the Company was served with a complaint that alleges the
Company is liable for approximately $5.9 million related to a guarantee executed
in 1982. In August 1996, the Company's cross-motion for summary judgment was
granted in this case, although the plaintiffs have filed a motion for
reconsideration. Certain litigation involving Halotron was initiated by the
Company in 1994.

     The information set forth in Note 10 of Notes to Consolidated Financial
Statements describing the foregoing litigation is incorporated herein by
reference. Reference is also made to Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------

     Not Applicable.

                                       20
<PAGE>
 
                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
--------------------------------------------------------------------------------

     The Company's Common Stock is traded in the over-the-counter market on
NASDAQ/NMS under the symbol "APFC".  The table below sets forth the high and low
closing prices of the Common Stock on NASDAQ/NMS for the periods indicated.

<TABLE>
<CAPTION>
                               NASDAQ/NMS
                            (Closing Prices)
                              High    Low
<S>                          <C>     <C>
 
       Fiscal Year 1996
       ----------------
       1st Quarter           6 3/8   4 1/2
       2nd Quarter           8       5 1/2
       3rd Quarter           7 1/8   5 3/4
       4th Quarter           6 5/8   5 7/8
                                        
                                        
       Fiscal Year 1995                 
       ----------------                 
       1st Quarter           9 3/4   6 3/4
       2nd Quarter           7 3/4   5 3/4
       3rd Quarter           7       4 9/16
       4th Quarter           6 1/2   4 3/4
</TABLE>

     At December 1, 1996, there were approximately 1,644 shareholders of record
of the Company's Common Stock.  The Company has not paid a dividend on the
Common Stock since the Company's incorporation and does not anticipate paying
cash dividends in the foreseeable future.  In addition, covenants contained in
certain borrowing agreements restrict the Company's ability to pay dividends.
(See Note 6 of Notes to Consolidated Financial Statements.)

                                       21
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                              1996        1995        1994        1993       1992
                                         ----------------------------------------------------------
<S>                                          <C>         <C>         <C>         <C>        <C>
                                               ..........(in thousands except per share amounts)
STATEMENT OF OPERATIONS DATA:
  Surcharge revenues                                                 $  8,913    $ 19,774   $ 24,127
  Total sales and operating revenues         $ 42,381    $ 39,250      51,193      57,215     63,075
  Cost of sales                                32,579      29,861      26,317      24,612     28,125
  Gross profit                                  9,802       9,389      24,876      32,603     34,950
  Operating expenses                            9,367      11,436      12,522      11,931     10,390
  Litigation settlement                                                                        8,135
  Impairment charge                                                    39,401
  Equity in real estate venture                   700
  Operating income (loss)                       1,135      (2,047)    (27,047)     20,672     16,425
  Interest and other income                     1,381       1,429       1,088       2,928      3,435
  Interest and other expense                    2,836       1,709       3,315       7,796     11,834
  Income (loss) before provision (credit)
   for income taxes                              (320)     (2,327)    (29,274)     15,804      8,026
  Provision (credit) for income taxes            (109)       (791)     (9,937)      5,369      2,608
  Net income (loss)                              (211)     (1,536)    (19,337)     10,435      5,418
  Net income (loss) per common share (1)     $   (.03)   $   (.19)   $  (2.38)   $   1.26   $    .71
   
BALANCE SHEET DATA:
  Cash and cash equivalents and
   short-term investments                    $ 20,501    $ 26,540    $ 24,884    $ 20,782   $ 70,929
  Restricted cash                               4,969       3,743       1,584      37,218     35,232
  Inventories and accounts and notes
   receivable                                  16,199      13,086      14,630      17,694      7,782
  Restricted receivables                                                                         132
  Property, plant and equipment - net          77,217      80,944      81,606     122,346     84,092
  Development property                          8,631      10,296      11,525      12,717     23,495
  Real estate equity investments               18,698      17,725      14,526      12,979        618
  Total assets                                150,019     157,789     154,922     231,138    231,089
  Working capital                              24,905      26,440      34,383      28,109     73,225
  Notes payable and current portion
   of long-term debt                            7,334       8,500         504      43,504     14,661
  Long-term debt                               29,452      34,054      42,176      46,177     88,597
  Shareholders equity                          94,156      94,251      95,846     114,253    102,975
</TABLE>
  
  1)  Per share amounts are based on the weighted average number of shares of
      Common Stock outstanding considering the dilutive effect, if any, of stock
      options and warrants.
 
  2)  The independent auditors' report for 1994 and 1993 each included an
      explanatory paragraph discussing uncertainties.

                                       22
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
OF OPERATIONS
-------------

RESULTS OF OPERATIONS

SALES AND OPERATING REVENUES

     Sales and operating revenues were $42,381,000 in fiscal 1996 compared to
$39,250,000 in fiscal 1995. The increase is primarily due to increased sodium
azide and real estate sales. Such increase was partially offset by a decrease in
AP revenues (see below).

     Sales and operating revenues were $39,250,000 in fiscal 1995 compared to
$51,193,000 in fiscal 1994. The decrease is primarily due to a decrease in (and
ultimate elimination of) the surcharge and a decrease in AP revenues associated
with an amendment to the 1989 Advance Agreement (see below). Such decrease was
partially offset by an increase in sodium azide and real estate sales.

     The Company's perchlorate chemicals operations accounted for approximately
51%, 75% and 86% of revenues during the fiscal years ended September 30, 1996,
1995 and 1994, respectively. There were no significant sales of Halotron during
these periods.

     Gross profit as a percentage of sales and operating revenues was 23%, 24%
and 49% during the fiscal years ended September 30, 1996, 1995 and 1994,
respectively. The significant decrease in gross profit percentage in fiscal 1995
is due to a number of factors. As discussed below, the surcharge was eliminated
from AP pricing. In addition, depreciation expense associated with AP plant
assets was substantially lower in 1995 as a result of the impairment charge in
fiscal 1994 discussed below. The elimination of Surcharge revenues, partially
offset by the reduction in depreciation expense, contributed significantly to
the reduction in gross profit percentage. The results of sodium azide operations
in fiscal 1995 also added to the reduction in comparable gross profit
percentages. The level of sodium azide sales during the fiscal year ended
September 30, 1995 was not sufficient to absorb operational (fixed and variable)
costs associated with the production of sodium azide at relatively low amounts
in comparison to the productive capacity of the plant. Sodium azide sales and
margins increased significantly in fiscal 1996 although such increases were
offset by a decrease in perchlorate chemical sales and margins as discussed
below.

PERCHLORATE CHEMICAL OPERATIONS

     As part of the NASA/Thiokol agreements, WECCO entered into a Surcharge
Agreement with Thiokol pursuant to which a surcharge was imposed on all
purchases of AP by Thiokol and others. The Surcharge Agreement required Thiokol
to place sufficient AP orders which, when combined with WECCO's other AP sales,
would assure WECCO revenues in respect of not less than 5,000,000 pounds of AP
per quarter, 20,000,000 per year and 140,000,000 in the aggregate over a seven-
year period. (See below and Note 9 of Notes to Consolidated Financial Statements
for a discussion of an amendment to the Advance Agreement that, in May 1994,
terminated the Surcharge Agreement and certain other agreements.) All surcharge
payments were deposited into a cash collateral account and $.05 per pound of the
AP base price payments was deposited into a default account under the WECCO
loan. The Surcharge Agreement was approved and consented to by NASA. NASA and
Thiokol entered into separate agreements regarding Thiokol's obligations for AP
orders under the Surcharge Agreement.

                                       23
<PAGE>
 
     Surcharge revenues were $8,913,000 during the fiscal year ended September
30, 1994.  The minimum surcharge required to amortize indebtedness decreased by
approximately $.025 per pound each successive quarter until the WECCO loan was
amortized, as a result of the reduction in interest payable on the declining
balance of the WECCO loan.  The net difference between surcharge revenues, and
depreciation and amortization and interest expense related to the AP
manufacturing facility was approximately $863,000 during the fiscal year ended
September 30, 1994.

     As discussed in Note 10 of Notes to Consolidated Financial Statements, in
December 1992, Thiokol issued a Request for Quotation, inviting WECCO to submit
a proposal for the sale of NASA-related AP over a period extending through mid-
1998, approximately three years after the expiration of the NASA/Thiokol
agreements. To enable WECCO to submit a proposal which did not prejudice the
NASA/Thiokol agreements, Thiokol and WECCO signed an agreement to the effect
that WECCO and Thiokol would deal with the Request for Quotation and WECCO's
responsive proposal without reference to the NASA/Thiokol agreements or any
effects thereon, but WECCO reserved its rights under the NASA/Thiokol
agreements. At the time it submitted its proposal, WECCO also offered to
negotiate a termination of the NASA/Thiokol agreements, subject to the consent
and approval of NASA and Seafirst Bank.

     At a meeting on June 11, 1993, Thiokol advised WECCO that it had commenced
a legal action against WECCO in Weber County (Ogden) Utah, seeking declaratory
relief to the effect that once the principal and interest balance owing by WECCO
to Seafirst Bank was fully paid, Thiokol would have no further obligation to
purchase AP from WECCO under the NASA/Thiokol agreements, and to the effect that
there existed an alleged agreement among NASA, Thiokol, WECCO and Seafirst Bank
to prepay the WECCO loan on or about October 1, 1993. Thiokol also advised WECCO
that it intended to proceed with the declaratory relief action only if
negotiations underway between the parties were not concluded in a manner
satisfactory to Thiokol.

     On July 8, 1993, Thiokol dismissed, without prejudice, its declaratory
relief lawsuit against WECCO. A dismissal "without prejudice" operates as a
dismissal of the lawsuit, but does not prevent its re-filing at a later date,
nor does it constitute a final resolution of the dispute. On May 10, 1994, WECCO
and Thiokol executed the Amendment. The Amendment fully resolved all issues
between Thiokol and WECCO relating to the interpretation of the NASA/Thiokol
agreements. Thiokol separately agreed not to refile its declaratory relief
lawsuit. (See Note 9 of Notes to Consolidated Financial Statements.)

     Under and because of the resolution of its dispute with Thiokol completed
by the Amendment, WECCO exercised the contractual right reserved solely to it in
the WECCO loan agreement to direct that the funds in the cash collateral account
and default account be used to repay the WECCO loan. On May 10, 1994, such
prepayment was completed. Upon repayment in full of the WECCO loan, the
Amendment provided for the termination as fulfilled of the Surcharge Agreement,
the Working Capital Agreement and the Repayment Plan.

     The Amendment confirmed that the 1989 Advance Agreement had a continuous
term commencing with the first production of AP at the WECCO plant in August
1989 and ending September 30, 1996, (approximately two months subsequent to the
estimated original term of the Advance Agreement). The Amendment provided for
WECCO to receive revenues, excluding surcharge revenues, from sales of AP of
approximately $33 million, $28 million and $20 million during the fiscal years
ending September 30, 1994, 1995 and 1996, respectively. Total perchlorate
chemical sales (including surcharge revenues in 1994) were $21,451,000,
$29,300,000 and $44,100,000 during the fiscal years ended September 30, 1996,
1995 and 1994, respectively.

                                       24
<PAGE>
 
     Prior to the effective date of the Amendment, WECCO was indebted to Thiokol
for approximately $10,208,000 under the Working Capital Agreement and Repayment
Plan. Under the terms of the Amendment, WECCO paid $750,000 of this amount
ratably as deliveries of AP were made over the remainder of the fiscal year
ended September 30, 1994. The remaining obligation under the Working Capital
Agreement and Repayment has been partially and will continue to be repaid by
WECCO through the delivery of AP.

     The Company believes that the Amendment represented a fully satisfactory
commercial resolution of its dispute with Thiokol. AP revenues under the
Amendment have resulted in net cash flows to WECCO from AP operations during the
fiscal years ended September 30, 1996, 1995 and 1994, substantially the same as
those that would have been generated under the NASA/Thiokol agreements absent
the Amendment. As the Company has previously reported, however, certain changes
in revenues and cash flows, which would have also been present under the
NASA/Thiokol agreements absent the Amendment, have occurred with the cessation
of surcharge receipts. (See Note 9 of Notes to Consolidated Financial Statements
for a discussion of such changes.)

     In 1988-89, the government indicated that the yearly demand for AP was
approximately 60 million pounds. Since then, there has been a considerable
decline in AP demand. As discussed in Note 11 of Notes to Consolidated Financial
Statements, the Company recognized a non-recurring impairment charge of
$39,401,000 relating to the WECCO fixed assets as of March 31, 1994. Such charge
resulted from the effects of the change in the AP market. Operating income, net
income and earnings per share, before the non-recurring fixed asset impairment
charge of $39,401,000, were $12,354,000, $6,640,000 and $.82, respectively,
during the fiscal year ended September 30, 1994.

     In September 1996, WECCO executed a purchase order for deliveries of AP to
Thiokol during the fiscal year ending September 30, 1997.  The purchase order
amounts to approximately $13.3 million.  In October 1995, the Company received a
purchase order for the delivery of AP to another customer from October 1996
through 1999 having a value in the range of $8 million to $10 million.  This
contract includes options that could increase the order during the 1997-1999
period, and that could extend the contract to the year 2000.  As a result of the
above purchase orders, the Company has a backlog of approximately $17.5 million
for deliveries of AP in fiscal 1997.  Based upon this backlog and negotiations
currently in process, the Company estimates that total perchlorate revenues,
including sodium perchlorate and potassium perchlorate, will range between $19
an $24 million during the fiscal year ended September 30, 1997.

SODIUM AZIDE OPERATIONS

     Sodium azide sales were $12,027,000 and $4,640,000 during fiscal 1996 and
1995, respectively.  Commercial shipments of sodium azide began in April, 1994.
Sodium azide sales were approximately $3,378,000 during the six-month period
ended September 30, 1994.

     The price per pound of sodium azide has declined significantly since the
Company initiated its sodium azide project.  The Company believes that the price
erosion of sodium azide over the past few years is due to the unlawful pricing
procedures of Japanese sodium azide producers.  In response to such practices,
in January 1996, the Company filed an antidumping petition with the ITC and
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.  Specifically, Commerce calculated a
dumping margin of 29.5 percent for Masuda, the largest Japanese supplier and a
dumping

                                       25
<PAGE>
 
margin of 65.8 percent for Toyo and Nippon, the other Japanese producers.
Commerce's preliminary dumping determination applies 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.

     Although Commerce's preliminary dumping calculations are subject to change,
the Company believes that its allegations of significant and injurious Japanese
dumping in the United States will be sustained in final determinations reached
by Commerce and the ITC.

     As discussed in Note 14 of Notes to Consolidated Financial Statements, the
Company and Dynamit Nobel agreed to suspend royalty payments on sodium azide
effective July 1, 1995.

     Depreciation expense increased in the third quarter of fiscal 1995 as the
sodium azide facility completed its transition from construction to production
activities.  On an annualized basis, cost of sales associated with sodium azide
activities increased by approximately $3 million beginning April 1, 1995 as a
result of this increase in depreciation expense.  Depreciation expense related
to sodium azide production amounted to approximately $5.8 million in fiscal
1996.

REAL ESTATE OPERATIONS

     The Company's real estate development properties consist of approximately
4,700 acres in Iron County, Utah near Cedar City, Utah and a 380-acre tract
(Gibson Business Park) in Clark County, Nevada.  All development property is
held in fee simple.  Substantially all of the Gibson Business Park land is
pledged as collateral for the Azide Notes.  The Company is actively marketing
its Nevada property for sale and development.  About 240 acres of its Clark
County land has been transferred to GRLLC for the purpose of residential
development, construction, and sale.  (See Notes 5 and 6 of Notes to
Consolidated Financial Statements.)  The Iron County site is primarily dedicated
to the Company's growth and diversification.  Real estate and related sales
amounted to $5,221,000, $3,375,000 and $558,000 during the fiscal years ended
September 30, 1996, 1995 and 1994, 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 equity in earnings of
GRLLC.

     During fiscal 1996, the Company recognized its share of the equity in
earnings of GRLLC.  The Company's equity in the earnings of the project amounted
to approximately $700,000.  Profits and losses of GRLLC are split equally
between the Company and its venture partner, a local real estate development
company.  GRLLCs profits increased substantially during fiscal 1996 as a result
of the sale of improved land zoned for an apartment site to an outside developer
and a significant increase in residential sales.

ENVIRONMENTAL PROTECTION EQUIPMENT OPERATIONS

     Environmental protection equipment sales were approximately $3,099,000,
$1,656,000 and $2,934,000 during the fiscal years ended September 30, 1996, 1995
and 1994, respectively.  The Company is continuing its evaluation of future
operating activities in this business segment.  Effective December 31, 1994, the
Company laid off the work force associated with assembly activities
(approximately four hourly employees) and terminated the assembly facility lease
(saving $67,000 in annual operating rents).  Operating activities in this
segment are now being conducted at the Company's Iron County facility.  As of
November 30, 1996, this segment had a backlog of approximately $1,800,000.  In
addition, the Company 

                                       26
<PAGE>
 
has recently submitted a number of bids, although there can be no assurance that
any of these bids will result in future orders.

HALOTRON

     Sales of Halotron amounted to approximately $479,000 in fiscal 1996
compared to $213,000 in fiscal 1995.  In December 1995, the Company, in concert
with Buckeye Fire Equipment Company, successfully completed Underwriters
Laboratories (UL) fire tests of a line of portable fire extinguishers using
Halotron I.  Domestic distribution of the Buckeye Halotron extinguisher line
began in February, 1996.  The Company and Buckeye signed an agreement that calls
for the Company to supply Buckeye's requirements of Halotron I during calendar
1996.  Actual requirements to date have been substantially less than those
estimated in the agreement.

OPERATING EXPENSE

     Operating (selling, general and administrative) expenses were $9,261,000,
$11,006,000 and $12,364,000 during the fiscal years ended September 30, 1996,
1995 and 1994, respectively.  The decreases in fiscal 1996 and 1995 are
primarily due to the Company's implementation of certain cost control,
containment and reduction measures.

     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 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 has agreed to pay attorneys fees and
other defense costs related to the plaintiffs' appeal of this case.

     During the third quarter of fiscal 1995, the Company reduced total full-
time employee equivalents by approximately ten percent through involuntary
terminations and an offering of enhanced retirement benefits to a certain class
of employees.  The Company recognized a charge to operating expense of
approximately $226,000 as a result of these terminations and the acceptance of
the offer of enhanced retirement benefits by certain employees.

RESEARCH AND DEVELOPMENT

     The Company incurred approximately $106,000, $204,000 and $158,000 in
research and development costs related to its specialty chemicals segment in
1996, 1995 and 1994, respectively.  The Company's level of research and
development will be dependent upon the progress and growth of its new products.

INTEREST AND OTHER INCOME

     The decrease in interest and other income in fiscal 1996 is primarily due
to lower average cash and cash equivalents balances.  The increase in interest
and other income in fiscal 1995 is principally due to the higher average cash
and cash equivalents balances.

                                       27
<PAGE>
 
INTEREST AND OTHER EXPENSE

     Interest and other expense was $2,836,000,  $1,709,000 and $3,315,000
during the fiscal years ended September 30, 1996, 1995 and 1994, respectively.
The decrease in fiscal 1995 compared to fiscal 1994 is primarily a result of
WECCO's election to use the funds in the cash collateral and default accounts to
repay the WECCO loan.   The increase in interest expense in fiscal 1996 compared
to fiscal 1995 is primarily due to the cessation of interest capitalization on
the sodium azide facility.

PROVISIONS FOR INCOME TAXES

     The Company's effective income tax rates were approximately 34% during the
fiscal years ended September 30, 1996, 1995 and 1994, respectively.

OPERATING RESULTS

     Although the Company's net income (loss) and 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 of Notes to Consolidated Financial Statements, the Company may incur
material legal and other costs associated with certain litigation; (ii) the
timing of real estate and related sales and equity in earnings of real estate
ventures is not predictable; (iii) the recognition of revenues from
environmental protection equipment orders not accounted for as long-term
contracts depends upon orders generated and the timing of shipment of the
equipment; (iv) weighted average common and common equivalent shares for
purposes of calculating net income (loss) per common share are subject to
significant fluctuations based upon changes in the market price of the Company's
Common Stock due to outstanding warrants and options; and (v) the magnitude,
pricing and timing of AP, sodium azide and Halotron sales in the future is
uncertain.

     The Company's efforts to produce, market and sell Halotron I and Halotron
II are, among other factors, dependent upon the political climate and
environmental regulations that exist and may vary from country to country.
Although the Company is satisfied with the progress and performance
characteristics of Halotron I and Halotron II, the magnitude of orders received,
if any, in the future will be dependent to a large degree upon political issues
and environmental regulations that are not within the Company's control, as well
as additional testing and qualification in certain jurisdictions and the
ultimate extent of market acceptance.

     As a result of the uncertainties with respect to volume and price of sodium
azide and the outcome of the antidumping petition referred to above, the Company
may experience significant variations in sodium azide sales and related
operating results from quarter to quarter.

     In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", management reviews on a quarterly
basis whether the anticipated net cash flows from Halotron and sodium azide
operations will be sufficient to recover the Company's investment in each of
such facilities/projects. At September 30, 1996, the Company had approximately
$69 million and $6.4 million in recorded net long-lived assets associated with
sodium azide and Halotron, respectively. A number of factors are considered in
the evaluation of recoverability, including, but not limited to, anticipated
pricing and volume and the duration thereof, and expected costs associated with
production. Management believes that such net asset balances are recoverable
under the requirements of SFAS No. 121, although, in light of the uncertainties

                                       28
<PAGE>
 
discussed above, there can be no assurance that the results of the evaluation of
recoverability will remain the same in the future.

LITIGATION

     See Note 10 of Notes to Consolidated Financial Statements for a discussion
of litigation.

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,
1996.  The Company does not expect inflation to have a material effect on gross
profit in the future, because any increases in production costs should be
recovered through increases in product prices, although there can be no
assurance in that regard.

LIQUIDITY AND CAPITAL RESOURCES

     On July 29, 1994, the Board of Directors of the Company authorized the
repurchase of up to 1.5 million shares of the Company's common stock through
open market purchases and private transactions. Such authorization was briefly
suspended. As of November 30, 1996, the Company had repurchased approximately
138,000 shares through this program.

     As a result of the litigation described in Note 10 of Notes to Consolidated
Financial Statements, 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 Charter and Bylaws as a result of which the Company may be
required to indemnify its affected officers and directors to the extent, if at
all, that existing insurance coverages 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.

     Cash flows provided by operating activities were $5,875,000, $10,366,000
and $62,806,000 during the fiscal years ended September 30, 1996, 1995 and 1994,
respectively.  Approximately $8,913,000 of cash flows provided by operating
activities in fiscal 1994 related to surcharge revenues.  As discussed above,
the collection of surcharge receipts ceased effective March 31, 1994.  During
the third fiscal quarter of 1994, the WECCO loan was repaid which also increased
operating cash as a result of the balances in the cash collateral and default
accounts being immediately available to repay principal as opposed to being
restricted for WECCO loan collateral purposes.  In addition, cash flows from
operating activities were significantly less in fiscal 1995 due to the results
of sodium azide operations as discussed above.  Cash flows from operating
activities declined in fiscal 1996 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 satisfactory
resolution of litigation, 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.

                                       29
<PAGE>
 
     As discussed above, on May 10, 1994, WECCO elected to use the funds in the
cash collateral and default accounts to repay the WECCO loan.

     In February 1992, the Company concluded a $40,000,000 financing for the
design, construction and start-up of a sodium azide facility.  As a result of
the Company's decision to increase the production capacity of the plant and
construction cost overruns, the Company's cost estimates for the sodium azide
facility increased significantly during the construction process.  The majority
of the increase relates to the Company's decision to increase the productive
capacity of the plant, as discussed above.  In addition, certain estimates
increased throughout the construction process as a result of the highly
automated and technical nature of the operation and the difficulty in assigning
cost estimates to such an operation.  Design and construction also occurred over
a longer period of time than was originally estimated, which increased actual
expenditures. Although production and sales have recently increased, the
facility has not been operated at significant production levels in comparison to
capacity and greater-than-expected capital costs have been and may continue to
be incurred.  Subject to the ongoing receipt and magnitude of orders for sodium
azide and the avoidance of further erosion of the selling price per pound of
sodium azide, the Company believes that the increased costs associated with the
sodium azide facility will be recovered through future sodium azide sales,
although there can be no assurance in this regard.

FORWARD-LOOKING STATEMENTS/RISK FACTORS

     Certain matters discussed in this Annual Report on Form 10-K 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, governmental
budget decreases affecting the Department of Defense or NASA which would cause a
continued decrease in demand for AP, an adverse final determination of the
Company's sodium azide anti-dumping petition, 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.

                                       30
<PAGE>
 
     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 the GRLLC (Ventana
Canyon Joint Venture) and regulatory and environmental matters that may have a
negative impact on sales.

     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 of Notes
to Consolidated Financial Statements contained in this report, and claims made
by or against the Company relative to patents or property rights.

     9.   The adoption of new, or changes in existing, accounting policies and
practices.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------

     Financial statements called for hereunder are included herein on the
following pages:

<TABLE>
<CAPTION>
                                                                   Page(s)
                                                                   -------
<S>                                                                <C>
 
   Independent Auditors' Report                                       41
 
   Consolidated Balance Sheets                                        42
 
   Consolidated Statements of Operations                              43
 
   Consolidated Statements of Cash Flows                              44
 
   Consolidated Statements of Changes in Shareholders' Equity         45
 
   Notes to Consolidated Financial Statements                      46-65
</TABLE>

                                       31
<PAGE>
 
                Summarized Quarterly Financial Data (Unaudited)
                (amounts in thousands except per share amounts)

<TABLE>
<CAPTION>
                                   Quarters For Fiscal Year 1996
                           1st       2nd        3rd       4th      Total
<S>                      <C>       <C>        <C>       <C>       <C>
Sales and Operating
Revenues                 $9,776    $10,980    $10,617   $11,008   $42,381
Gross Profit              1,873      2,830      2,324     2,775     9,802
Net Income (Loss)          (588)      (112)       351       138      (211)
Net Income (Loss)
Per Common Share         $ (.07)   $  (.01)   $   .04   $   .01   $  (.03)
</TABLE>

<TABLE>
<CAPTION>
                                   Quarters For Fiscal Year 1995
                           1st       2nd       3rd       4th      Total
<S>                      <C>       <C>       <C>       <C>       <C>
Sales and Operating
Revenues                 $9,309    $8,908    $8,179    $12,854   $39,250
Gross Profit              1,573     2,188     1,953      3,675     9,389
Net Income (Loss)          (480)     (164)     (998)       106    (1,536)
Net Income (Loss)
Per Common Share         $ (.06)   $ (.02)   $ (.12)   $   .01   $  (.19)
</TABLE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

     Not Applicable.

                                       32
<PAGE>
 
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------------------------

     The required information regarding directors and executive officers is
incorporated herein by reference from the Company's definitive proxy statement
for its 1997 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission not later than January 28, 1997.


ITEM 11. EXECUTIVE COMPENSATION
-------------------------------

     The required information regarding executive compensation is incorporated
herein by reference from the Company's definitive proxy statement for its 1997
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission not later than January 28, 1997.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------

     The required information regarding security ownership of certain beneficial
owners and management is incorporated herein by reference from the Company's
definitive proxy statement for its 1997 Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission not later than January 28,
1997.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------

     The required information regarding certain relationships and related
transactions is incorporated by reference from the Company's definitive proxy
statement for its 1997 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission not later than January 28, 1997.

                                       33
<PAGE>
 
                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------

(a)  (1)  Financial Statements
          --------------------

          See Part II, Item 8 for index to financial statements and
          supplementary data.

     (2)  Financial Statement Schedules
          -----------------------------

          None applicable.

     (3)  Exhibits
          --------

          (a) The following Exhibits are filed as part of this Report
              (references are to Regulation S-K Exhibit Numbers):

      3.1     Registrant's Restated Certificate of Incorporation, incorporated
              by reference to Exhibit 3A to Registrant's Registration Statement
              on Form S-14 (File No. 2-70830), (the "Form S-14").

      3.2     Registrant's By-Laws, incorporated by reference to Exhibit 3B to
              the Form S-14.

      3.3     Articles of Amendment to the Restated Certificate of
              Incorporation, as filed with the Secretary of State, State of
              Delaware, on October 7, 1991, incorporated by reference to Exhibit
              4.3 to Registrant's Registration Statement on Form S-3 (File No.
              33-52196) (the "Form S-3").

      3.4     Articles of Amendment to the Restated Certificate of Incorporation
              as filed with the Secretary of State, State of Delaware, on April
              21, 1992, incorporated by reference to Exhibit 4.4 to the Form 
              S-3.

     10.1     Term Loan Agreement between the Registrant and Security Pacific
              National Bank, N.A., dated as of March 3, 1989, incorporated by
              reference to Exhibit 10(a) to the Registrants Annual Report on
              Form 10-K for the fiscal year ended September 30, 1989 (the "1989
              10-K").

     10.2     Advance Agreement between the Registrant and Morton-Thiokol, Inc.
              dated as of March 3, 1989 (the "Advance Agreement"), incorporated
              by reference to Exhibit 10(b) to the 1989 10-K.

     10.3     Amendments dated August 31, 1989 and June 27, 1990 to the Advance
              Agreement, incorporated by reference to Exhibit 10.3 of
              Registrant's Registration Statement on Form S-2 (File No. 33-
              36664) (the "1990 S-2").

     10.4     Amendment dated May 10, 1994 to the Advance Agreement, 
              incorporated by reference to Exhibit 19 to the Registrants
              Quarterly Report on Form 10-Q for the fiscal quarter ended March
              31, 1994.

                                       34
<PAGE>
 
     10.5     Amendment dated August 30, 1994 to the Advance Agreement,
              incorporated by reference to Exhibit 10.5 of the Registrants
              Annual Report on Form 10-K for the fiscal year ended September 30,
              1994 (the "1994 10-K").

     10.6     Surcharge Agreement between the Registrant and Morton-Thiokol,
              Inc. dated as of March 3, 1989, incorporated by reference to
              Exhibit 10(c) to the 1989 10-K.

     10.7     Amendment of Solicitation/Modification of Contract dated March 24,
              1989 between National Aeronautics and Space Administration and
              Morton-Thiokol, Inc., incorporated by reference to Exhibit 10(d)
              to the 1989 10-K.

     10.8     National Aeronautics and Space Administration Determination and
              Findings dated March 28, 1989, incorporated by reference to
              Exhibit 10(e) to the 1989 10-K.

     10.9     Memorandum of Agreement dated April 19, 1989 between the
              Department of Defense and the National Aeronautics and Space
              Administration, incorporated by reference to Exhibit 10(f) to the
              1989 10-K.

     10.10    Incentive Stock Option Plan for Key Employees 1982, incorporated
              by reference to Exhibit 4.2 to the Company's Annual Report on Form
              10-K for the fiscal year ended September 30, 1990 (the "1990 
              10-K").

     10.11    First Amendment to American Pacific Corporation Incentive Stock
              Option Plan for Key Employees - 1982, incorporated by reference to
              Registrant's Definitive Proxy Statement dated January 27, 1989
              (the "1989 Proxy").

     10.12    American Pacific Corporation 1988 Nonqualified Stock Option Plan
              and 1988 Incentive Stock Option Plan, incorporated by reference to
              the 1989 Proxy.

     10.13    First Amendment to American Pacific Corporation 1988 Nonqualified
              Stock Option Plan, incorporated by reference to Exhibit 10.11 to
              the 1990 S-2.

     10.14    Nonqualified Stock Option Agreement between the Registrant and
              David N. Keys dated July 1, 1989, incorporated by reference to
              Appendix E to Registrant's Registration Statement on Form S-8
              (File No. 33-30321).

     10.15    Employment Agreement between Registrant, Pacific Engineering &
              Production Co. of Nevada, and AmPac Development Company, and C.
              Keith Rooker, and Retainer Agreement between Mr. Rooker and
              Registrant, Pacific Engineering & Production Co. of Nevada, and
              AmPac Development Company executed on July 15, 1987, as of June 1,
              1986, incorporated by reference to Exhibit 10(g) to Registrant's
              Annual Report on Form 10-K for the fiscal year ended September 30,
              1988.

     10.16    Employment Agreement dated as of March 3, 1989 between Western
              Electrochemical Company and Fred D. Gibson, Jr., incorporated by
              reference to Exhibit 10(o) to the 1989 10-K.

                                       35
<PAGE>
 
     10.17    Employment Agreement dated as of March 3, 1989 between Western
              Electrochemical Company and James J. Peveler, incorporated by
              reference to Exhibit 10(p) to the 1989 10-K.

     10.18    Employment Agreement dated as of September 9, 1985 between
              American Pacific Corporation and  Fred D. Gibson, Jr.,
              incorporated by reference to Exhibit 10.20 to the 1990 S-2.

     10.19    Employment agreement dated November 7, 1994 between the Registrant
              and David N. Keys, incorporated by reference to Exhibit 10.22 of
              the 1994 10-K.

     10.20    Form of American Pacific Corporation Defined Benefit Pension Plan,
              incorporated by reference to Exhibit 10.21 to the 1990 S-2.

     10.21    Lease Agreement between 3770 Hughes Parkway Associates Limited
              Partnership and the Registrant, dated July 31, 1990, incorporated
              by reference to Exhibit 10.22 to the 1990 S-2.

     10.22    Limited Partnership Agreement of 3770 Hughes Parkway Associates,
              Limited Partnership, incorporated by reference to Exhibit 10.23 to
              the 1990 S-2.

     10.23    Cooperation and Stock Option Agreement dated as of July 4, 1990 by
              and between Dynamit Nobel AG and the Registrant, including
              exhibits thereto, incorporated by reference to Exhibit 10.24 to
              the 1990 S-2.

     10.24    Amended and Restated Stock Option Agreement between the Registrant
              and David N. Keys dated November 12, 1990, effective October 30,
              1990, incorporated by reference to Exhibit 19 to the Registrant's
              quarterly Report on Form 10-Q for the fiscal quarter ended
              December 31, 1990.

     10.25    American Pacific Corporation 1991 Nonqualified Stock Option Plan,
              incorporated by reference to Exhibit 10.26 to the 1990 S-2.

     10.26    Indenture dated February 21, 1992, between the Registrant and
              American Azide Corporation, a Nevada corporation, and Security
              Pacific National Bank, Trustee, relating to the Registrant's
              outstanding 11% Subordinated Secured Term Notes, incorporated by
              reference to Exhibit 10.1 to the Registrant's Current Report on
              Form 8-K dated February 28, 1992 (the "Form 8-K").

     10.27    Form of Subordinated Secured Term Note dated February 21, 1992,
              made by Registrant Incorporated by reference to Exhibit 10.2 to
              the Form 8-K.

     10.28    Form of Note and Warrants Purchase Agreement dated February 21,
              1992, relating to the Registrant's Subordinated Secured Term
              Notes, incorporated by reference to Exhibit 10.3 to the Form 8-K.

     10.29    Form of Warrant to purchase Common Stock of the Registrant dated
              February 21, 1992, incorporated by reference to Exhibit 10.4 to
              the Form 8-K.

                                       36
<PAGE>
 
     10.30    Form of Warrant to purchase Common Stock of American Azide
              Corporation dated February 21, 1992, incorporated by reference to
              Exhibit 10.5 to the Form 8-K.

     10.31    Stock Option Agreement between American Pacific Corporation and
              Joseph W. Cuzzupoli dated January 30, 1992, incorporated by
              reference to Exhibit 4.6 of Registrant's Registration Statement on
              Form S-8 (File No. 33-52898).

     10.32    Articles of organization of Gibson Ranch Limited - Liability
              Company dated August 25, 1993, incorporated by reference to
              Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for
              the fiscal year ended September 30, 1993 (the "1993 10-K").

     10.33    Operating agreement of Gibson Ranch Limited - Liability Company, a
              Nevada Limited - Liability Company, incorporated by reference to
              Exhibit 10.34 to the 1993 10-K.

     10.34    American Pacific Corporation 1994 Directors' Stock Option Plan
              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").

     10.35    Stock Option Agreement between American Pacific Corporation and
              General Technical Services, Inc. dated July 11, 1995 incorporated
              by reference to Exhibit 10.35 to the 1995 10-K.

      *22     Subsidiaries of the Registrant.

      *23     Consent of Deloitte & Touche LLP.

      *24     Power of Attorney, included on Page 38.

      *27     Financial Data Schedule (filed electronically)

* FILED HEREWITH.

         (b)  Reports on Form 8-K.
              --------------------

              None.

                                       37
<PAGE>
 
                               POWER OF ATTORNEY
                               -----------------

     American Pacific Corporation and each of the undersigned do hereby appoint
C. Keith Rooker and David N. Keys and each of them severally, its or his true
and lawful attorneys to execute on behalf of American Pacific Corporation and
the undersigned any and all amendments to this Report and to file the same with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission. Each of such attorneys shall have the power
to act hereunder with or without the others.

                                   SIGNATURES
                                   ----------

     Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated:  December 18, 1996     AMERICAN PACIFIC CORPORATION
                                      (Registrant)



                              By: /s/ C. Keith Rooker
                                  --------------------------------
                                  C. Keith Rooker
                                  Executive Vice President
                                  and General Counsel



                              By: /s/ David N. Keys
                                  --------------------------------
                                  David N. Keys
                                  Vice President, Chief Financial
                                  Officer and Treasurer, Principal
                                  Financial and Accounting Officer

                                       38
<PAGE>
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on behalf of the Registrant by the following
persons in the capacities and on the dates indicated.


 /s/ Fred D. Gibson, Jr.                      Date:  December 18, 1996
------------------------------------------
Fred D. Gibson, Jr.
President and Chief
Executive Officer, and
Director


 /s/ C. Keith Rooker                          Date:  December 18, 1996
------------------------------------------
C. Keith Rooker
Executive Vice President,
and Director


 /s/ John R. Gibson                           Date:  December 18, 1996
------------------------------------------
John R. Gibson
Vice President,
and Director


 /s/ Norval F. Pohl                           Date:  December 18, 1996
------------------------------------------
Norval F. Pohl, Ph.D.
Director


 /s/ Thomas A. Turner                         Date:  December 18, 1996
------------------------------------------
Thomas A. Turner
Director


 /s/ T. L. War                                Date:  December 18, 1996
------------------------------------------
T. L. War
Director


 /s/ David N. Keys                            Date:  December 18, 1996
------------------------------------------
David N. Keys
Vice President, Chief
Financial Officer, and Treasurer;
Principal Financial and Accounting Officer


 /s/ Berlyn D. Miller                         Date:  December 18, 1996
------------------------------------------
Berlyn D. Miller
Director

                                       39
<PAGE>
 
 /s/ Jane L. Williams                         Date:  December 18, 1996
------------------------------------------
Jane L. Williams
Director


 /s/ Charles H. Feltz                         Date:  December 18, 1996
------------------------------------------
Charles H. Feltz
Director


 /s/ Victor M. Rosenzweig                     Date:  December 18, 1996
------------------------------------------
Victor M. Rosenzweig
Director

                                       40
<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, 1996 and
1995, 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, 1996.  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, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1996 in conformity with generally
accepted accounting principles.


/s/ Deloitte & Touche LLP
 
DELOITTE & TOUCHE LLP
 
Las Vegas, Nevada
November 19, 1996

                                       41
<PAGE>
 
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                       Notes             1996            1995
                                                                    ---------------------------------------------
<S>                                                                 <C>              <C>             <C> 
ASSETS                                                            
CURRENT ASSETS:                                                   
  Cash and cash equivalents                                         1,6              $ 18,501,000    $ 24,540,000
  Short-term investments                                            1                   2,000,000       2,000,000
  Accounts and notes receivable                                     1                   4,165,000       2,534,000
  Income tax receivable                                             7                                   2,570,000
  Related party notes receivable                                    1                     737,000         888,000
  Inventories                                                       1,2                11,297,000       7,094,000
  Prepaid expenses and other assets                                                       946,000         986,000
                                                                                     ----------------------------
    Total current assets                                                               37,646,000      40,612,000
PROPERTY, PLANT AND EQUIPMENT, NET                                  1,4,6,11,14        77,217,000      80,944,000
DEVELOPMENT PROPERTY                                                1,5,6               8,631,000      10,296,000
RESTRICTED CASH                                                     3,6,9,10            4,969,000       3,743,000
REAL ESTATE EQUITY INVESTMENTS                                      5,6                18,698,000      17,725,000
DEBT ISSUE COSTS                                                    1                     965,000       1,220,000
INTANGIBLE ASSETS                                                   8,15                1,760,000       2,995,000
OTHER ASSETS                                                                              133,000         254,000
                                                                                     ----------------------------
TOTAL ASSETS                                                                         $150,019,000    $157,789,000
                                                                                     ============================
LIABILITIES AND SHAREHOLDERS' EQUITY                                                                  
CURRENT LIABILITIES:                                                                                  
  Accounts payable and accrued liabilities                                           $  5,407,000    $  5,672,000
  Notes payable and current portion of                                                                
    long-term debt                                                  3,6,9,10,11         7,334,000       8,500,000
                                                                                     ----------------------------
    Total current liabilities                                                          12,741,000      14,172,000
LONG-TERM DEBT                                                      3,6,9,10,11        29,452,000      34,054,000
DEFERRED INCOME TAXES                                               1,7                10,101,000      10,568,000
MINIMUM PENSION LIABILITY                                           8                   1,175,000
                                                                                     ----------------------------
TOTAL LIABILITIES                                                                      52,294,000      59,969,000
                                                                                     ----------------------------
COMMITMENTS AND CONTINGENCIES                                       5,10,14,15                       
WARRANTS TO PURCHASE COMMON STOCK                                   6,12                3,569,000       3,569,000
SHAREHOLDERS' EQUITY:                                               6,12                       
  Common stock - $.10 par value, 20,000,000 authorized:                                   823,000         822,000
    outstanding - 8,098,621 in 1996 and 8,100,791 in 1995                                             
  Capital in excess of par value                                    1                  78,331,000      78,285,000
  Retained earnings                                                 1                  15,978,000      16,189,000
  Treasury stock (130,170 shares in 1996 and 116,000 in 1995)       1                    (879,000)       (789,000)
  Receivable from the sale of stock                                 1,12                  (97,000)        (97,000)
  Excess additional pension liability                               8                                    (159,000)
                                                                                     ----------------------------
    Total shareholders' equity                                                         94,156,000      94,251,000
                                                                                     ----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                           $150,019,000    $157,789,000
                                                                                     ============================
</TABLE> 

See Notes to Consolidated Financial Statements.

                                       42
<PAGE>
 
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                             Notes           1996             1995             1994
                                                           -------------------------------------------------------------
<S>                                                        <C>           <C>               <C>              <C>
SURCHARGE REVENUES                                         6,9,10,13                                        $  8,913,000
SALES AND OPERATING REVENUES                               6,10,13,16    $42,381,000       $39,250,000        42,280,000
                                                                         -----------------------------------------------
TOTAL SALES AND OPERATING                                                                                 
 REVENUES                                                                 42,381,000        39,250,000        51,193,000
COST OF SALES                                              1,9,14,15      32,579,000        29,861,000        26,317,000
                                                                         -----------------------------------------------
GROSS PROFIT                                                               9,802,000         9,389,000        24,876,000
SELLING, GENERAL AND                                                                                      
 ADMINISTRATIVE EXPENSES                                   8,10,15         9,261,000        11,006,000        12,364,000
RESEARCH AND DEVELOPMENT                                   1                 106,000           204,000           158,000
FIXED ASSET IMPAIRMENT CHARGE                              11                                                 39,401,000
INVOLUNTARY TERMINATION AND                                                                               
 ENHANCED RETIREMENT BENEFITS                                                                  226,000       
EQUITY IN EARNINGS OF REAL                                                                                
 ESTATE VENTURE                                            5                 700,000                                               
                                                                         -----------------------------------------------
OPERATING INCOME (LOSS)                                                    1,135,000        (2,047,000)      (27,047,000)
INTEREST AND OTHER INCOME                                  1,3,5,9,12      1,381,000         1,429,000         1,088,000
INTEREST AND OTHER EXPENSE                                 1,5,6           2,836,000         1,709,000         3,315,000
                                                                         -----------------------------------------------
LOSS BEFORE CREDIT FOR                                                                                    
 INCOME TAXES                                                               (320,000)       (2,327,000)      (29,274,000)
CREDIT FOR INCOME TAXES                                    1,7              (109,000)         (791,000)       (9,937,000)
                                                                         -----------------------------------------------
NET LOSS                                                   17            $  (211,000)      $(1,536,000)     $(19,337,000)
                                                                         ===============================================
NET LOSS PER COMMON SHARE                                  1,16          $      (.03)      $      (.19)     $      (2.38)
                                                                         ===============================================
</TABLE> 
 
 
See Notes to Consolidated Financial Statements.

                                       43
<PAGE>
 
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                       1996            1995             1994
                                                                                  ----------------------------------------------
<S>                                                                               <C>              <C>              <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:                                            
 Net loss                                                                         $  (211,000)     $(1,536,000)     $(19,337,000)
                                                                                  ----------------------------------------------
 Adjustments to reconcile net loss  to net cash provided by operating                              
 activities:                                                                                      
   Depreciation and amortization                                                    7,810,000        5,883,000         7,679,000
   Fixed asset impairment charge                                                                                      39,401,000
   Basis in development property sold                                               2,449,000        1,614,000
   Equity in real estate venture                                                      700,000      
   Changes in assets and liabilities:                                                               
     Decrease in short-term investments                                                                                5,995,000
     (Increase) decrease in accounts and notes receivable                          (1,480,000)       5,525,000         2,003,000
     (Increase) decrease in income tax receivable                                   2,570,000       (2,570,000)
     (Increase) decrease in inventories                                            (4,203,000)      (1,411,000)        1,061,000
     (Increase) decrease in restricted cash                                        (1,226,000)      (2,159,000)       35,634,000
     (Increase) decrease in prepaid expenses and other                                198,000         (323,000)          335,000
     Net change in pension assets and liabilities                                                      190,000           435,000
     Increase (decrease) in accounts payable and accrued liabilities                 (265,000)         (17,000)          348,000
     Increase (decrease) in deferred income taxes                                    (467,000)       5,170,000       (10,748,000)
                                                                                  ----------------------------------------------
     Total adjustments                                                              6,086,000       11,902,000        82,143,000
                                                                                  ----------------------------------------------
       Net cash provided by operating activities                                    5,875,000       10,366,000        62,806,000
                                                                                  ----------------------------------------------
 CASH FLOWS FROM INVESTING ACTIVITIES:                                                             
   Capital expenditures                                                            (3,248,000)      (4,462,000)       (9,218,000)
   Real estate equity advances and development property additions                  (2,457,000)      (3,583,000)       (2,078,000)
   Payments for Halotron rights                                                                                         (188,000)
                                                                                  ----------------------------------------------
       Net cash used for investing activities                                      (5,705,000)      (8,045,000)      (11,484,000)
                                                                                  ----------------------------------------------
 CASH FLOWS FROM FINANCING ACTIVITIES:                                                             
   Principal payments on debt                                                      (6,166,000)                       (41,650,000)
   Issuance of common stock                                                            47,000           82,000           467,000
   Treasury stock acquired                                                            (90,000)        (747,000)          (42,000)
                                                                                  ----------------------------------------------
       Net cash used for financing activities                                      (6,209,000)        (665,000)      (41,225,000)
                                                                                  ----------------------------------------------
 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              (6,039,000)       1,656,000        10,097,000
 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                    24,540,000       22,884,000        12,787,000
                                                                                  ----------------------------------------------
 CASH AND CASH EQUIVALENTS, END OF PERIOD                                         $18,501,000     $ 24,540,000      $ 22,884,000
                                                                                  ==============================================
 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                 
 Cash paid during period for interest (net of amounts capitalized)                $ 2,197,000     $  1,700,000      $  2,352,000
                                                                                  ==============================================
 Taxes paid                                                                                                         $    700,000
                                                                                  ==============================================
 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING                                          
   ACTIVITIES:                                                                                      
 Receivable from the sale of stock                                                                                  $     97,000
                                                                                  ==============================================
 Excess additional pension liability                                              $ 1,175,000     $    606,000      $    505,000
                                                                                  ==============================================
 Development property transferred to property                                                                       $  1,723,000
                                                                                  ==============================================
</TABLE> 
 

See Notes to Consolidated Financial Statements.

                                       44
<PAGE>
 
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                Par Value                                               Notes           Excess    
                                   Number of    of Shares      Capital in                               Receivable      Additional
                                   Common       Issued and     excess of    Retained        Treasury    from the Sale   Pension   
                           Notes   Shares       Outstanding    Par Value    Earnings        Stock       of Stock        Liability 
                           -------------------------------------------------------------------------------------------------------
<S>                        <C>     <C>          <C>            <C>          <C>             <C>           <C>        <C> 
BALANCES,                                                                                                                         
 OCTOBER 1, 1993                   8,098,691    $810,000       $77,651,000  $ 37,062,000                             $(1,270,000) 
Net loss                                                                     (19,337,000)                               
Issuance of common                                                                                                      
 stock                        12      96,700      10,000           554,000                                              
Treasury stock acquired               (4,700)                                               $ (42,000)                  
Receivable from the sale                                                                                                
 of stock                                                                                                 $(97,000)     
Excess additional                                                                                                       
 pension liability             8                                                                                         505,000
                              --------------------------------------------------------------------------------------------------
BALANCES,                                                                                                               
 SEPTEMBER 30, 1994                8,190,691     820,000        78,205,000    17,725,000      (42,000)     (97,000)     (765,000)
Net loss                                                                      (1,536,000)                               
Issuance of common                                                                                                      
 stock                        12      21,400       2,000            80,000                                              
Treasury stock acquired             (111,300)                                                (747,000)                  
Excess additional                                                                                                       
 pension liability             8                                                                                         606,000
                              --------------------------------------------------------------------------------------------------
BALANCES,                                                                                                               
 SEPTEMBER 30, 1995                8,100,791     822,000        78,285,000    16,189,000      (789,000)    (97,000)     (159,000)
Net loss                                                                        (211,000)                               
Issuance of common                                                                                                      
 stock                        12      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)     
                              ==================================================================================================
</TABLE>


See Notes to Consolidated Financial Statements.

                                       45
<PAGE>
 
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
--------------------------------------------------------------------------------
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 years 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, 1996 and 1995 closely approximated amortized cost.  There were
    no material unrealized gains or losses on investment securities and no
    recorded adjustments to amortized cost at September 30, 1996 or 1995.

    Related Party Notes Receivable - Related party notes receivable represent
    ------------------------------
    demand notes bearing interest at a bank's prime rate from various officers
    and, at September 30, 1995, a corporation owned by a director of the
    Company.

    Inventories - Inventories are stated at the lower of cost or market.  Cost
    -------------------------------------------------------------------
    of the specialty chemicals segment inventories is determined principally on
    a moving average basis and cost of the environmental protection equipment
    segment inventories is determined principally on the specific identification
    basis.

    Property, Plant and Equipment - Property, plant and equipment are carried at
    -----------------------------
    the lower of cost less accumulated depreciation, or estimated fair value.
    Depreciation is computed on the straight line method over the estimated
    useful lives of the assets (3 to 12 years for machinery and equipment and 15
    to 31 years for buildings and improvements).

                                       46
<PAGE>
 
    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, 1996.
    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, 1996:
    -----------------------------------------------

    Cash and cash equivalents, accounts and notes receivable, restricted cash,
    and accounts payable and accrued liabilities - The carrying value of these
    items are a reasonable estimate of their fair value.

    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 long-term debt and related warrants were issued
    in February 1992.  The Company believes that similar terms would be
    available at September 30, 1996.

    Sales and Revenue Recognition - Sales of the specialty chemicals segment are
    -----------------------------
    recognized as the product is 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 (8,104,000,
    8,177,000 and 8,121,000 for the years ended September 30, 1996, 1995 and
    1994).  Common share equivalents, although not considered during net loss
    years, consist of outstanding stock options and warrants.  See Notes 6 and
    16 for a description of the potential effects on net 

                                       47
<PAGE>
 
    income per common share of warrants issued in connection with the issuance
    of certain notes.

    Income Taxes - The Company accounts for income taxes under the provision 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.  Actual results may differ from
    estimates.

    Recently Issued Accounting Standards - In March 1995, the FASB issued SFAS
    ------------------------------------
    No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-
    Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived
    assets and certain identifiable intangibles be reviewed for impairment
    whenever events or changes in circumstances indicate that the carrying
    amount of an asset may not be recoverable. SFAS No. 121 is effective for
    fiscal years beginning after December 15, 1995. (See Note 16.)

    In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
    Compensation" which establishes financial accounting and reporting standards
    for stock-based employee compensation plans and for transactions in which an
    entity issues its equity instruments to acquire goods or services from
    nonemployees.  SFAS No. 123 is generally effective for fiscal years
    beginning after December 15, 1995.  The Company intends to provide the pro
    forma and other additional disclosures about stock-based employee
    compensation plans in its fiscal 1997 consolidated financial statements as
    required by SFAS No. 123.

    Reclassification - Certain reclassifications have been made in the 1995 and
    ----------------
    1994 consolidated financial statements in order to conform to the
    presentation used in 1996.

2.  INVENTORIES

    Inventories consist of the following:

<TABLE>
<CAPTION> 
                                    -------------------------
                                          September 30,
                                    -------------------------
                                        1996          1995
                                    -----------   -----------
                                    
<S>                                 <C>            <C> 
    Work-in-process                 $ 5,011,000    $3,828,000
    Raw material and supplies         6,286,000     3,266,000
                                    -------------------------
    Total                           $11,297,000    $7,094,000
                                    =========================
</TABLE>

3.  RESTRICTED CASH

    At September 30, 1996, restricted cash consists, in part, of $1,142,000 held
    in a cash collateral account by Seafirst Bank, the lender which provided a
    term loan (the "WECCO loan") as the principal financing for an ammonium
    perchlorate ("AP") manufacturing facility erected and 

                                       48
<PAGE>
 
    operated by the Company's indirect subsidiary, Western Electrochemical
    Company ("WECCO"). Funds in the cash collateral account are restricted for
    future indemnity (if any) payments relating to the WECCO loan. Pursuant to
    the contractual right reserved solely for WECCO in the WECCO loan agreement,
    on May 10, 1994, WECCO directed Seafirst Bank to apply all of the funds in
    the cash collateral account and default account (another restricted cash
    account that secured the loan), except for the funds that continue to be
    held, to effect an early repayment of the outstanding balances due under the
    WECCO loan. (See Note 9.)

    The $1,142,000 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").  WECCO's obligation to
    return such funds is included in long-term debt at September 30, 1996.  Any
    indemnity payments made will serve to reduce the cash collateral account and
    WECCO's obligation to Thiokol.

    Restricted cash at September 30, 1996 also includes $3,827,000 held in a
    Trust account by the Trustee under the indenture relating to a $40,000,000
    financing (the "Azide Notes") concluded in February 1992.  (See Note 6.)

4.  PROPERTY, PLANT AND EQUIPMENT

    Property, plant and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                        -------------------------
                                               September 30,
                                        -------------------------
                                           1996           1995
                                        ----------     -----------
                                        
<S>                                     <C>            <C>
    Land                                $   305,000    $   305,000
    Buildings and improvements           13,865,000     13,860,000
    Machinery and equipment              76,935,000     73,759,000
    Construction in progress                139,000        142,000
                                        --------------------------
    Total                                91,244,000     88,066,000
    Less:  accumulated depreciation      14,027,000      7,122,000
                                        --------------------------
    Property, plant and equipment, net  $77,217,000    $80,944,000
                                        ==========================
</TABLE>

    In 1995 and 1994, approximately $1,800,000 and $4,000,000, respectively, in
    interest costs were capitalized on assets constructed for the Company's own
    use.  Certain of the Company's property, plant and equipment is pledged as
    collateral to secure debt.  (See Note 7.)  A fixed asset impairment charge
    was recognized in 1994.  (See Note 11.)

5.  REAL ESTATE EQUITY INVESTMENTS

    During fiscal 1993, AmPac Development ("AMDECO"), a wholly-owned subsidiary
    of the Company, contributed approximately 240 acres of development property
    to Gibson Ranch Limited Liability Company ("GRLLC"). The development
    property contributed had a carrying value of approximately $12,300,000 at
    the date of contribution which was transferred to Real Estate Equity
    Investments on the accompanying consolidated balance sheets. AMDECO's
    interest in GRLLC is assigned to secure the Azide Notes. A local real estate
    development

                                       49
<PAGE>
 
    group ("D") contributed an adjacent 80-acre parcel to GRLLC. GRLLC is
    developing the 320-acre parcel principally as a residential real estate
    development.

    Each of AMDECO and D is obligated to loan to GRLLC, under a revolving line
    of credit, up to $2,400,000 at market interest rates.  However, D will not
    be required to advance funds under its revolving line of credit until
    AMDECO's line is exhausted.  At September 30, 1996, AMDECO had advanced all
    of its committed amount of $2,400,000 to GRLLC.  In November, 1995, AMDECO
    committed to advance an additional $1,700,000 to D.  D is required to
    advance any funds received to GRLLC.  Funds advanced under this additional
    commitment bear annual interest of 12 percent.  Advances to GRLLC under
    these commitments totaled $2,828,000 at September 30, 1996.

    D is the managing member of GRLLC and is managing the business conducted by
    GRLLC.  Certain major decisions, such as incurring debt and changes in the
    development plan or budget may be made only by a management committee on
    which AMDECO is equally represented.  The profits and losses of GRLLC will
    be split equally between AMDECO and D after the return of advances under the
    revolving line of credit and agreed upon values for initial contributions.

    In July 1990, AMDECO contributed $725,000 to Gibson Business Park Associates
    1986-I, a real estate development limited partnership (the "Partnership"),
    in return for a 70% interest as a general and limited partner, and other
    limited partners contributed $315,000 in return for a 30% interest as
    limited partners. Such other limited partners included the Company's
    President and Executive Vice-President and certain members of the Company's
    Board of Directors. The Partnership, in turn, contributed $1,040,000 to 3770
    Hughes Parkway Associates Limited Partnership, a Nevada limited partnership
    ("Hughes Parkway"), in return for a 33% interest as a limited partner in
    Hughes Parkway. The Company entered into an agreement with Hughes Parkway
    pursuant to which the Company leases office space in a building in Las
    Vegas, Nevada (see Note 10). In 1992, AMDECO's investment in the partnership
    was transferred to the Company.

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,
                                            --------------------------
                                               1996           1995
                                            -----------   ------------
                                            
<S>                                         <C>            <C>
  Subordinated secured term notes           
  (interest at 11%)                         $33,310,000    $37,933,000
  Obligation to deliver AP (see Note 9)       2,334,000      3,500,000
  Indemnity obligation (see Notes 3 and 9)    1,142,000      1,121,000
                                            --------------------------
  Total                                      36,786,000     42,554,000
  Less current portion                        7,334,000      8,500,000
                                            --------------------------
  Total                                     $29,452,000    $34,054,000
                                            ==========================
</TABLE>

                                       50
<PAGE>
 
    In February 1992, the Company concluded a $40,000,000 financing for the
    design, construction and start-up of a sodium azide facility.  The funds
    were provided by a major state public employee retirement fund and a leading
    investment management company.  The financing is in the form of $40,000,000
    principal amount of noncallable subordinated secured notes (the "Azide
    Notes") issued at par, providing for the semi-annual payment in arrears of
    interest at the rate of 11% per annum. Principal is to be amortized to the
    extent of $5,000,000 on each of the fourth (February 1996) through ninth
    (February 2001) anniversary dates of the funding, with the remaining
    $10,000,000 principal amount to be repaid on the tenth anniversary date. The
    Company has registered the Azide Notes but has no obligation to maintain the
    effectiveness of the Registration Statement after December 31, 1994. The
    Azide Notes are secured by the fixed assets and stock of American Azide
    Corporation ("AAC"), an indirect wholly-owned subsidiary of the Company, as
    well as by a mortgage on land in Clark County, Nevada being developed by
    AMDECO and by certain restricted cash (see Note 3). Approximately 240 acres
    of such land has been contributed to GRLLC subject to certain conditions.
    AMDECO's interest in GRLLC has been assigned to secure the Azide Notes (see
    Note 5). The Company issued to the purchasers of the Notes warrants (the
    "Warrants"), exercisable for a ten-year period commencing on December 31,
    1993, to purchase shares of Common Stock at an exercise price of $14.00 per
    share. The maximum number of shares purchasable upon exercise of the
    Warrants is 2,857,000 shares. The Warrants are exercisable, at the option of
    their holders, to purchase up to 20 percent of the common stock of AAC,
    rather than the Company's Common Stock. In the event of such an election,
    the exercise price of the Warrants will be based upon a pro rata share of
    AAC's capital, adjusted for earnings and losses, plus interest from the date
    of contribution. At the option of the Warrant holders, the exercise price of
    the Warrants may be paid by delivering an equal amount of Azide Notes.

    The indenture imposes various operating restrictions upon the Company
    including restrictions on (i) the incurrence of debt; (ii) the declaration
    of dividends and the purchase and repurchase of stock; (iii) certain mergers
    and consolidations, and (iv) certain dispositions of assets.  Management
    believes the Company has complied with these operating restrictions.

    On each of December 31, 1995, 1997 and 1999, holders of the Warrants will
    have the right to put to the Company as much as one-third thereof based upon
    the differences between the Warrant exercise price and prices determined by
    multiplying the Company's fully diluted earnings per share at multiples of
    13, 12 and 11, respectively, but the Company's obligation in such respect is
    limited to $5,000,000 on each of such dates and to $15,000,000 in the
    aggregate.  Such put rights may not be exercised if the Company's Common
    Stock has traded at values during the preceding 90-day period that would
    yield to the warrant holders a 25% internal rate of return to the date of
    the put (inclusive of the 11% Azide Notes' yield).  At September 30, 1996,
    it is not probable that the remaining put rights will become exercisable.
    On or after December 31, of each of the years 1995 through 1999, the Company
    may call up to 10% of the Warrants (but no more than 50% in the aggregate)
    at prices that would provide a 30% internal rate of return to the holders
    thereof through the date of call (inclusive of the 11% Azide Notes' yield).
    The holders of the Warrants were also granted the right to require that the
    Common Stock underlying the Warrants be registered on one occasion, as well
    as certain incidental registration rights.

                                       51
<PAGE>
 
    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.  Although not applicable for the fiscal
    years ended September 30, 1996, 1995 and 1994, 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.

    Notes payable and long-term debt maturities are as follows:

<TABLE>
<CAPTION>
             ------------------------ 
               For the Years Ending
                   September 30,
             -----------------------
 
                       <S>                   <C>
                       1997                  $ 7,334,000
                       1998                    5,000,000
                       1999                    6,142,000
                       2000                    5,000,000
                       2001                    5,000,000
                       2002                    8,310,000
                                             -----------
                       Total                 $36,786,000
                                             ===========
</TABLE>

7.  INCOME TAXES

    The Company accounts for income taxes in accordance with SFAS No. 109 using
    an asset and liability approach.  The asset and liability approach requires
    the recognition of deferred tax liabilities and assets for the expected
    future tax consequences of temporary differences between the carrying
    amounts and the tax bases of the Company's assets and liabilities.  Future
    tax benefits attributable to temporary differences are recognized to the
    extent that realization of such benefits is more likely than not.  These
    future tax benefits are measured by applying currently enacted tax rates.

    The following table provides an analysis of the Company's credit for income
    taxes for the years ended September 30:

<TABLE>
<CAPTION>
                                            -------------------------------------------
                                               1996            1995            1994
                                            -------------------------------------------
<S>                                         <C>             <C>            <C>
   Current                                  $(1,349,000)    $(4,888,000)   $    426,000
   Deferred (federal & state)                 1,240,000       4,097,000     (10,363,000)
                                            -------------------------------------------
   Provision (credit) for income taxes      $  (109,000)    $  (791,000)   $ (9,937,000)
                                            ===========================================
</TABLE>

                                       52
<PAGE>
 
    The temporary differences and tax carryforwards (which expire in years
    beginning after September 30, 2008) that created deferred tax assets and
    liabilities at September 30, 1996 are detailed below:

<TABLE>
<S>                                     <C>
    Net operating loss carryforwards         $16,618,000
    Inventory capitalization                     349,000
    Alternative minimum tax credits            1,395,000
    Accruals                                     127,000
                                             -----------
      Total deferred assets                   18,489,000
                                             -----------
    Property                                  23,711,000
    Accrued income and expenses                  412,000
    State taxes                                  600,000
    Other                                      3,867,000
                                             -----------
      Total deferred liabilities              28,590,000
                                             -----------
  
    Net Deferred Tax Liability               $10,101,000
                                             ===========
</TABLE>

    A reconciliation of the total credit for income taxes to amounts computed by
    applying the federal tax rate to income is as follows for the years ended
    September 30:

<TABLE>
<CAPTION>
                          ---------------------------------------------------------
                            1996                1995                 1994
                           Amount       %      Amount       %       Amount        %
                          ---------------------------------------------------------
<S>                       <C>          <C>    <C>          <C>   <C>             <C>
   Computed at            
    statutory federal     
    rate                  $(109,000)   34%    $(814,000)   35%    $(9,953,000)   34%
   State income taxes     
    net of federal        
    benefits                                                          292,000     1
   Surtax benefit                                23,000    (1)       (292,000)   (1)
   Other                                                               16,000
                          ---------------------------------------------------------
   Credit for             
    income taxes          $(109,000)   34%    $(791,000)   34%    $(9,937,000)   34%
                          =========================================================
</TABLE>

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, 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 7.75% and 7% in 1996 and 1995.  The rate of salary
    progression used to determine the projected benefit obligations was 5% in
    both 1996 and 1995.  The expected 

                                       53
<PAGE>
 
    long-term rate of return on plan assets was 8.0% in 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, 1996 and 1995.

<TABLE>
<CAPTION>
                                                       --------------------------
                                                          1996           1995    
                                                       --------------------------
<S>                                                    <C>            <C>        
   Actuarial present value of benefit obligations:                         
   Vested benefits                                     $6,524,000     $ 7,131,000
   Nonvested benefits                                   1,254,000         832,000
                                                       --------------------------
   Accumulated benefit                                 $7,778,000     $ 7,963,000
                                                       ==========================
   Projected benefit obligation                        $9,754,000     $10,159,000
   Plan assets at fair value                            8,459,000      (7,012,000)
                                                       --------------------------
   Projected benefit obligation in excess of           
     Plan assets                                        1,295,000       3,147,000 
   Unrecognized net transition obligation                                         
     amortized over fifteen years                        (916,000)     (1,069,000)
   Unrecognized net loss and prior                                                
     service cost                                        (499,000)     (2,302,000) 
                                                       --------------------------
   Prepaid pension                                     $ (120,000)       (224,000)
   Additional liability                                                 1,399,000
                                                       --------------------------
   Required minimum liability                                         $ 1,175,000
                                                       ==========================
   Balance of:                                                                   
    Intangible asset                                                  $ 1,016,000
                                                       ==========================
    Equity account                                                    $   159,000
                                                       ========================== 
</TABLE>

    Net periodic pension cost was $1,187,000, $1,295,000 and $1,480,000,
    respectively, for the years ended September 30, 1996, 1995 and 1994, and
    consists of the following:

<TABLE>
<CAPTION>
                                       ----------------------------------------
                                          1996           1995           1994
                                       ----------------------------------------
<S>                                    <C>            <C>            <C>
    Service cost                       $  765,000     $  787,000     $  906,000
    Interest cost                         696,000        620,000        592,000
    Return on Plan assets                (519,000)      (708,000)      (315,000)
    Net total of other components         245,000        596,000        297,000
                                       ----------------------------------------
    Net periodic pension cost          $1,187,000     $1,295,000     $1,480,000
                                       ========================================
</TABLE>
                                                                    
    In November 1994, the Board of Directors approved a Supplemental Retirement
    Plan ("SRP") that currently applies only to the Chairman of the Company. The
    SRP has not and is not expected to have a material effect on the Company's
    results of operations or financial condition.

9.  AGREEMENTS WITH THIOKOL CORPORATION                            
                                                                   
    In 1989, WECCO 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, WECCO would receive revenues in respect of at least 20 million
    pounds per year, 5 million per quarter, over seven 

                                       54
<PAGE>
 
    years (140 million pounds in the aggregate), beginning with initial
    production. WECCO was required to impose a surcharge on all sales of AP
    sufficient to amortize the WECCO loan over or during the period of such
    revenue assurance.
 
    The Surcharge Agreement required that the AP product price be divided into
    two components.  The surcharge component of the AP price represented the
    amount necessary to amortize principal, pay interest, and meet related
    obligations on the WECCO loan over seven years.  The surcharge component was
    deposited into the cash collateral account.  The manufacturing component of
    the AP price included manufacturing costs and profits.  The manufacturing
    component also included a $.05 per AP pound charge which was deposited into
    the default account.
 
    The Surcharge Agreement obligated Thiokol to fund the cash collateral
    account in the event the balance of such account was less than the balance
    required under the terms of the WECCO loan.  Thiokol's obligation was
    subject to the availability of appropriations to NASA.  Thiokol deposited
    approximately $7,935,000 in the cash collateral account on February 28, 1990
    to bring the balance of the cash collateral account to the level required
    under the terms of the WECCO loan.
 
    In the event of the termination of or failure of NASA to continue to fund
    its contract with Thiokol (unless replaced by a successor contract) or in
    the event of default under the loan caused by the federal government,
    Thiokol was obligated to pay all termination expenses, including the
    outstanding principal and interest under the WECCO loan.  Thiokol's
    obligations were subject to the availability of appropriations to NASA.

    The Advance and Surcharge Agreements were approved and consented to by NASA.
    NASA and the United States Air Force entered into a Memorandum of Agreement
    providing for a sharing of the obligations under the Advance and Surcharge
    Agreements.  NASA and Thiokol entered into separate agreements regarding
    Thiokol's obligations for AP orders and payments under the Advance and
    Surcharge Agreements.

    On May 10, 1994, WECCO and Thiokol executed an amendment to the Advance
    Agreement ("the Amendment"). The Amendment fully resolved all issues between
    Thiokol and WECCO relating to the interpretation and application of the
    NASA/Thiokol agreements (see Note 10). Under and because of the resolution
    of its dispute with Thiokol completed by the Amendment, WECCO exercised the
    contractual right reserved solely to it in the WECCO loan agreement to
    direct that the funds in the cash collateral account and default account be
    used to repay the WECCO loan, including accrued interest, any interest rate
    swap termination fee, and any other costs relating to the repayment. On May
    10, 1994, such prepayment was completed. Upon early repayment in full of the
    WECCO loan, the Amendment provided for the termination as fulfilled of the
    Surcharge Agreement and termination of certain other agreements relating to
    the repayment of advances (the Working Capital Agreement and the Repayment
    Plan).

    The Amendment confirms that the 1989 Advance Agreement has a continuous term
    commencing with the first production of AP at the WECCO plant in August 1989
    and ending September 30, 1996, (approximately two months subsequent to the
    estimated original term of the Advance Agreement).  The Amendment provides
    for WECCO to receive revenues, 

                                       55
<PAGE>
 
    excluding surcharge revenues, from sales of AP of approximately $33 million,
    $28 million and $20 million during the fiscal years ending September 30,
    1994, 1995 and 1996, respectively. Prior to the effective date of the
    Amendment, WECCO was indebted to Thiokol for approximately $10,208,000 under
    the Working Capital Agreement and Repayment Plan. The Amendment required
    WECCO to pay $750,000 of this amount ratably as deliveries of AP were made
    over the remainder of the fiscal year ended September 30, 1994. The
    remaining obligation under the Working Capital Agreement and Repayment Plan
    has been and will continue to be repaid by WECCO through delivery of AP.

    The Company believes that the Amendment to the 1989 Advance Agreement
    represents a fully satisfactory commercial resolution of its dispute with
    Thiokol.  AP revenues under the NASA/Thiokol agreements have resulted in net
    cash flows to WECCO from AP operations during the fiscal years ended
    September 30, 1996, 1995 and 1994, substantially the same as those that
    would have been generated under the NASA/Thiokol agreements.

    As the Company has previously reported however, certain changes, which would
    have occurred in any event under the NASA/Thiokol agreements, have occurred.
    The Surcharge has been eliminated. The Surcharge would have ended in any
    event when amounts sufficient in the aggregate to pay principal and interest
    on the WECCO loan had been paid through the Surcharge. This was expected to
    occur during the calendar year 1994 under the NASA/Thiokol agreements. As a
    result of the elimination of the Surcharge and as expected, gross revenues
    from AP operations during fiscal 1994, 1995 and 1996 have been less than
    gross AP revenues during the fiscal years ended September 30, 1993, 1992,
    1991 and 1990. In addition, Surcharge revenues have historically been in
    excess of depreciation and amortization and interest expense related to the
    AP manufacturing facility. Further, the default account payment of $0.05 per
    pound of AP, or $1 million per year, formerly included in the AP price, is
    no longer part of the AP price because there will no longer be a default
    account required under the WECCO loan, the contents of the default account
    having been dedicated to payments of principal and interest under and as
    collateral for the WECCO loan. In addition, the technology transfer fee of
    $0.05 per pound of AP, or $1 million per year, formerly included in the AP
    price, is no longer part of the AP price. Lastly, cash collateral account
    and default account balances were used to repay the WECCO loan. Accordingly,
    there will be no interest earnings associated with these accounts in the
    future.

10. COMMITMENTS AND CONTINGENCIES

    In December 1992, Thiokol issued a Request for Quotation, inviting WECCO to
    submit a proposal for the sale of NASA-related AP over a period extending
    through mid-1998, approximately two years after the expiration of the
    NASA/Thiokol agreements.  To enable WECCO to submit a proposal which did not
    prejudice the NASA/Thiokol agreements, Thiokol and WECCO signed an agreement
    to the effect that WECCO and Thiokol would deal with the Request for
    Quotation and WECCO's responsive proposal without reference to the
    NASA/Thiokol agreements or any effects thereon, but WECCO reserved its
    rights under the NASA/Thiokol agreements.  Based upon the Request for
    Quotation and the agreement, WECCO submitted a proposal calculated to win
    the NASA-related AP business of Thiokol through the extended period covered
    by the proposal.  At the time it submitted its proposal, WECCO also offered
    to negotiate a termination of the NASA/Thiokol agreements, subject to the
    consent and approval of NASA and Seafirst Bank.  As a result of its proposal
    and 

                                       56
<PAGE>
 
    discussions with Thiokol, WECCO was optimistic that it would succeed in
    achieving its objective of extending its base contractual assurances for AP
    sales set forth in the NASA/Thiokol agreements. At a meeting in Ogden, Utah
    on June 11, 1993, Thiokol delivered to a Company representative a draft
    memorandum that, if executed by WECCO, would have effectively released
    Thiokol from its obligations under the NASA/Thiokol agreements. Thiokol also
    delivered a proposed purchase order that covered AP sales only over a period
    approximately corresponding to the remaining term of the NASA/Thiokol
    agreements, rather than through mid-1998, as contemplated by the Request for
    Quotation, but for a lower quantity although at higher prices than were
    offered by WECCO over the longer term. Thiokol advised WECCO that it had
    made a similar proposal to the other producer of AP. At the June 11 meeting
    Thiokol also advised WECCO that it had commenced a legal action against
    WECCO in Weber County (Ogden), State of Utah, seeking declaratory relief to
    the effect that once the principal and interest balance owing by WECCO to
    Seafirst Bank was fully paid, Thiokol would have no further obligation to
    purchase AP from WECCO under the NASA/Thiokol agreements, and to the effect
    that there existed an agreement among NASA, Thiokol, WECCO and Seafirst Bank
    to prepay the WECCO loan on or about October 1, 1993. Thiokol also advised
    WECCO that it intended to proceed with the declaratory relief action only if
    negotiations underway between the parties were not concluded in a manner
    satisfactory to Thiokol.

    Thiokol's complaint alleged that Thiokol, WECCO, NASA and Seafirst Bank had
    agreed that Thiokol would prepay WECCO's Seafirst Bank loan in October 1993,
    and that upon prepayment Thiokol's obligation to purchase AP from WECCO
    under the NASA/Thiokol agreements would cease.  In fact, there neither was
    nor is any such agreement.  Moreover, before submitting its responsive
    proposal to Thiokol's Request for Quotation, WECCO sought and obtained from
    a nationally recognized law firm specializing in government contract law,
    opinions to the effect that (i) only WECCO had the right to prepay the
    balance owing to Seafirst Bank and (ii) even if the balance owing had been
    so prepaid, Thiokol would have continued to be obligated to purchase AP from
    WECCO under the NASA/Thiokol agreements through August, 1996.

    On July 8, 1993, Thiokol dismissed, without prejudice, its declaratory
    relief lawsuit against WECCO.  A dismissal "without prejudice" operates as a
    dismissal of the lawsuit, but does not prevent its re-filing at a later
    date, nor did it constitute a final resolution of the dispute.  According to
    a "Standstill Agreement" between the parties, "... Thiokol [could] not
    [have] re-file[d] its action nor commence[d] a new action against WECCO
    without first giving WECCO five days' notice of its intent to do so and
    WECCO [could] not [have] file[d] an action against Thiokol without first
    giving Thiokol 20 days' notice of its intent to do so; and (3) any such
    litigation [could have been] filed only in state or federal court in Salt
    Lake County, Utah."

    On March 29, 1994, WECCO and Thiokol agreed to a draft amendment to the 1989
    Advance Agreement.  On May 10, 1994, the amendment (the "Amendment") was
    executed.  The Amendment fully resolved all issues between Thiokol and WECCO
    relating to the interpretation and application of the NASA/Thiokol
    agreements.  Thiokol separately agreed not to refile its declaratory relief
    lawsuit.

                                       57
<PAGE>
 
    Following and because of the announcement of Thiokol's lawsuit against WECCO
    described above, and the consequent decline in the trading prices of the
    Company's Common Stock, three shareholder class action lawsuits, which have
    since been consolidated, were filed in the United States District Court for
    the District of Nevada against the Company and certain of its directors and
    officers.  The complaints alleged that the Company's public statements
    violated Federal securities laws by inadequately disclosing certain
    information.  On November 27, 1995, the U.S. District Court granted in part
    the Company's motion for summary judgment ruling that the Company had not
    violated the federal securities laws in relation to disclosure concerning
    the Company's agreements with Thiokol.  The remaining claims, which related
    to allegedly misleading or inadequate disclosures regarding Halotron, were
    the subject of a jury trial that began in December 1995 and ended on January
    17, 1996.  The jury reached a unanimous verdict that neither the Company nor
    its directors and officers made misleading or inadequate statements
    regarding Halotron.  The plaintiffs have appealed the summary judgment
    ruling and portions of the trial proceedings to the Ninth Circuit of the
    United States District Court of Appeals.

    A reliable estimate of the amount of potential damages relating to the
    shareholder lawsuits, if any, to the Company cannot be made at the present
    time.  The Company has in force substantial insurance covering this risk.
    However defense costs and any potential settlement or judgment associated
    with this litigation, to the extent borne by the Company and not recovered
    through insurance, may adversely affect the Company's liquidity.

    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 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 has agreed to pay
    attorneys' fees and other defense costs related to the plaintiffs appeal of
    the case 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 allege that the Company is liable to them in the amount of
    approximately $5.9 million on a guarantee executed in 1982.  The Company
    believes that the claim against it is wholly without merit.  In August 1996,
    the Company's cross-motion for summary judgment was granted in this case,
    although the plaintiffs have filed a motion for reconsideration.

    As a result of the above-described litigation, 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 these costs, if any, may be reimbursable under policies providing for
    insurance coverage.  The Company has adopted certain policies in its Charter
    and Bylaws as a result of which the Company may have the obligation to
    indemnify its affected officers and directors to the extent, if at all, the
    existing insurance coverages relating to the shareholder lawsuits are
    insufficient.  The Company's insurance carriers have reserved the right to
    exclude or disclaim coverage under certain circumstances.  The Company is
    currently unable to predict or quantify the amount or the range of such
    costs, if any, or the period of time during which such litigation related
    costs will be incurred.

                                       58
<PAGE>
 
    See Note 15 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.  Rent expense was
    approximately $550,000 during the fiscal years ended September 30, 1996,
    1995 and 1994.  Future minimum rental payments under this lease for the
    years ending September 30, are as follows:


<TABLE>
<S>                                                                   <C>       
    1997                                                              $  550,000
    1998                                                                 550,000
    1999                                                                 550,000
    2000                                                                 275,000
                                                                      ----------
    Total                                                             $1,925,000
                                                                      ==========
</TABLE>

11. IMPAIRMENT OF WECCO'S FIXED ASSETS

    The down-sizing of the defense budget has had a dramatic impact on AP
    requirements.  As of March 31, 1994, the Company estimated that the total
    market available to the Company and its only U.S. competitor (including
    exports) approximated 25 million pounds per year, as compared to over 60
    million pounds per year as estimated by the government in 1988-89.  That
    estimate appears to remain a reasonable approximation of the yearly demand
    for AP.  The Company's understanding has been and continues to be that the
    government considers AP to be a critical material, and both the Company's
    plant and that of its competitor to be critical facilities, and intends as a
    matter of policy to maintain two viable and operating sources of AP for the
    foreseeable future.  The Company believes that this policy has been
    implemented through the Amendment to the 1989 Advance Agreement described
    above in Note 9 and the fact that the Company has received significant
    orders for deliveries of AP in fiscal 1997.  The Company is committed to a
    continuing strong participation and presence in the AP market.  However, as
    of March 31, 1994 management believed that competitive conditions in the
    market place would not allow the Company to recover any facility costs on
    sales of AP.  Furthermore, management doesn't expect the demand for AP to
    increase significantly in the future.  As of March 31, 1994, the Company's
    best estimate of the net cash flows expected to result from operation of the
    AP plant were not sufficient to recover any of the carrying amount of the
    WECCO fixed assets and, as a result, a non-recurring impairment charge of
    $39,401,000 was recognized in the second quarter of the Company's fiscal
    year ended September 30, 1994.

                                       59
<PAGE>
 
12. SHAREHOLDERS' EQUITY

    The Company has authorized the issuance of 3,000,000 shares of preferred
    stock, of which 125,000 shares have been designated as Series A, 125,000
    shares have been designated as Series B and 15,340 shares have been
    designated as Series C redeemable convertible preferred stock.  The Series C
    redeemable convertible preferred stock was outstanding at September 30,
    1989, was redeemed in December 1989, and is no longer authorized for
    issuance.

    The Company has granted options and warrants to purchase shares of the
    Company's common stock at prices at or in excess of market value at the date
    of grant.  The options and warrants were granted under various plans or by
    specific grants approved by the Company's Board of Directors.  In 1994, the
    Executive Vice President of the Company exercised options for 45,000 shares
    of the Company's common stock by executing demand notes bearing interest at
    a bank's prime rate for the total option price of $174,000.  Approximately
    $97,000 of this amount remains outstanding at September 30, 1996.  Interest
    income of $7,000,  $8,000 and $1,000 was recorded on these notes in fiscal
    1996, 1995 and 1994.

    Option and warrant transactions are summarized as follows:

<TABLE>
<CAPTION>
                                        -------------------------------
                                        Shares Under 
                                        Options and 
                                          Warrants       Option Price
                                        -------------------------------
                                  
<S>                                      <C>            <C>
    October 1, 1993                      3,250,150      3.88  -  $30.50
    Exercised, expired or canceled         (96,700)     3.88  -   10.50
                                         ------------------------------
                                                                  
    September 30, 1994                   3,153,450      3.88  -   30.50
    Granted                                281,000      4.88  -    7.50
    Exercised, expired or canceled        (104,400)     3.88  -   30.50
                                         ------------------------------
                                                                  
    September 30, 1995                   3,330,050      3.88  -   21.50
    Exercised, expired or canceled         (35,000)     3.88  -   12.50
                                         ------------------------------
                                                                  
    September 30, 1996                   3,295,050      3.88  -  $21.50
                                         ==============================
</TABLE>

    At September 30, 1996, substantially all options and warrants were
    exercisable.  Options for approximately 312,000 shares were available for
    additional grants under existing plans at September 30, 1996.

    In February 1992, the Company issued $40,000,000 in Subordinated Secured
    Notes (the "Azide Notes") with Warrants. See Note 6 for a description of the
    Warrants. Shares under options and warrants at September 30, 1996 include
    approximately 2,857,000 Warrants at a price of $14 per Warrant.

13. 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 

                                       60
<PAGE>
 
    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,
                                                ----------------------------------------------
                                                    1996             1995             1994
                                                    ----             ----             ----     
    <S>                                         <C>              <C>              <C>
    Revenues:                                   
    Specialty chemicals                         $ 34,061,000     $ 34,219,000     $ 47,701,000
    Environmental protection                       3,099,000        1,656,000        2,934,000
    Real estate                                    5,221,000        3,375,000          558,000
                                                ----------------------------------------------
                                                
    Total                                       $ 42,381,000     $ 39,250,000     $ 51,193,000
                                                ==============================================
    Operating income (loss) before              
      unallocated income and expenses:          
    Specialty chemicals                         $   (879,000)    $ (2,150,000)    $(24,129,000)
    Environmental protection                        (249,000)        (640,000)      (1,965,000)
    Real estate                                    2,769,000        1,356,000           24,000
                                            ----------------------------------------------
                                                
    Total                                          1,641,000       (1,434,000)     (26,070,000)
                                                ----------------------------------------------
    Deduct (add) unallocated expense            
      (income):                                 
    General corporate                                400,000          409,000          819,000
    Research and development                         106,000          204,000          158,000
    Interest and other income                     (1,381,000)      (1,429,000)      (1,088,000)
    Interest and other expense                     2,836,000        1,709,000        3,315,000
    Income tax credit                               (109,000)        (791,000)      (9,937,000)
                                                ----------------------------------------------
                                                
    Net loss                                    $   (211,000)    $ (1,536,000)    $(19,337,000)
                                                ==============================================
    Identifiable assets:
    Specialty chemicals                         $ 91,869,000     $ 95,845,000     $ 99,432,000
    Environmental protection                       1,476,000        1,087,000        1,148,000
    Real estate                                   28,996,000       29,827,000       27,897,000
    Corporate                                     27,678,000       28,460,000       26,515,000
                                                ----------------------------------------------
     
    Total                                       $150,019,000     $155,219,000     $154,992,000
                                                ==============================================
     
    Financial information relating to domestic 
      and export sales (domestic operations):
    Domestic revenues                           $ 40,029,000     $ 38,857,000     $ 49,616,000
    Export revenues                                2,784,000          393,000        1,577,000
                                                ----------------------------------------------
     
    Total                                       $ 42,381,000     $ 39,250,000     $ 51,193,000
                                                ==============================================
</TABLE>

    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.

                                       61
<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:

<TABLE>
<CAPTION>
                                            --------------------------------------
                                              1996          1995          1994
                                            --------------------------------------
<S>                                         <C>           <C>           <C>
    Specialty chemicals                     $6,899,000    $4,824,000    $7,251,000
    All other segments                         911,000     1,059,000       428,000
                                            --------------------------------------
    Total                                   $7,810,000    $5,883,000    $7,679,000
                                            ======================================
</TABLE> 
 
    Capital expenditures for the years ended September 30 are as follows:
 
<TABLE> 
<CAPTION> 
                                                          ------------------------
                                                             1996         1995
                                                          ------------------------
<S>                                                       <C>           <C> 
    Specialty chemicals                                   $3,157,000    $4,229,000
    All other segments                                        91,000       233,000
                                                          ------------------------
    Total                                                 $3,248,000    $4,462,000
                                                          ========================
</TABLE>

    The Company had three customers that accounted for 10% or more of the
    Company's revenues in one or more of fiscal 1996, 1995 and 1994. These three
    customers accounted respectively for the following revenues during the
    fiscal years ended September 30:

<TABLE>
<CAPTION>
 Customer           Chemical         Industry       1996           1995           1994
------------------------------------------------------------------------------------------
<S>           <C>                    <C>         <C>            <C>            <C>
    A         Ammonium Perchlorate   Space       $20,000,000    $27,963,000    $36,524,000
    B         Ammonium Perchlorate   Defense                        108,000      5,570,000
    C         Sodium Azide           Airbag        9,378,000
</TABLE>

14. SODIUM AZIDE

    In July 1990, the Company entered into agreements (the "Azide Agreements")
    pursuant to which Dynamit Nobel has licensed to the Company on an exclusive
    basis for the North American market its most advanced technology and know-
    how for the production of sodium azide, the principal component of the gas
    generant used in automotive airbag safety systems.  In addition, Dynamit
    Nobel has provided technical support for the design, construction and start-
    up of the facility.  The facility was constructed and is being operated by
    AAC, has an annual design capacity of approximately 6,000,000 pounds, and is
    located on land owned by AAC in Iron County, Utah.

    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.

                                       62
<PAGE>
 
    Commercial shipments of sodium azide began in April 1994 and are continuing,
    although sales and related variable operating margins have not reached a
    level sufficient to absorb fixed costs.  The Company's plans with respect to
    its sodium azide project continue to be grounded in the Company's objective
    to become the major supplier to the U.S. airbag inflator market.  There can
    be no assurance in that regard, however, and as a consequence the Company
    cannot predict over what period of time, if at all, its sodium azide plant
    will operate at levels consistent with such expectations.

    The Company previously believed that demand for sodium azide in North
    America and the world would substantially exceed existing manufacturing
    capacity and announced expansions or new facilities (including the AAC
    plant) by the 1994 model year (which for sodium azide sales purposes is the
    period June 1993 through May 1994). Currently, demand for sodium azide is
    substantially less than supply on a worldwide basis. The Company believes
    this is the result of capacity expansions by existing producers, although
    the Company's information with respect to competitors' existing and planned
    capacity is limited. There can be no assurance that other manufacturing
    capacities not now known to the Company will not be established. By reason
    of this highly competitive market 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 is due to the unlawful pricing procedures of Japanese sodium azide
    producers. In response to such practices, in January 1996, the Company filed
    an antidumping petition with the ITC and the 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. Specifically, Commerce calculated a dumping margin of 29.5
    percent for Masuda, the largest Japanese supplier and a dumping margin of
    65.8 percent for Toyo and Nippon, the other Japanese producers. Commerce's
    preliminary dumping determination applies 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.

    Although Commerce's preliminary dumping calculations are subject to change,
    the Company believes that its allegations of significant and injurious
    Japanese dumping in the United States will be sustained in final
    determinations reached by Commerce and the ITC.

15. HALOTRON

    On August 30, 1991, Halotron, Inc. (a wholly-owned subsidiary of the
    Company) entered into an agreement (the "Halotron Agreement") granting the
    Company the option to acquire the exclusive worldwide rights to manufacture
    and sell Halotron I (a replacement for halon 1211).  Halotron products are
    fire suppression systems, including a series of chemical compounds and
    application technologies, designed to replace halons, chemicals presently in
    wide use as a fire suppression agent in military, industrial, commercial and
    residential applications.

    The Halotron Agreement provides for disclosure to the Company of all
    confidential and proprietary information concerning Halotron I, which
    together with testing undergone by Halotron I at independent laboratories in
    Sweden and the United States and consulting services that were provided, was
    intended to enable the Company to evaluate Halotron I's commercial utility
    and feasibility.  In February 1992, the Company announced that a series of

                                       63
<PAGE>
 
    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 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, Halotron, Inc. purchased the rights to certain
    fire suppression chemicals and delivery systems called Halotron from their
    Swedish inventor, Jan Andersson and his corporation, AB Bejaro Product;
    Andersson and Bejaro breached the contract in which they had sold the rights
    to Halotron.  This breach resulted in litigation initiated by AmPac
    Technologies, Inc. (also a wholly-owned subsidiary of the Company) and
    Halotron, Inc.  This initial litigation was settled when Andersson and
    Bejaro promised to perform faithfully their duties and to honor the terms of
    the contracts that, among other things, gave Halotron, Inc. exclusive rights
    to the Halotron chemicals and delivery systems.

    Following the settlement of the initial litigation, however, Andersson and
    Bejaro failed to perform the acts they had promised in order to secure
    dismissal of that litigation.  As a result, litigation was initiated in the
    Utah state courts in March 1994, for the purpose of establishing Halotron,
    Inc.'s and AmPac Technologies, Inc.'s exclusive rights to the Halotron
    chemicals and delivery systems.  On August 15, 1994, the court entered a
    default judgment ("Judgment") against Andersson and Bejaro granting the
    injunctive relief requested by Halotron, Inc. and AmPac Technologies, Inc.
    and awarding damages in the amount of $42,233,000.

    The trial court further ordered Andersson and Bejaro to execute documents
    required for patent registration of Halotron in various countries.  When
    Andersson and Bejaro ignored this order, the Court directed the Clerk of the
    Court to execute these documents on behalf of Andersson and Bejaro. Finally,
    the Court ordered that Andersson's and Bejaro's rights to any future
    royalties from sales of Halotron were terminated. AmPac Technologies, Inc.
    and Halotron, Inc. are exploring ways to collect the Judgment from 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.

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<PAGE>
 
16. OPERATING RESULTS

    Although the Company's net income (loss) and 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 of Notes to Consolidated Financial Statements, the Company may incur
    material legal and other costs associated with certain litigation; (ii) the
    timing of real estate and related sales and equity in earnings of real
    estate ventures is not predictable; (iii) the recognition of revenues from
    environmental protection equipment orders not accounted for as long-term
    contracts depends upon orders generated and the timing of shipment of the
    equipment; (iv) weighted average common and common equivalent shares for
    purposes of calculating net income (loss) per common share are subject to
    significant fluctuations based upon changes in the market price of the
    Company's Common Stock due to outstanding warrants and options; and (v) the
    magnitude, pricing and timing of AP, sodium azide and Halotron sales in the
    future is uncertain.

    The Company's efforts to produce, market and sell Halotron I and Halotron II
    are, among other factors, dependent upon the political climate and
    environmental regulations that exist and may vary from country to country.
    Although the Company is satisfied with the progress and performance
    characteristics of Halotron I and Halotron II, the magnitude of orders
    received, if any, in the future will be dependent to a large degree upon
    political issues and environmental regulations that are not within the
    Company's control, as well as additional testing and qualification in
    certain jurisdictions and the ultimate extent of market acceptance.

    As a result of the uncertainties with respect to volume and price of sodium
    azide and the outcome of the antidumping petition referred to above, the
    Company may experience significant variations in sodium azide sales and
    related operating results from quarter to quarter.

    In accordance with the provisions of SFAS No. 121, management reviews on a
    quarterly basis whether the anticipated net cash flows from Halotron and
    sodium azide operations will be sufficient to recover the Company's
    investment in each of such facilities/projects.  At September 30, 1996, the
    Company had approximately $69 million and $6.4 million in recorded net long-
    lived assets associated with sodium azide and Halotron, respectively.  A
    number of factors are considered in the evaluation of  recoverability,
    including, but not limited to, anticipated pricing and volume and the
    duration thereof, and expected costs associated with production.  Management
    believes that such net asset balances are recoverable under the requirements
    of SFAS 121, although, in light of the uncertainties discussed above, there
    can be no assurance that the results of the evaluation of recoverability
    will remain the same in the future.

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