-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UZUIKeFn06mD0oAjdkSWQiLn+y/jXj1+pkyct1n04UexAzDctk3D2Uywg3RmDjjI ova+dL8KqNNnHUngP4BbCA== 0000898430-98-000261.txt : 19980202 0000898430-98-000261.hdr.sgml : 19980202 ACCESSION NUMBER: 0000898430-98-000261 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980130 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PACIFIC CORP CENTRAL INDEX KEY: 0000350832 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 596490478 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21046 FILM NUMBER: 98517207 BUSINESS ADDRESS: STREET 1: 3770 HOWARD HUGHES PKWY STE 300 CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027352200 MAIL ADDRESS: STREET 1: 3770 HOWARD HUGHES PKWY STE 300 STREET 2: 3770 HOWARD HUGHES PKWY STE 300 CITY: LAS VEGAS STATE: NV ZIP: 89109 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) - OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-8137 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 AMERICAN PACIFIC CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 59-6490478 (State or other jurisdiction (IRS Employer of incorporation or Identification No.) organization) 3770 HOWARD HUGHES PARKWAY, SUITE 300 LAS VEGAS, NV 89109 (Address of principal executive offices) (Zip Code) (702) 735-2200 (Registrant's telephone number, including area code) NOT APPLICABLE --------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X No - -- Applicable Only to Corporate Issuers Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 8,137,537 AS OF JANUARY 31, 1998. PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements ------------------------------------------- The information required by Rule 10-01 of Regulation S-X is provided on pages 4 through 10 of this Report on Form 10-Q. ITEM 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- The information required by Item 303 of Regulation S-K is provided on pages 11 through 16 of this Report on Form 10-Q. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ----------------- The information required by Item 103 of Regulation S-K is provided on pages 8 through 9 of this Report on Form 10-Q. ITEM 2. Changes in Securities --------------------- None. ITEM 3. Defaults Upon Senior Securities ------------------------------- None. ITEM 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. ITEM 5. Other Information ----------------- None. ITEM 6. Exhibits and Reports on Form 8 -K --------------------------------- a) The following Exhibit is filed in connection with the Registrant's electronic filing: 27. Financial Data Schedule. b) None. 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN PACIFIC CORPORATION Date: January 28, 1998 /s/ John R. Gibson ------------------------------------ John R. Gibson Chief Executive Officer and President Date: January 28, 1998 /s/ David N. Keys ------------------------------------ David N. Keys Vice President, Chief Financial Officer, Secretary and Treasurer; Principal Financial and Accounting Officer 3 AMERICAN PACIFIC CORPORATION Condensed Consolidated Statements of Operations For the Three Months Ended December 31,
- -------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------- Sales and Operating Revenues $11,268,000 $ 8,396,000 Cost of Sales 8,106,000 7,083,000 -------------------------- Gross Profit 3,162,000 1,313,000 Operating Expenses 2,183,000 2,363,000 Equity in Earnings of Real Estate Venture 300,000 -------------------------- Operating Income (Loss) 1,279,000 (1,050,000) Net Interest and Other Expense 713,000 240,000 -------------------------- Income (Loss) Before Provision (Credit) for Income Taxes 566,000 (1,290,000) Provision (Credit) for Income Taxes (440,000) -------------------------- Net Income (Loss) $ 566,000 $ (850,000) -------------------------- Basic Net Income (Loss) Per Share $ .07 $ (.10) -------------------------- Average Shares Outstanding 8,138,000 8,099,000 -------------------------- Diluted Net Income (Loss) Per Share $ .07 $ (.10) -------------------------- Diluted Shares 8,217,000 8,099,000 --------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. 4 AMERICAN PACIFIC CORPORATION Condensed Consolidated Balance Sheets
- -------------------------------------------------------------------------------- DECEMBER 31, SEPTEMBER 30, 1997 1997 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and Cash Equivalents $12,989,000 $18,881,000 Accounts and Notes Receivable 9,905,000 5,551,000 Related Party Notes Receivable 612,000 637,000 Inventories 10,880,000 11,116,000 Prepaid Expenses and Other Assets 1,511,000 979,000 ------------------------------------ TOTAL CURRENT ASSETS 35,897,000 37,164,000 Property, Plant and Equipment, Net 19,632,000 19,314,000 Development Property 7,053,000 7,362,000 Real Estate Equity Investments 18,535,000 20,248,000 Other Assets 2,329,000 2,413,000 Restricted Cash 6,408,000 3,580,000 ------------------------------------ TOTAL ASSETS $89,854,000 $90,081,000 ------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. 5 AMERICAN PACIFIC CORPORATION Condensed Consolidated Balance Sheets
- -------------------------------------------------------------------------------- DECEMBER 31, SEPTEMBER 30, 1997 1997 - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Liabilities $ 7,229,000 $ 7,519,000 Current Portion of Long-Term Debt 5,000,000 6,166,000 -------------------------------- TOTAL CURRENT LIABILITIES 12,229,000 13,685,000 Long-Term Debt 25,006,000 24,900,000 Long-Term Payables 2,933,000 2,376,000 -------------------------------- TOTAL LIABILITIES 40,168,000 40,961,000 -------------------------------- Commitments and Contingencies Warrants to Purchase Common Stock 3,569,000 3,569,000 SHAREHOLDERS' EQUITY: Common Stock 829,000 829,000 Capital in Excess of Par Value 78,561,000 78,561,000 Accumulated Deficit (32,141,000) (32,707,000) Treasury Stock (1,035,000) (1,035,000) Receivable from the Sale of Stock (97,000) (97,000) -------------------------------- TOTAL SHAREHOLDERS' EQUITY 46,117,000 45,551,000 -------------------------------- -------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 89,854,000 $ 90,081,000 --------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. 6 AMERICAN PACIFIC CORPORATION Condensed Consolidated Statements of Cash Flows For the Three Months Ended December 31,
- -------------------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------------- Cash Used For Operating Activities $(5,416,000) $ (854,000) ------------------------------- Cash Flows Provided by (Used for) Investing Activities: Capital Expenditures, Development Property Additions and Real Estate Equity Investments 690,000 (1,184,000) ------------------------------- Net Cash Used For Investing Activities 690,000 (1,184,000) ------------------------------- Cash Flows From Financing Activities: Principal Payment on Debt (1,166,000) Treasury Stock Acquired (156,000) Issuance of Common Stock 70,000 ------------------------------- Net Cash Used For Financing Activities (1,166,000) (86,000) ------------------------------- Net Decrease in Cash and Cash Equivalents (5,892,000) (2,124,000) Cash and Cash Equivalents, Beginning of Period 18,881,000 18,501,000 ------------------------------- Cash and Cash Equivalents, End of Period $12,989,000 $16,377,000 -------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: 1. BASIS OF REPORTING The accompanying Condensed Consolidated Financial Statements are unaudited and do not include certain information and disclosures included in the Annual Report on Form 10-K of American Pacific Corporation (the "Company"). The Condensed Consolidated Balance Sheet as of September 30, 1997 was derived from the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 1997. Such statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1997. In the opinion of Management, however, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included. The operating results and cash flows for the three-month period ended December 31, 1997 are not necessarily indicative of the results that will be achieved for the full fiscal year or for future periods. 2. NET INCOME (LOSS) PER COMMON SHARE During the first quarter of fiscal 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share." SFAS No. 128 requires the presentation of basic net income (loss) per share and diluted net income (loss) per share. Basic per share amounts are computed by dividing net income (loss) by average shares outstanding during the period. Diluted per share amounts are computed by dividing net income (loss) by average shares outstanding plus the dilutive effect of common share equivalents. Since the Company incurred a net loss during the three- month period ended December 31, 1996, both basic and diluted per share calculations are based upon average shares outstanding of 8,099,000 during this period. The effect of options and warrants outstanding to purchase 3,230,000 shares was not included in diluted calculations during this period. Diluted net income per share during the first quarter of fiscal 1998 is determined considering the dilutive effect of outstanding stock options and warrants. The effect of options and warrants outstanding to purchase 3,160,000 shares was not included in diluted calculations during the first quarter of fiscal 1998 since the exercise price of such options and warrants was greater than the average price of the Company's common shares. 3. INVENTORIES Inventories consist of the following:
December 31, September 30, 1997 1997 ------------ ------------- Work-in-process $ 7,517,000 $ 3,349,000 Raw materials and supplies 3,363,000 7,767,000 ----------- ----------- Total $10,880,000 $11,116,000 ----------- -----------
8 4. COMMITMENTS AND CONTINGENCIES In fiscal 1993, three shareholder lawsuits were filed in the United States District Court for the District of Nevada against the Company and certain of its directors and officers (the "Company Defendants"). The complaints, which were consolidated, alleged that the Company's public statements violated Federal securities laws by inadequately disclosing information concerning its agreements with Thiokol Corporation ("Thiokol") and the Company's operations. On November 27, 1995, the U.S. District Court granted in part the Company's motion for summary judgment, ruling that the Company had not violated the Federal securities laws in relation to disclosures concerning the Company's agreements with Thiokol. The remaining claims, which related to allegedly misleading or inadequate disclosures regarding Halotron, were the subject of a jury trial that ended on January 17, 1996. The jury reached a unanimous verdict that none of the Company Defendants made misleading or inadequate statements regarding Halotron. The District Court thereafter entered judgment in favor of the Company Defendants on the Halotron claims. The plaintiffs appealed the summary judgment ruling and the judgment on the jury verdict to the Ninth Circuit of the United States Court of Appeals. On June 5, 1997, the Court of Appeals affirmed the judgments of the United States District Court in favor of the Company Defendants. On June 19, 1997, the plaintiffs filed an Appellants Petition for Rehearing and Suggestion of Rehearing En Banc with the Court of Appeals. On September 3, 1997, the Court of Appeals denied the Petition for Rehearing. In October 1997, the plaintiffs filed a Petition for Writ of Certiorari with the Supreme Court of the United States. Trace amounts of perchlorate chemicals have been found in Lake Mead. Clark County, Nevada, where Lake Mead is situated, is the location of Kerr-McGee Chemical Corporation's ("Kerr-McGee") ammonium perchlorate ("AP") operations, and was the location of the Company's AP operations until May 1988. The Company is cooperating with State and local agencies, and with Kerr-McGee and other interested firms, in the investigation and evaluation of the source or sources of these trace amounts, possible environmental impacts, and potential remediation methods. Until these investigations and evaluations have reached definitive conclusions, it will not be possible for the Company to determine the extent to which, if at all, the Company may be called upon to contribute to or assist with future remediation efforts, or the financial impacts, if any, of such cooperation, contributions or assistance. 5. INCOME TAXES The Company established a valuation allowance for deferred tax assets in the amount of $10,431,000 as of September 30, 1997. The Company's effective tax rate will be 0% until its net operating losses expire or the Company has taxable income necessary to eliminate the need for the valuation allowance. 6. ASSET PURCHASE AGREEMENT On October 10, 1997, the Company entered into an Asset Purchase Agreement (the "Agreement") with Kerr-McGee. The Agreement contemplates that the Company will acquire certain process data, technical information, customer lists, marketing 9 contacts, and related expertise used by Kerr-McGee primarily in the AP industry. The Agreement calls for a purchase price of $39 million, and grants the Company the option to purchase limited AP inventory of Kerr- McGee for additional consideration. Closing of the transaction is subject to a number of conditions, including the Company's securing of financing for 100 percent of the purchase price and Board of Director approvals by both parties. In December 1997, the Company received notification that the Federal Trade Commission ("FTC") had determined to grant early termination of the waiting period relating to the Company's and Kerr-McGee's premerger notification filings with the FTC and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Company has entered into long-term pricing agreements for AP with certain major customers that are contingent upon the closing of the transaction and, on a continuing basis, that will be contingent upon agreement on the terms of specific purchase orders. There can be no assurance that the conditions to closing of the transaction will be satisfied, or that the transaction will close. The management of the Company will, however, make all reasonable efforts to meet all conditions, and to conclude successfully this transaction. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SALES AND OPERATING REVENUES AND GROSS PROFIT Sales and operating revenues were $11,268,000 during the three-month period ended December 31, 1997 compared to $8,396,000 during the same period last year. The increase is primarily due to increased perchlorate, sodium azide and real estate sales. Such increase was partially offset by decreases in environmental protection equipment and Halotron sales. Gross profit as a percentage of sales and operating revenues was 28% in the first quarter of fiscal 1998 compared to 16% in the first quarter of last year. As discussed below, the increase in gross profit percentage is primarily due to an increase in sodium azide margins. The increase was offset by decreases in perchlorate and Halotron margins. PERCHLORATE CHEMICAL OPERATIONS Perchlorate chemical revenues were $5.6 million and $4.1 million during the three-month periods ended December 31, 1997 and 1996, respectively. In September 1997, the Company received a purchase order for deliveries of AP to Thiokol during the fiscal year ending September 30, 1998. The purchase order amounts to approximately $16.1 million. Approximately $3.6 million of this order was delivered in the first quarter of fiscal 1998. 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. Approximately $4.5 million of this purchase order was delivered in fiscal 1997 and approximately $1.3 million was delivered in the first quarter of fiscal 1998. This purchase order includes options that could increase the order during the 1998-1999 period, and that could extend the purchase order to the year 2000. In October 1997, the Company entered into the Agreement with Kerr-McGee. The Agreement contemplates that the Company will acquire certain process data, technical information, customer lists, marketing contacts, and related expertise used by Kerr-McGee primarily in the AP industry. The Agreement calls for a purchase price of $39 million, and grants the Company the option to the purchase limited AP inventory of Kerr-McGee for additional consideration. Closing of the transaction is subject to a number of conditions, including the Company's securing of financing for 100 percent of the purchase price and Board of Director approvals by both parties. In December 1997, the Company received notification that the FTC had determined to grant early termination of the waiting period relating to the Company's and Kerr-McGee's premerger notification filings with the FTC and the Department of Justice. The Company has entered into long-term pricing agreements for AP with certain of its major customers that are contingent upon the closing of the transaction and, on a continuing basis, that will be contingent upon agreement on terms of specific purchase orders. There can be no assurance that the conditions to closing of the transaction will be satisfied, or that the transaction will close. 11 SODIUM AZIDE OPERATIONS Sodium azide sales were $3.6 million during the first quarter of fiscal 1998 compared to $3.1 million in the same period last year. In May 1997, the Company entered into a three-year contract with Autoliv. The contract provides for the Company to supply sodium azide used by Autoliv in the manufacture of automotive airbags. Deliveries under the contract commenced in July 1997. The estimated sales value of the contract is approximately $45 - $55 million over the three-year period. The actual sales value, however, will depend upon many factors beyond the control of the Company, such as the number of automobiles and light trucks manufactured and competitive conditions in the airbag market, that will influence the actual magnitude of Autoliv's sodium azide requirements, and there can therefore be no assurance as to the actual sales value of the contract. The Company incurred significant operating losses in its sodium azide operation during the last three fiscal years. Sodium azide performance improved in the fourth quarter of fiscal 1997, principally as a result of additional sodium azide deliveries under the Autoliv agreement referred to above, and the operations were cash flow positive during the year ended September 30, 1997. However, Management's view of the economics of the sodium azide market indicated that the cash flows associated with sodium azide operations would not be sufficient to recover the Company's investment in sodium azide related fixed assets. As quoted market prices were not available, the present value of estimated future cash flows was used to estimate the fair value of sodium azide fixed assets. Under the requirements of SFAS No. 121, and as a result of this valuation technique, an impairment charge of $52,605,000 was recognized in the fourth quarter of fiscal 1997. Depreciation expense related to sodium azide operations amounted to approximately $400,000 and $1.4 million during the three-month periods ended December 31, 1997 and 1996, respectively. On an annualized basis, depreciation expense is expected to decrease by approximately $3.5 to $4 million in fiscal 1998 as a result of the impairment charge referred to above. REAL ESTATE OPERATIONS Real estate and related sales amounted to $1.7 million during the three months ended December 31, 1997 compared to $61,000 during the three months ended December 31, 1996. During the first quarter of fiscal 1998, the Company recognized its share of the equity in earnings of its residential joint venture project. The Company's equity in the earnings of this project amounted to approximately $300,000. Profits and losses are split equally between the Company and its venture partner, a local real estate development company. The venture's profits increased substantially during the first quarter of fiscal 1998 as a result of the sale of improved land zoned for an apartment site to an outside developer. 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 the residential joint venture project. 12 ENVIRONMENTAL PROTECTION EQUIPMENT OPERATIONS Environmental protection equipment sales were approximately $209,000 and $550,000 during the three-month periods ended December 31, 1997 and 1996, respectively. As of December 31, 1997, this segment had a backlog of approximately $3.1 million. The Company has submitted a number of bids on significant projects, although there can be no assurance that any of these bids will result in future orders. HALOTRON Sales of Halotron amounted to approximately $151,000 in the first quarter of fiscal 1998 compared to $436,000 during the same period last year. 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. In September 1997, the Company and Badger Fire Protection, Inc. ("Badger") began UL fire tests of a line of portable fire extinguishers using Halotron I. Assuming final UL certifications are received, it is the Company's understanding that Badger expects to begin distribution of this line during the first half of calendar 1998. The Company is also marketing Halotron I to other fire extinguisher manufacturers. OPERATING EXPENSE Operating (selling, general and administrative) expenses were $2,183,00 and $2,363,000 during the three-month periods ended December 31, 1997 and 1996, respectively. As described below, the decrease is primarily due to a reorganization effected in the fourth quarter of fiscal 1997. During the fourth quarter of fiscal 1997, the Company recognized a charge of $3,616,000 associated with employee separations and management reorganization costs. In addition, relocation costs of approximately $387,000 were incurred in the fourth quarter of fiscal 1997. The Company expects operating expenses to be approximately $800,000 to $1,000,000 lower in fiscal 1998 as a result of these separations and relocations. NET INTEREST EXPENSE Net interest expense was $713,000 and $240,000 during the three-month periods ended December 31, 1997 and 1996, respectively. The increase in interest expense is primarily due to the cessation of interest capitalization on the Company's residential real estate joint venture project. Such increase was partially offset by a decrease in interest associated with a reduction in debt balances. PROVISION (CREDIT) FOR INCOME TAXES The Company's effective income tax rates were 0% in the first quarter of fiscal 1998 compared to 34% during the same period last year. See Note 5 of Notes to Condensed Consolidated Financial Statements for a discussion of the reduced effective rate in fiscal 1998 and the Company's expectation of effective rates during the remainder of fiscal 1998. 13 VARIATIONS IN OPERATING RESULTS Although the Company's operating results 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 additional factors, among others; (i) as discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, the Company may incur material legal and other costs associated with certain litigation and contingencies; (ii) the timing of real estate and related sales and equity in earnings of real estate ventures is not predictable; (iii) the recognition of revenues from environmental protection equipment orders not accounted for as long-term contracts depends upon orders generated and the timing of shipment of the equipment; (iv) weighted average common and common equivalent shares for purposes of calculating diluted net income (loss) per common share are subject to significant fluctuations based upon changes in the market price of the Company's Common Stock due to outstanding warrants and options; and (v) the magnitude, pricing and timing of AP, sodium azide, Halotron, and environmental protection equipment sales in the future is uncertain. LITIGATION AND CONTINGENCIES See Note 4 of Notes to Condensed Consolidated Financial Statements for a discussion of litigation and contingencies. INFLATION Inflation did not have a significant effect on the Company's sales and operating revenues or costs during the three-month periods ended December 31, 1997 and 1996, respectively. 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 As a result of the litigation and contingencies described in Note 4 of Notes to Condensed 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. Operating cash flows were $(5,416,000) and $(854,000) during the three-month periods ended December 31, 1997 and 1996, respectively. Cash flows from operating activities declined in the first quarter of fiscal 1998 principally as a result of changes in certain working capital balances, most notably a significant increase in receivables related to AP shipments in late December, 1997. Such receivables are scheduled to be collected in the 14 second quarter of fiscal 1998. The Company believes that its cash flows from operations and existing cash balances will be adequate for the foreseeable future to satisfy the needs of its operations. However, the resolution of litigation and contingencies, and the timing, pricing and magnitude of orders for AP, sodium azide and Halotron, may have an effect on the use and availability of cash. The Company is currently in the process of evaluating its computer software and databases to determine whether or not modifications will be required to prevent problems related to the Year 2000. These problems, which have been widely reported in the media, could cause malfunctions in certain software and databases with respect to dates on or after January 1, 2000, unless corrected. At this time, the Company has not yet determined the cost of evaluating its computer software or databases or of making any modifications required to correct any "Year 2000" problems. As a condition of the Agreement with Kerr-McGee, the Company will be required to obtain financing for 100 percent of the purchase price. The Company currently expects that such financing will be available on customary commercial terms, although there can be no assurance given with respect thereto. FORWARD-LOOKING STATEMENTS/RISK FACTORS Certain matters discussed in this Report may be forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, the risk factors set forth below. The following important risk factors, among others, may cause the Company's operating results and/or financial position to be adversely affected from time to time: 1. Declining demand or downward pricing pressure for the Company's products as a result of general or specific economic conditions, further governmental budget decreases affecting the Department of Defense or NASA which would cause a continued decrease in demand for AP, the results achieved by the Suspension Agreement resulting from the Company's anti-dumping petition and the possible termination of such agreement, technological advances and improvements or new competitive products causing a reduction or elimination of demand for 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. 15 4. Difficulties in procuring raw materials, supplies, power and natural gas used in the production of perchlorates, sodium azide and Halotron products and used in the engineering and assembly process for environmental protection equipment products. 5. The Company's ability to control the amount of operating expenses and/or the impact of any non-recurring or unusual items resulting from the Company's continuing evaluation of its strategies, plans, organizational structure and asset valuations. 6. Risks associated with the Company's real estate activities, including, but not limited to, dependence upon the Las Vegas commercial, industrial and residential real estate markets, changes in general or local, economic conditions, interest rate fluctuations affecting the availability and the cost of financing, the performance of the managing partner of its residential real estate joint venture (Ventana Canyon Joint Venture) and regulatory and environmental matters that may have a negative impact on sales or costs. 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 4 of Notes to Condensed Consolidated Financial Statements 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. 10. Closing of the Agreement to acquire the Kerr-McGee AP business. 11. The results of the Company's periodic review of impairment issues under the provision of SFAS No. 121. 12. The dependence upon a single facility for the production of most of the Company's products. 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS SEP-30-1997 DEC-31-1997 12,989 0 10,517 0 10,880 35,897 24,170 4,538 89,854 12,229 0 0 0 829 0 89,854 11,268 11,268 8,106 10,289 0 0 713 566 0 566 0 0 0 566 .07 .07
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