-----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, MdmLIFQWHbTutp05rgOT721v3Xhs0ncf4gyTHv0IA/RwYwqPtZ23NgHcEwpUbd2H Nr7ROfUWOkwZqJO4rW6DIg== 0000898430-00-001553.txt : 20000515 0000898430-00-001553.hdr.sgml : 20000515 ACCESSION NUMBER: 0000898430-00-001553 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 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: 001-08137 FILM NUMBER: 629769 BUSINESS ADDRESS: STREET 1: 3770 HOWARD HUGHES PKWY STE 300 CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027352200 MAIL ADDRESS: STREET 1: 3770 HOWARD HUGHES PKWY STE 300 STREET 2: 3770 HOWARD HUGHES PKWY STE 300 CITY: LAS VEGAS STATE: NV ZIP: 89109 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15 (d) - of the Securities Exchange Act of 1934 For Quarterly Period Ended March 31, 2000 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: 7,080,955 as of April 30, 2000. -1- 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 15 of this Report on Form 10-Q. ITEM 3. Quantitative and Qualitative Disclosure About Market Risk --------------------------------------------------------- The Company has certain fixed-rate debt which it believes to have a fair value that approximates reported amounts. The Company believes that any market risk arising from these financial instruments is not material. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ----------------- The information required by Item 103 of Regulation S-K is provided on pages 8 and 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 --------------------------------------------------- The information required hereunder is incorporated by reference to the Registrant's Current Report on Form 8-K dated March 14, 2000. ITEM 5. Other Information ----------------- None. ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- a) 27. Financial Data Schedules. This Exhibit is filed in connection with the Registrant's electronic filing. b) A Current Report on Form 8-K, dated March 14, 2000, was filed during the Registrant's second quarter of fiscal 2000. The Form 8-K reported the voting results of matters submitted to a vote of Security Holders at the Registrant's Annual Meeting of Stockholders held March 14, 2000, and a change to an ammonium perchlorate purchase order from a major customer. -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: May 11, 2000 /S/ JOHN R. GIBSON ----------------------------- John R. Gibson Chief Executive Officer and President Date: May 11, 2000 /S/ DAVID N. KEYS ---------------------------- David N. Keys Executive Vice President, Chief Financial Officer, Secretary and Treasurer; Principal Financial and Accounting Officer -3- AMERICAN PACIFIC CORPORATION Condensed Consolidated Income Statements (unaudited)
____________________________________________________________________________________________________________ For the three months ended For the six months March 31, ended March 31, 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Sales and Operating Revenues $16,319,000 $ 16,891,000 $ 37,295,000 $ 35,745,000 Cost of Sales 11,294,000 10,970,000 23,697,000 22,558,000 ------------------------------------------------------------------- Gross Profit 5,025,000 5,921,000 13,598,000 13,187,000 Operating Expenses 2,815,000 2,465,000 5,240,000 4,957,000 ------------------------------------------------------------------- Operating Income 2,210,000 3,456,000 8,358,000 8,230,000 Net Interest and Other Expense 984,000 1,392,000 2,108,000 2,865,000 ------------------------------------------------------------------- Income Before Provision for Income Taxes 1,226,000 2,064,000 6,250,000 5,365,000 Provision for Income Taxes ------------------------------------------------------------------- Net Income Before Extraordinary Loss 1,226,000 2,064,000 6,250,000 5,365,000 Extraordinary Loss-Debt Extinguishment 614,000 614,000 --------------------------------------------------------------------- Net Income $ 612,000 $ 2,064,000 $ 5,636,000 $ 5,365,000 --------------------------------------------------------------------- Basic Net Income (Loss) Per Share: Income Before Extraordinary Loss $ .16 $ .25 $ .83 $ .66 Extraordinary Loss $ (.08) $ (.08) --------------------------------------------------------------------- Net Income $ .08 $ .25 $ .75 $ .66 --------------------------------------------------------------------- Average Shares Outstanding 7,315,000 8,144,000 7,559,000 8,167,000 --------------------------------------------------------------------- Diluted Net Income (Loss) Per Share: Income Before Extraordinary Loss $ .16 $ .25 $ .81 $ .65 Extraordinary Loss $ (.08) $ (.08) --------------------------------------------------------------------- Net Income $ .08 $ .25 $ .73 $ .65 --------------------------------------------------------------------- Diluted Shares 7,473,000 8,291,000 7,673,000 8,267,000 ---------------------------------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. -4- AMERICAN PACIFIC CORPORATION Condensed Consolidated Balance Sheets (unaudited)
________________________________________________________________________________________________________________ March 31, September 30, 2000 1999 - ---------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and Cash Equivalents $ 35,932,000 $ 40,434,000 Accounts and Notes Receivable 11,094,000 8,859,000 Related Party Notes Receivable 423,000 447,000 Inventories 10,459,000 9,577,000 Prepaid Expenses and Other Assets 774,000 680,000 Restricted Cash 1,195,000 ------------------------------------------------ Total Current Assets 58,682,000 61,192,000 Property, Plant and Equipment, Net 16,415,000 17,254,000 Intangible Assets, Net 32,007,000 34,210,000 Real Estate Equity Investments 8,543,000 11,237,000 Development Property 6,197,000 6,440,000 Other Assets, Net 2,001,000 2,549,000 ------------------------------------------------ TOTAL ASSETS $123,845,000 $132,882,000 ------------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. -5- AMERICAN PACIFIC CORPORATION Condensed Consolidated Balance Sheets (unaudited)
________________________________________________________________________________________________________________ March 31, September 30, 2000 1999 - ---------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts Payable and Accrued Liabilities $ 8,952,000 $ 6,909,000 Current Portion of Long-Term Debt 1,195,000 ------------------------------------- Total Current Liabilities 8,952,000 8,104,000 Long-Term Debt 58,175,000 67,000,000 Long-Term Payables 1,635,000 2,005,000 ------------------------------------- TOTAL LIABILITIES 68,762,000 77,109,000 ------------------------------------- Commitments and Contingencies Warrants to Purchase Common Stock 3,569,000 3,569,000 Shareholders' Equity: Common Stock 852,000 847,000 Capital in Excess of Par Value 80,094,000 79,757,000 Accumulated Deficit (17,643,000) (23,279,000) Treasury Stock (11,722,000) (5,034,000) Receivable from the Sale of Stock (67,000) (87,000) ------------------------------------- Total Shareholders' Equity 51,514,000 52,204,000 ------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $123,845,000 $132,882,000 -------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. -6- AMERICAN PACIFIC CORPORATION Condensed Consolidated Statements of Cash Flows (unaudited)
________________________________________________________________________________________________________________ For the three months For the six months ended March 31, ended March 31, 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities $ 2,578,000 $ (591,000) $ 10,627,000 $10,670,000 --------------------------------------------------------------- Cash Flows From Investing Activities: Capital Expenditures (989,000) (387,000) (1,155,000) (2,092,000) Real Estate Equity Investment Capital Activity 1,077,000 916,000 2,694,000 1,380,000 --------------------------------------------------------------- Net Cash Flows From Investing Activities 88,000 529,000 1,539,000 (712,000) --------------------------------------------------------------- Cash Flows From Financing Activities: Debt Related Payments (9,127,000) (10,322,000) Issuance of Common Stock 21,000 45,000 342,000 45,000 Treasury Stock Acquired (5,946,000) (425,000) (6,688,000) (725,000) --------------------------------------------------------------- Net Cash Flows From Financing Activities (15,052,000) (380,000) (16,668,000) (680,000) --------------------------------------------------------------- Net Change in Cash and Cash Equivalents (12,386,000) (442,000) (4,502,000) 9,278,000 Cash and Cash Equivalents, Beginning of Period 48,318,000 30,109,000 40,434,000 20,389,000 --------------------------------------------------------------- Cash and Cash Equivalents, End of Period $ 35,932,000 $29,667,000 $ 35,932,000 $29,667,000 --------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Interest Paid $ 3,050,000 $ 3,238,000 $ 3,050,000 $ 3,238,000 ---------------------------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. -7- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED): 1. BASIS OF REPORTING The accompanying Condensed Consolidated Financial Statements are unaudited and do not include certain information and disclosures included in the Annual Report on Form 10-K of American Pacific Corporation (the "Company"). The Condensed Consolidated Balance Sheet as of September 30, 1999 was derived from the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 1999. 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, 1999. In the opinion of Management, however, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included. The operating results and cash flows for the three-month and six-month periods ended March 31, 2000 are not necessarily indicative of the results that will be achieved for the full fiscal year or for future periods. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by the Company include estimated useful lives for depreciable and amortizable assets, the estimated valuation allowance for deferred tax assets, and estimated cash flows in assessing the recoverability of long-lived assets. Actual results may differ from these and other estimates. 2. NET INCOME PER COMMON SHARE Basic per share amounts are computed by dividing net income by average shares outstanding during the period. Diluted per share amounts are computed by dividing net income by average shares outstanding plus the dilutive effect of common share equivalents. The effect of stock options and warrants outstanding to purchase approximately 2.9 million shares of common stock were not included in diluted per share calculations during the three-month and six-month periods ended March 31, 2000 and 1999, since the average exercise price of such options and warrants was greater than the average price of the Company's common stock during these periods. 3. INVENTORIES Inventories consist of the following:
March 31, September 30, 2000 1999 ----------- ------------- Work-in-process $ 6,485,000 $5,938,000 Raw materials and supplies 3,974,000 3,639,000 ----------- ---------- Total $10,459,000 $9,577,000 ----------- ----------
4. COMMITMENTS AND CONTINGENCIES Trace amounts of perchlorate chemicals have been found in Lake Mead. Clark County, Nevada, where Lake Mead is situated, is the location of Kerr-McGee Chemical Corporation's ("Kerr-McGee") ammonium perchlorate ("AP") operations, and was the location of the Company's AP operations until May 1988. The Company is cooperating with State and local agencies, and with Kerr-McGee and other interested firms, in the investigation and evaluation of the source or sources of these trace amounts, possible environmental impacts, and potential remediation methods. Until these investigations and evaluations have reached definitive conclusions, it will not be possible for the Company to determine the extent to -8- which, if at all, the Company may be called upon to contribute to or assist with future remediation efforts, or the financial impact, if any, of such cooperation, contributions or assistance. Accordingly, no accrual for potential costs has been made in the accompanying Condensed Consolidated Financial Statements. In 1999, two lawsuits were filed in Utah state court against the Company and certain unrelated equipment and product manufacturers claiming unspecified monetary damages as a result of a fire and explosion on July 30, 1997, at the Company's AP production facility that resulted in the death of one employee and the injury of three employees. The Company believes that it has statutory immunity as an employer under the applicable worker's compensation laws of the State of Utah and that there was no negligence on the part of the Company that contributed to the incident. The lawsuits are currently in a discovery phase. The Company is a party to an agreement with Utah Power and Light Company ("UPL") for its electrical requirements. The agreement provides for the supply of power for a minimum of a ten-year period, which began in 1988, and obligates the Company to purchase minimum amounts of power, while assuring the Company competitive pricing for its electricity needs for the duration of the agreement. Under the terms of the agreement, the Company's minimum monthly charge for firm and interruptible demand is approximately $22,000. The agreement has a three year notice of termination provision and, on April 7, 1999, UPL provided written notice of termination effective April 7, 2002. The Company is in the process of negotiating for its expected power requirements beyond April 7, 2002. 5. INCOME TAXES The Company established a valuation allowance for deferred tax assets at September 30, 1997. The Company's effective tax rate will be approximately 0% until its net operating losses expire or the Company believes the valuation allowance is no longer required. 6. REAL ESTATE EQUITY INVESTMENTS The Company's interest in Gibson Ranch Limited Liability Company ("GRLLC") is accounted for using the equity method. GRLLC operates on a calendar year. The Company recognizes its share of the earnings in GRLLC (after amortization of differences in basis) on a current quarterly basis. Summarized financial information for GRLLC as of and for the three-month and six-month periods ended March 31, 2000 was as follows:
-------------------------------------------------------------------- Three-Month Period Ended Six-Month Period Ended March 31, 2000 March 31, 2000 -------------------------------------------------------------------- Income Statement: Revenues $8,108,000 $20,946,000 Gross Profit 900,000 2,433,000 Operating Expenses 313,000 730,000 Net Income 581,000 1,706,000
7. SEGMENT INFORMATION The Company's three reportable operating segments are specialty chemicals, environmental protection equipment and real estate sales and development. These segments are based upon business units that offer distinct products and services, are operationally managed separately and produce products using different production methods. -9- The Company evaluates the performance of each operating segment and allocates resources based upon operating income or loss before an allocation of interest expense and income taxes. The accounting policies of each reportable operating segment are the same as those of the Company. The Company's specialty chemicals segment manufactures and sells perchlorate chemicals used principally in solid rocket propellants for the space shuttle and defense programs, sodium azide used principally in the inflation of certain automotive airbag systems and Halotron (TM) I, a clean gas fire extinguishing agent designed to replace Halon 1211. The specialty chemicals segment production facilities are located in Iron County, Utah. The Company's environmental protection equipment operating segment designs, manufactures and markets systems for the control of noxious odors, the disinfection of waste water streams and the treatment of seawater. These operations are also located in Iron County, Utah. At March 31, 2000, the Company's real estate operating segment had approximately 70 remaining acres of improved land in the Gibson Business Park near Las Vegas, Nevada, that is held for development and sale. Recent activity has consisted of sales of land parcels. Although not included in operating activities, this segment also has an equity investment in a residential joint venture that is located across the street from the Gibson Business Park. (See Note 6). Additional information about the Company's operations, by segment, for the three months and six months ended March 31, is provided below.
-------------------------------------------------------------- Three Months Ended Six Months Ended March 31, March 31, 2000 1999 2000 1999 -------------------------------------------------------------- Revenues: Specialty chemicals $13,661,000 $16,675,000 $33,015,000 $33,161,000 Environmental protection 2,655,000 149,000 3,127,000 856,000 Real estate 3,000 67,000 1,153,000 1,728,000 -------------------------------------------------------------- Total revenues $16,319,000 $16,891,000 $37,295,000 $35,745,000 -------------------------------------------------------------- Operating income (loss): Specialty chemicals $ 1,640,000 $ 4,198,000 $ 7,316,000 $ 7,911,000 Environmental protection 730,000 (360,000) 692,000 (367,000) Real estate (150,000) (94,000) 578,000 1,217,000 -------------------------------------------------------------- Total segment operating income 2,220,000 3,744,000 8,586,000 8,761,000 Unallocated net expenses (principally net interest) 994,000 1,680,000 2,336,000 3,396,000 -------------------------------------------------------------- Income before income taxes $ 1,226,000 $ 2,064,000 $ 6,250,000 $ 5,365,000 ==============================================================
8. DEBT REPURCHASE In June 1999 and September 1998, the Company repurchased and retired $3.0 million and $5.0 million, respectively, in principal amount of its senior unsecured notes (the "Notes"). The Company incurred extraordinary losses on debt extinguishment of approximately $0.2 million on each of these transactions principally as a result of writing off costs associated with the issuance of the Notes. During the second quarter of fiscal 2000, the Company repurchased and retired approximately $8.8 million in principal amount of Notes. The Company incurred extraordinary losses on debt extinguishment of approximately $0.6 million on these second quarter transactions. In April and May 2000, the Company repurchased and retired an additional $14.0 million in principal amount of Notes. Since the original issuance of the Notes, the Company has repurchased and retired approximately $30.8 million in principal amount at a weighted average cost of approximately 102.7% of par. -10- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is principally engaged in the production of AP for the aerospace and national defense industries. In addition, the Company produces and sells sodium azide, the primary component of a gas generant used in certain automotive airbag safety systems, and Halotron, a chemical used in fire extinguishing systems ranging from portable fire extinguishers to airport firefighting vehicles. The perchlorate, sodium azide and Halotron facilities are located on the Company's property in Southern Utah and the chemicals produced and sold at these facilities collectively represent the Company's specialty chemical segment. The Company's other lines of business include the development of real estate in Nevada and the production of environmental protection equipment, including waste and seawater treatment systems. During 1998, the Company entered into a Purchase Agreement with Kerr-McGee. On March 12, 1998, the Company sold $75.0 million of Notes, consummated an acquisition (the "Acquisition") of certain assets from Kerr-McGee and repurchased the remaining $25.0 million principal amount balance outstanding of subordinated secured notes (the "Azide Notes"). Upon consummation of the Acquisition, the Company effectively became the sole North American producer of AP. Sales and Operating Revenues. Sales of the Company's perchlorate chemical - ---------------------------- products, consisting almost entirely of AP sales, accounted for approximately 69% and 72% of revenues during the six-month periods ended March 31, 2000 and 1999, respectively. In general, demand for AP is driven by a relatively small number of DOD and NASA contractors; as a result, any one individual AP customer usually accounts for a significant portion of the Company's revenues. Sodium azide sales accounted for approximately 17% and 20% of revenues during the six-month periods ended March 31, 2000 and 1999, respectively. The Company's principal sodium azide customer accounted for in excess of 80% of such revenues. Sales of Halotron amounted to approximately 3% and 1% of revenues during the six-month periods ended March 31, 2000 and 1999, respectively. Halotron is designed to replace halon-based fire extinguishing systems. Accordingly, demand for Halotron depends upon a number of factors including the willingness of consumers to switch from halon-based systems, as well as existing and potential governmental regulations. Real estate and related sales amounted to approximately 3% and 5% of revenues during the six-month periods ended March 31, 2000 and 1999, respectively. The nature of real estate development and sales is such that the Company is unable reliably to predict any pattern of future real estate sales or the recognition of the equity in earnings of real estate ventures. Environmental protection equipment sales accounted for approximately 8% and 2% of revenues during the six-month periods ended March 31, 2000 and 1999, respectively. In March 2000, the Company received notification from Thiokol Propulsion (a division of Cordant Technologies, Inc.) ("Thiokol") of a change in the current purchase order for AP which will result in an estimated reduction in revenues of approximately $4.0 million in the fiscal year ending September 30, 2000. In 1998, the Company entered into an agreement with Thiokol with respect to the supply of AP through the year 2008. The agreement establishes a pricing matrix under which AP unit prices to Thiokol vary inversely with the quantity of AP sold by the Company to all of its customers. The reduced AP delivery quantities in the Thiokol change order results in an AP unit price increase for all AP sold to Thiokol in fiscal 2000 and the Company has recognized in revenues the effects of the higher AP unit price for quantities sold to Thiokol during the first half of fiscal 2000. The financial effects of the change order will be concentrated mostly on the Company's second half of fiscal 2000. The Company currently expects AP volumes and revenues to be between 30% and 40% lower in the second half of fiscal 2000 as compared to the first half. However, the change order also allows for a price adjustment claim which the Company expects to complete and submit in May 2000. Subject to the outcome of -11- the price adjustment claim process, the purchase order modification may have a material adverse effect on the Company's fiscal year 2000 operating results. Cost of Sales. The principal elements comprising the Company's cost of sales - -------------- are depreciation and amortization, raw materials, electric power, labor, manufacturing overhead and the basis in real estate sold. The major raw materials used by the Company in its production processes are graphite, sodium chlorate, ammonia, hydrochloric acid, sodium metal, and nitrous oxide. Significant increases in the cost of raw materials may have an adverse impact on margins if the Company is unable to pass along such increases to its customers, although all of the raw materials used in the Company's manufacturing processes have historically been available in commercial quantities with relatively stable pricing, and the Company has had no difficulty obtaining necessary raw materials. The costs of operating the Company's specialty chemical plants are, however, largely fixed. Income Taxes. The Company's effective income tax rates were 0% during the six- - ------------ month periods ended March 31, 2000 and 1999. The Company's effective income tax rate was 0% during these periods as a result of the establishment of a $10.4 million deferred tax valuation allowance in the fourth quarter of fiscal 1997. The Company's effective tax rate will be 0% until the Company's net operating losses expire or the valuation allowance is no longer necessary. Net Income. Although the Company's net income and diluted net income per share - ---------- have not been subject to seasonal fluctuations, they have been and are expected to continue to be subject to variations from quarter to quarter and year to year due to the following factors, among others: (i) as discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, the Company may incur material costs associated with certain contingencies; (ii) the timing of real estate and related sales and the equity in earnings of real estate ventures is not predictable; (iii) the recognition of revenues from environmental protection equipment orders not accounted for as long-term contracts depends upon orders generated and the timing of shipment of the equipment; (iv) weighted average common and common equivalent shares for purposes of calculating diluted net income per share are subject to significant fluctuations based upon changes in the market price of the Company's Common Stock due to outstanding warrants and options; and (v) the magnitude, pricing and timing of AP, sodium azide, Halotron, and environmental protection equipment orders in the future is uncertain. (See "Forward Looking Statements/Risk Factors" below.) Results of Operations Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999 Sales and Operating Revenues. Sales decreased $0.6 million, or 4%, during the - ---------------------------- three months ended March 31, 2000, to $16.3 million from $16.9 million in the corresponding period of the prior year. This decrease was principally attributable to decreased sales of specialty chemicals. Perchlorate and sodium azide chemical sales decreased approximately $3.4 million (see above for a discussion of the impact of a change order for AP). This decrease was partially offset by an increase in environmental protection equipment sales of approximately $2.5 million due primarily to the timing of the shipment of certain equipment. Cost of Sales. Cost of sales increased $0.3 million, or 3%, in the three months - ------------- ended March 31, 2000, to $11.3 million from $11.0 million in the corresponding period of the prior year. As a percentage of sales, cost of sales was 69% during the three-month period ended March 31, 2000 compared to 65% during the same period last year. The increases were principally due to a change in the mix of sales and the lower variable margins associated with the Company's environmental protection equipment segment as compared to the specialty chemicals segment. Operating Expenses. Operating (selling, general and administrative) expenses - ------------------ increased $0.3 million, or 12%, in the three months ended March 31, 2000, to $2.8 million from $2.5 million in the corresponding period of 1999. -12- Net Interest Expense. Net interest and other expense decreased to $1.0 million - -------------------- in the three months ended March 31, 2000, from $1.4 million in the corresponding period of the prior year as a result of lower average debt balances. Six Months Ended March 31, 2000 Compared to Six Months Ended March 31, 1999 Sales and Operating Revenues. Sales increased $1.6 million, or 4%, during the - ---------------------------- six months ended March 31, 2000, to $37.3 million from $35.7 million in the corresponding period of the prior year. The increase was principally due to an increase in environmental protection equipment sales of approximately $2.3 million. Such increase was partially offset by a decrease in real estate sales of approximately $0.6 million. Cost of Sales. Cost of sales increased $1.1 million, or 5%, in the six months - ------------- ended March 31, 2000, to $23.7 million from $22.6 million in the corresponding period of the prior year. As a percentage of sales, cost of sales was 63% during the first six months of this fiscal year and last fiscal year. Operating Expenses. Operating expenses were $5.2 million during the six-month - ------------------ period ended March 31, 2000 compared to $5.0 million in the corresponding period of the prior year. Operating expenses during the six-month periods ended March 31, 2000 and 1999 include approximately $0.5 million and $0.4 million, respectively, in costs associated with the investigation and evaluation of trace amounts of perchlorate chemicals found in Lake Mead. (See Note 4 to the Condensed Consolidated Financial Statements). Net Interest Expense. Net interest and other expense decreased to $2.1 million - -------------------- in the six months ended March 31, 2000, from $2.9 million in the corresponding period of the prior year, principally as a result of lower average debt balances. Segment Operating Income (Loss). Operating income (loss) of the Company's - ------------------------------- industry segments during the six-month periods ended March 31, 2000 and 1999 was as follows:
------------------------ 2000 1999 ---------- ---------- Specialty chemicals $7,316,000 $7,911,000 Environmental protection equipment 692,000 (367,000) Real Estate 578,000 1,217,000 ---------- ---------- Total $8,586,000 $8,761,000 ========== ==========
The decrease in operating income in the Company's specialty chemical industry segment was primarily attributable to lower sales. The increase in operating performance of the environmental protection equipment segment was principally due to increased sales. The decrease in real estate segment operating income was attributable to decreased land sales. Inflation Inflation did not have a significant effect on the Company's sales and operating revenues or costs during the three-month or six-month periods ended March 31, 2000 or 1999. Inflation may have an effect on gross profit in the future as certain of the Company's agreements with AP and sodium azide customers require fixed prices, although certain of such agreements contain escalation features that should somewhat insulate the Company from increases in costs associated with inflation. Liquidity and Capital Resources In March 1998, the Company sold Notes in the principal amount of $75.0 million, acquired certain assets from Kerr-McGee for a cash purchase price of $39.0 million and paid $28.2 million to repurchase the remaining $25.0 million principal amount outstanding of the Azide Notes. In June 1999 and September 1998, the Company repurchased and retired $3.0 million and $5.0 million, respectively, in principal amount of Notes. -13- The Company incurred extraordinary losses on debt extinguishment of approximately $0.2 million on each of these transactions principally as a result of writing off costs associated with the issuance of the Notes. During the second quarter of fiscal 2000, the Company repurchases and retired approximately $8.8 million in principal amount of Notes. The Company incurred extraordinary losses on debt extinguishment of approximately $0.6 million on these second quarter transactions. In April and May 2000, the Company repurchased and retired an additional $14.0 million in principal amount of Notes. Since the original issuance of the Notes, the Company has repurchased and retired approximately $30.8 million in principal amount at a weighted average cost of approximately 102.7% of par. Cash flows provided by operating activities were $10.6 million and $10.7 million during the six-months ended March 31, 2000 and 1999, respectively. The Company believes that its cash flows from operations and existing cash balances will be adequate for the foreseeable future to satisfy the needs of its operations. However, the resolution of contingencies and 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. Capital expenditures were $1.2 million during the six months ended March 31, 2000, compared to $2.1 million during the same period last year. Capital expenditures are budgeted to amount to approximately $3.0 million in fiscal 2000 and are expected to relate primarily to specialty chemical segment capital improvement projects. During the six-month period ended March 31, 2000, the Company received cash of approximately $2.7 million relating to the return of capital invested in GRLLC. The Company currently anticipates that cash returns of invested capital and equity in earnings will continue through the conclusion of the project currently projected to be the end of calendar 2001. During the six-month period ended March 31, 2000, the Company spent approximately $6.7 million on the repurchase of its Common Stock. The Company may (but is not obligated to) continue to repurchase its Common Stock but is limited in its ability to use cash to repurchase stock by certain covenants contained in the Indenture associated with the Notes. Forward-Looking Statements/Risk Factors Certain matters discussed in this Report may be forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, the risk factors set forth below. The following risk factors, among others, may cause the Company's operating results and/or financial position to be adversely affected from time to time: 1. (a) Declining demand or downward pricing pressure for the Company's products as a result of general or specific economic conditions, (b) governmental budget decreases affecting the DOD or NASA that would cause a decrease in demand for AP, (c) the results achieved by the Suspension Agreement resulting from the Company's anti-dumping petition against foreign sodium azide producers and the possible termination of such agreement, (d) technological advances and improvements with respect to existing or new competitive products causing a reduction or elimination of demand for AP, sodium azide or Halotron, (e) the ability and desire of purchasers to change existing products or substitute other products for the Company's products based upon perceived quality, environmental effects and pricing, and (f) the fact that perchlorate chemicals, sodium azide, Halotron and the Company's environmental products have limited applications and highly concentrated customer bases. 2. Competitive factors including, but not limited to, the Company's limitations respecting financial resources and its ability to compete against companies with substantially greater resources, significant excess market supply in the sodium azide market and the development or penetration of competing new products, particularly in the propulsion, airbag inflation and fire suppression businesses. -14- 3. Underutilization of the Company's manufacturing facilities resulting in production inefficiencies and increased costs, the inability to recover facility costs and reductions in margins. 4. Risks associated with the Company's real estate activities, including, but not limited to, dependence upon the Las Vegas commercial, industrial and residential real estate markets, changes in general or local economic conditions, interest rate fluctuations affecting the availability and cost of financing, the performance of the managing partner of its residential real estate joint venture (GRLLC) and regulatory and environmental matters that may have a negative impact on sales or costs. 5. The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies or similar organizations, including, but not limited to, environmental, safety and transportation issues. 6. The cost and effects of legal and administrative proceedings, settlements and investigations, particularly those investigations described in Note 4 of Notes to Condensed Consolidated Financial Statements and claims made by or against the Company relative to patents or property rights. 7. Integration of new customers and the ability to meet additional production and delivery requirements resulting from the Acquisition. 8. The results of the Company's periodic review of impairment issues under the provisions of SFAS No. 121. 9. The dependence upon a single facility for the production of most of the Company's products. 10. Provisions of the Company's Certificate of Incorporation and By-laws, and Series D Preferred Stock, the potential dividend of preference stock purchase rights thereunder and the related Rights Agreement could have the effect of making it more difficult for potential acquirors to obtain a control position in the Company. -15- EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS SEP-30-2000 MAR-31-2000 35,932,000 0 11,094,000 0 10,459,000 58,682,000 27,495,000 11,080,000 123,845,000 8,952,000 0 0 0 852,000 50,662,000 123,845,000 37,295,000 37,295,000 23,697,000 28,937,000 0 0 2,108,000 6,250,000 0 6,250,000 0 (614,000) 0 5,636,000 .75 .73
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