-----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, PJhPITu2wwsdLnUlRCtX+CeHKvQvMCF9A9zyoJB/nTZftTDYDS3WTVGzJCkqQ/21 2GG47RCTwei1pEGBft/ghA== 0000898430-01-501654.txt : 20010809 0000898430-01-501654.hdr.sgml : 20010809 ACCESSION NUMBER: 0000898430-01-501654 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010808 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: 1934 Act SEC FILE NUMBER: 001-08137 FILM NUMBER: 1700954 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 d10q.txt 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 June 30, 2001 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: 7,017,000 as of July 31, 2001. -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 11 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 12 through 16 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 page 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) None. 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: August 8, 2001 /S/ JOHN R. GIBSON ------------------------- John R. Gibson Chief Executive Officer and President Date: August 8, 2001 /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 nine months June 30, ended June 30, 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------------------------------- Sales and Operating Revenues $15,353,000 $17,021,000 $42,062,000 $54,316,000 Cost of Sales 9,142,000 10,866,000 28,063,000 34,563,000 ------------------------------------------------------------------------------------- Gross Profit 6,211,000 6,155,000 13,999,000 19,753,000 Operating Expenses 2,412,000 2,572,000 7,158,000 7,812,000 ------------------------------------------------------------------------------------- Operating Income 3,799,000 3,583,000 6,841,000 11,941,000 Net Interest and Other Expense 720,000 756,000 2,040,000 2,864,000 ------------------------------------------------------------------------------------- Income Before Income Taxes 3,079,000 2,827,000 4,801,000 9,077,000 Income Taxes 1,139,000 1,776,000 ------------------------------------------------------------------------------------- Net Income Before Extraordinary Loss 1,940,000 2,827,000 3,025,000 9,077,000 Extraordinary Loss-Debt Extinguishments 980,000 1,594,000 ------------------------------------------------------------------------------------- Net Income $ 1,940,000 $ 1,847,000 $ 3,025,000 $ 7,483,000 ------------------------------------------------------------------------------------- Basic Net Income Per Share: Income Before Extraordinary Loss $ .28 $ .40 $ .43 $ 1.23 Extraordinary Loss (.14) (.22) ------------------------------------------------------------------------------------- Net Income $ .28 $ .26 $ .43 $ 1.01 ------------------------------------------------------------------------------------- Average Shares Outstanding 7,026,000 7,080,000 7,047,000 7,399,000 ------------------------------------------------------------------------------------- Diluted Net Income Per Share: Income Before Extraordinary Loss $ .28 $ .40 $ .43 $ 1.22 Extraordinary Loss (.14) (.22) ------------------------------------------------------------------------------------- Net Income $ .28 $ .26 $ .43 $ 1.00 ------------------------------------------------------------------------------------- Diluted Shares 7,030,000 7,090,000 7,050,000 7,469,000 -------------------------------------------------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. -4- AMERICAN PACIFIC CORPORATION Condensed Consolidated Balance Sheets (unaudited)
- ------------------------------------------------------------------------------------------------------------ June 30, September 30, 2001 2000 - ------------------------------------------------------------------------------------------------------------ ASSETS Current Assets: Cash and Cash Equivalents $ 37,591,000 $ 30,128,000 Accounts and Notes Receivable 8,637,000 9,461,000 Related Party Notes Receivable 361,000 477,000 Inventories 15,977,000 10,875,000 Prepaid Expenses and Other Assets 1,109,000 661,000 Deferred Income Taxes 600,000 650,000 ---------------------------------------------- Total Current Assets 64,275,000 52,252,000 Property, Plant and Equipment, Net 7,175,000 7,064,000 Intangible Assets, Net 26,518,000 29,805,000 Real Estate Equity Investments 2,243,000 6,838,000 Development Property 4,755,000 5,482,000 Deferred Income Taxes 13,030,000 14,756,000 Other Assets, Net 1,149,000 1,393,000 ---------------------------------------------- TOTAL ASSETS $119,145,000 $117,590,000 ----------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. -5- AMERICAN PACIFIC CORPORATION Condensed Consolidated Balance Sheets (unaudited)
- ------------------------------------------------------------------------------------------------------------- June 30, September 30, 2001 2000 - ------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts Payable and Accrued Liabilities $ 7,164,000 $ 8,494,000 ----------------------------------------------- Total Current Liabilities 7,164,000 8,494,000 Long-Term Debt 44,175,000 44,175,000 SERP Obligation and Other Non-Current Liabilities 1,875,000 1,743,000 ----------------------------------------------- TOTAL LIABILITIES 53,214,000 54,412,000 ----------------------------------------------- Commitments and Contingencies Warrants to Purchase Common Stock 3,569,000 3,569,000 Shareholders' Equity: Common Stock 852,000 852,000 Capital in Excess of Par Value 80,094,000 80,094,000 Accumulated Deficit (6,523,000) (9,548,000) Treasury Stock (12,050,000) (11,722,000) Receivable from the Sale of Stock (11,000) (67,000) ----------------------------------------------- Total Shareholders' Equity 62,362,000 59,609,000 ----------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $119,145,000 $117,590,000 -----------------------------------------------
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 nine months ended June 30, ended June 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities $ 7,510,000 $ 1,099,000 $ 4,464,000 $ 11,726,000 ----------------------------------------------------------- Cash Flows From Investing Activities: Capital Expenditures (875,000) (1,066,000) (1,268,000) (2,221,000) Real Estate Equity Investment Capital Activity 1,411,000 563,000 4,595,000 3,257,000 ----------------------------------------------------------- Net Cash Flows From Investing Activities 536,000 (503,000) 3,327,000 1,036,000 ----------------------------------------------------------- Cash Flows From Financing Activities: Debt Related Payments (14,567,000) (24,889,000) Issuance of Common Stock 342,000 Treasury Stock Acquired (120,000) (328,000) (6,688,000) ----------------------------------------------------------- Net Cash Flows From Financing Activities (120,000) (14,567,000) (328,000) (31,235,000) ----------------------------------------------------------- Net Change in Cash and Cash Equivalents 7,926,000 (13,971,000) 7,463,000 (18,473,000) Cash and Cash Equivalents, Beginning of Period 29,665,000 35,932,000 30,128,000 40,434,000 ----------------------------------------------------------- Cash and Cash Equivalents, End of Period $37,591,000 $ 21,961,000 $37,591,000 $ 21,961,000 ----------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Interest Paid $ 2,045,000 $ 3,050,000 -----------------------------------------------------------
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 June 30, 2001 was derived from the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2000. 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, 2000. In the opinion of Management, however, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included. The operating results and cash flows for the three-month and nine-month periods ended June 30, 2001 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 accounting principles generally accepted in the United States of America 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. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and other Intangible Assets". SFAS 141 prohibits the use of the pooling-of-interest method for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS 142 is effective for fiscal years beginning after December 14, 2001 to all goodwill and other intangible assets recognized in an entity's balance sheet at that date, regardless of when those assets were initially recognized. The Company is currently evaluating the provisions of SFAS 141 and SFAS 142 and has not adopted such provisions in its June 30, 2001 financial statements. 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 3.0 million shares of common stock were not included in diluted per share calculations during the three-month and nine-month periods ended June 30, 2001 and 2000, 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. -8- 3. INVENTORIES Inventories consist of the following:
June 30, September 30, 2001 2000 ----------- ----------- Work-in-process $11,170,000 $ 8,429,000 Raw materials and supplies 4,807,000 2,446,000 ----------- ----------- Total $15,977,000 $10,875,000 ----------- -----------
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 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. In March 2001, the Company was dismissed without prejudice from these lawsuits. 5. ELECTRIC ENERGY Electric energy is one of the Company's primary raw material costs for the production of AP. The Company is a party to an agreement with Utah Power ("UP") for its electrical requirements. The agreement provided for the supply of power for a minimum of a ten-year period, which began in 1989. This agreement had a three year notice of termination provision and, on April 7, 1999, UP provided written notice of termination, effective April 7, 2002. The Company recently experienced unusual increases in its monthly power bills at its Utah production facilities as compared to average historical monthly amounts. For the months of November and December 2000, and January 2001, the Company received power bills from UP totaling approximately $1.9 million, which were approximately $1.5 million in excess of average historical monthly amounts. The Company claimed that UP had improperly calculated replacement energy costs and breached the agreement by failing to comply with the advance notice provisions of the agreement. Accordingly, the Company disputed all power bills received from UP since January 1999, claiming it had been overcharged by approximately $2.9 million through January 2001. A partial settlement of this dispute has been reached in which the Company and UP have entered into an amendment of the electric supply agreement dated February 21, 2001. Under the terms of the amendment, the Company has been placed on the equivalent of Utah's Electric Service Schedule No. 9. Under this rate schedule, the Company's estimated monthly power bills will be approximately 20% to 30% higher than historical monthly amounts prior to the dispute. As a result, the Company will -9- experience an estimated annual increase in power costs that could be as much as $0.6 million. This amendment has been approved by the Utah Public Service Commission. In May 2001, the Company and UP reached a settlement on the remaining disputed matters. The settlement includes both a cash payment from UP to the Company and a demand curtailment arrangement under Utah's Electric Service Schedule No. 71. Under the curtailment, the Company has accepted UP's offer to curtail demand during the months of June, July and August 2001. As a result of the Company's lower perchlorate sales volumes expected in fiscal 2001, the Company believes it can operate at lower total and peak electric energy consumption levels during these months and, at the same time, operate efficiently and meet its customers' product delivery requirements. The Company estimates that the settlement and curtailment arrangement will result in approximately an additional $2.0 million in cash flow (over the amount which would otherwise be expended on monthly power bills under the February 21, 2001 amendment described above) to the Company. Through June 30, 2001, the Company had realized and recognized (initially as an adjustment to inventories) approximately $1.1 million resulting from the settlement and curtailment arrangement. However, there can be no assurances given with respect to this estimate. The ultimate amount of incremental cash flow to the Company will depend upon the Company's ability to effectively operate under the curtailment arrangement. 6. INCOME TAXES The Company's effective income tax rates were approximately 37% and 0% during the nine-month periods ended June 30, 2001 and 2000, respectively. In fiscal 1997, the Company established a deferred tax valuation allowance. In the fourth quarter of fiscal 2000, the Company released its deferred tax valuation allowance and recognized approximately $15.4 million in net deferred tax assets. 7. 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 nine-month periods ended June 30, 2001 was as follows:
------------------------------------------------------------ Three-Month Period Ended Nine-Month Period Ended June 30, 2001 June 30, 2001 ------------------------------------------------------------ Income Statement: Revenues $7,819,000 $32,029,000 Gross Profit 1,149,000 4,169,000 Operating Expenses 351,000 1,017,000 Net Income 812,000 3,198,000
8. 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. 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. -10- 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 June 30, 2001, the Company's real estate operating segment had approximately 58 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 7). Additional information about the Company's operations, by segment, for the three months and nine months ended June 30, is provided below.
--------------------------------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, 2001 2000 2001 2000 --------------------------------------------------------------------------------- Revenues: Specialty chemicals $10,911,000 $15,572,000 $35,915,000 $48,587,000 Environmental protection 2,296,000 124,000 3,525,000 3,251,000 Real estate 2,146,000 1,325,000 2,622,000 2,478,000 --------------------------------------------------------------------------------- Total revenues $15,353,000 $17,021,000 $42,062,000 $54,316,000 --------------------------------------------------------------------------------- Operating income (loss): Specialty chemicals $ 1,981,000 $ 3,522,000 $ 4,699,000 $10,838,000 Environmental protection 424,000 (148,000) 427,000 544,000 Real estate 1,365,000 456,000 1,395,000 1,034,000 --------------------------------------------------------------------------------- Total segment operating income 3,770,000 3,830,000 6,521,000 12,416,000 Unallocated net expenses (principally net interest) 691,000 1,003,000 1,720,000 3,339,000 --------------------------------------------------------------------------------- Income before income taxes $ 3,079,000 $ 2,827,000 $ 4,801,000 $ 9,077,000 =================================================================================
-11- 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(TM), 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 Senior Unsecured Notes (the "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 60% and 68% of revenues during the nine-month periods ended June 30, 2001 and 2000, respectively. In general, demand for AP is driven by a relatively small number of DOD and NASA contractors; as a result, any one AP customer usually accounts for a significant portion of the Company's revenues. Sodium azide sales accounted for approximately 18% and 17% of revenues during the nine-month periods ended June 30, 2001 and 2000, respectively. The Company's principal sodium azide customer accounted for in excess of 75% of such revenues. Sales of Halotron(TM) amounted to approximately 8% and 4% of revenues during the nine-month periods ended June 30, 2001 and 2000, respectively. Halotron(TM) 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 6% and 5% of revenues during the nine-month periods ended June 30, 2001 and 2000, 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 6% of revenues during the nine-month periods ended June 30, 2001 and 2000, respectively. As of July 31, 2001, this segment had no significant backlog. 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, nitrous oxide and HCFC 123. 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. During the first six months of fiscal 2001, the Company purchased greater quantities of certain raw materials because of recent excessive power costs (see Note 5 to the Condensed Consolidated Financial Statements). Prices paid by the Company for raw materials have historically been relatively stable, although the Company has recently experienced cost increases on certain raw materials, particularly on HCFC 123 and those requiring substantial energy costs to produce. All the raw materials used in the Company's manufacturing processes have been available in commercial quantities and the Company has had no difficulty obtaining -12- necessary raw materials. A substantial portion of the total costs of operating the Company's specialty chemical plants, consisting mostly of labor and overhead, are largely fixed in nature. Income Taxes. The Company's effective income tax rates were approximately 37% - ------------ and 0% during the nine-month periods ended June 30, 2001 and 2000, respectively. In fiscal 1997, the Company established a deferred tax valuation allowance. In the fourth quarter of fiscal 2000, the Company released its deferred tax valuation allowance and recognized approximately $15.4 million in net deferred tax assets. 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 the 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 results of periodic reviews of impairment issues; (vi) the ability to pass on increases in raw material costs, including electric power costs, to customers; and (vii) the magnitude, pricing and timing of AP, sodium azide, Halotron(TM), and environmental protection equipment orders in the future is uncertain. (See "Forward Looking Statements/Risk Factors" below.) Results of Operations Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 Sales and Operating Revenues. Sales decreased $1.6 million, or 10%, during the - ---------------------------- three months ended June 30, 2001, to $15.3 million from $17.0 million in the corresponding period of the prior year. This decrease was principally attributable to lower specialty chemical sales. This decrease was partially offset by an increase in environmental protection equipment and real estate sales of approximately $3.0 million. Cost of Sales. Cost of sales decreased $1.8 million, or 16%, in the three - ------------- months ended June 30, 2001, to $9.1 million from $10.9 million in the corresponding period of the prior year. As a percentage of sales, cost of sales was 60% during the three-month period ended June 30, 2001 compared to 64% during the same period last year. These decreases were principally due to a decrease in sales, slightly better margins associated with the Company's specialty chemicals segment and differences in the mix of sales and associated margins. Operating Expenses. Operating (selling, general and administrative) expenses - ------------------ decreased $0.2 million, or 8%, in the three months ended June 30, 2001, to $2.4 million from $2.6 million in the corresponding period of 2000. Net Interest Expense. Net interest and other expense was approximately $0.7 - -------------------- million during the three-month periods ended June 30, 2001 and 2000. Nine Months Ended June 30, 2001 Compared to Nine Months Ended June 30, 2000 Sales and Operating Revenues. Sales decreased $12.2 million, or 23%, during the - ---------------------------- nine months ended June 30, 2001, to $42.1 million from $54.3 million in the corresponding period of the prior year. The decrease was principally due to a decrease in specialty chemical sales. Such decrease resulted principally from decreased perchlorate and sodium azide shipments. In March 2000, the Company received notification from Thiokol Propulsion ("Thiokol") of a change in the fiscal 2000 purchase order for AP that resulted in a decrease of approximately 3.23 million pounds of AP (from 10.48 -13- million pounds of AP). The Company submitted a price adjustment claim under the change order and, in September 2000, negotiated and settled the claim which resulted in a $3.0 million payment from Thiokol. Sales volume levels for AP declined from approximately 20.2 million pounds in fiscal 1999 to approximately 16.4 million pounds in fiscal 2000. The Company estimates sales volumes for AP in fiscal 2001 will decrease further to between 12.5 million and 13.0 million pounds. The recent weakness in sales volumes is primarily attributable to lower requirements for applications in certain commercial space launch vehicles used primarily in satellite launches, particularly telecommunication satellites. In addition, purchases of AP for use in the solid rocket motors for the Space Shuttle, as evidenced by the change order referred to above, have declined as a result of existing excess inventory levels. The Company believes that such excess should be reduced over the next few years by reason of the number of shuttle flights planned for the construction and servicing of the International Space Station. The Company also understands that existing plans call for significant AP requirements over the next several years for use in the Minuteman program. Accordingly, the Company believes that the estimated future AP requirements for these two programs should bring North American demand for AP back to an annual level of between 16.0 and 20.0 million pounds over the next few years, although there can be no assurance given with respect to these estimates. The Company has no ability to influence the demand for AP. Cost of Sales. Cost of sales decreased $6.5 million, or 19%, in the nine months - ------------- ended June 30, 2001, to $28.1 million from $34.6 million in the corresponding period of the prior year. As a percentage of sales, cost of sales was 67% during the first nine months of this fiscal year as compared to 64% during the same period last year. The increase in the percentage of cost of sales to sales was principally attributable to lower specialty chemical sales volumes and the significant increase in power costs (mostly in the first quarter of fiscal 2001) discussed in Note 5 to the Condensed Consolidated Financial Statements. Operating Expenses. Operating expenses were $7.2 million during the nine-month - ------------------ period ended June 30, 2001 compared to $7.8 million in the corresponding period of the prior year. Operating expenses during the nine-month periods ended June 30, 2001 and 2000 include approximately $0.8 million and $0.6 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 $2.0 million - -------------------- in the nine months ended June 30, 2001, from $2.9 million in the corresponding period of the prior year, principally as a result of lower average debt balances. Segment Operating Income. Operating income of the Company's industry segments - ------------------------ during the nine-month periods ended June 30, 2001 and 2000 was as follows:
------------------------------------ 2001 2000 ---------------- --------------- Specialty chemicals $4,699,000 $10,838,000 Environmental protection equipment 427,000 544,000 Real Estate 1,395,000 1,034,000 ---------------- --------------- Total $6,521,000 $12,416,000 ================ ===============
The decreases in operating income in the Company's specialty chemical industry segment was primarily attributable to lower sales and increased power costs (See Note 5 to the Condensed Consolidated Financial Statements). Inflation General inflation did not have a significant effect on the Company's sales and operating revenues or costs during the three-month or nine-month periods ended June 30, 2001 or 2000. General 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 -14- fixed prices, although certain of such agreements contain escalation features that should somewhat insulate the Company from increases in costs associated with inflation. As discussed above, the Company has recently experienced significant increases in certain raw material costs and power costs, although the Company believes that such increases are not specifically related to the effects of general 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. 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 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 $4.5 million and $11.7 million during the nine-months ended June 30, 2001 and 2000, respectively. The decrease in cash flows from operating activities was principally due to lower sales and operating profits as described above. 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(TM), may have an effect on the use and availability of cash. Capital expenditures were $1.3 million during the nine months ended June 30, 2001, compared to $2.2 million during the same period last year. Capital expenditures are budgeted to amount to approximately $2.5 million in fiscal 2001 and are expected to relate primarily to specialty chemical segment capital improvement projects. During the nine-month period ended June 30, 2001, the Company received cash of approximately $4.6 million attributable 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 nine-month period ended June 30, 2001, the Company spent approximately $0.3 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 governing 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) Weakness in demand (including excess customer inventories) 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 -15- 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(TM), (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, (f) future power costs including the ultimate impact of the settlement of the Company's disputes concerning its power agreement, and (g) the fact that perchlorate chemicals, sodium azide, Halotron(TM) 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 recently in the perchlorate market, potential patent coverage issues, and the development or penetration of competing new products, particularly in the propulsion, airbag inflation and fire extinguishing 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. 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 by 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. The results of the Company's periodic review of impairment issues under the provisions of SFAS No. 121. 8. The dependence upon a single facility for the production of most of the Company's products. 9. Provisions of the Company's Certificate of Incorporation and By-laws and Series D Preferred Stock, dividend of preference stock purchase rights and related Rights Agreement could have the effect of making it more difficult for potential acquirors to obtain a control position in the Company. -16- -----END PRIVACY-ENHANCED MESSAGE-----