-----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, NbwdJmbQ7Y7KhnEwWxWLwlR9afL3rrGKO68PHd4rIpx4Uc2wWSbagBTNSPzU43DQ Qdxn1/duK3pBI8KPL7Z3VA== 0000898430-96-003580.txt : 19960812 0000898430-96-003580.hdr.sgml : 19960812 ACCESSION NUMBER: 0000898430-96-003580 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960809 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: 1934 Act SEC FILE NUMBER: 000-21046 FILM NUMBER: 96607008 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 FOR PERIOD ENDED JUNE 30, 1996 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, 1996 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: 8,105,621 AS OF JULY 31, 1996. 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. 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 ----------------- A cautionary statement for purposes of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 is provided in pages 16 through 17. 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 Statement Schedules. 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 9, 1996 /s/ C. Keith Rooker ----------------------- C. Keith Rooker Executive Vice President Secretary/General Counsel Date: August 9, 1996 /s/ David N. Keys --------------------- David N. Keys Vice President, Chief Financial Officer and Treasurer; Principal Financial and Accounting Officer 3 AMERICAN PACIFIC CORPORATION Condensed Consolidated Statements of Operations
- ---------------------------------------------------------------------------------------------------------------- FOR THE THREE-MONTHS FOR THE NINE-MONTHS ENDED JUNE 30, ENDED JUNE 30, 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Sales and Operating Revenues $ 10,617,000 $ 8,179,000 $ 31,373,000 $ 26,396,000 Cost of Sales 8,293,000 6,226,000 24,346,000 20,682,000 ---------------------------------------------------------------------- Gross Profit 2,324,000 1,953,000 7,027,000 5,714,000 Operating Expenses 2,035,000 2,789,000 6,941,000 8,300,000 Involuntary Terminations and Enchanced Retirement Benefits 226,000 226,000 Equity in Earnings of Real Estate Venture 600,000 600,000 ---------------------------------------------------------------------- Operating Income (Loss) 889,000 (1,062,000) 686,000 (2,812,000) Net Interest and Other Expense (Income) 357,000 451,000 1,215,000 (324,000) ---------------------------------------------------------------------- Income (Loss) Before Provision (Credit) for Income Taxes 532,000 (1,513,000) (529,000) (2,488,000) Provision (Credit) for Income Taxes 181,000 (515,000) (180,000) (846,000) ---------------------------------------------------------------------- Net Income (Loss) $ 351,000 $ (998,000) $ (349,000) $ (1,642,000) ---------------------------------------------------------------------- Net Income (Loss) Per Common Share $ .04 $ (.12) $ (.04) $ (.20) ---------------------------------------------------------------------- Weighted Average Common and Common Equivalent Shares Outstanding 8,142,000 8,240,000 8,105,000 8,240,000 ----------------------------------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. 4 AMERICAN PACIFIC CORPORATION Condensed Consolidated Balance Sheets
- --------------------------------------------------------------------------------------------------------------- JUNE 30, SEPTEMBER 30, 1996 1995 - --------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 19,250,000 $ 24,540,000 Short-term Investments 2,000,000 2,000,000 Accounts and Notes Receivable 3,137,000 2,534,000 Income Tax Receivable 2,570,000 2,570,000 Related Party Notes Receivable 888,000 888,000 Inventories 11,875,000 7,094,000 Prepaid Expenses and Other Assets 1,253,000 986,000 ------------------------------------ TOTAL CURRENT ASSETS 40,973,000 40,612,000 Property, Plant and Equipment, Net 78,459,000 80,944,000 Development Property 8,744,000 10,296,000 Real Estate Equity Investments 18,786,000 17,725,000 Other Assets 4,048,000 4,469,000 Restricted Cash 4,076,000 3,743,000 ------------------------------------ TOTAL ASSETS $ 155,086,000 $ 157,789,000 ------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. 5 AMERICAN PACIFIC CORPORATION Condensed Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------- JUNE 30, SEPTEMBER 30, 1996 1995 - ---------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Liabilities $ 8,213,000 $ 5,672,000 Current Portion of Long-Term Debt 8,500,000 8,500,000 ------------------------------------- TOTAL CURRENT LIABILITIES 16,713,000 14,172,000 Long-Term Debt 29,329,000 34,054,000 Deferred Income Taxes 10,388,000 10,568,000 Minimum Pension Liability 1,175,000 1,175,000 ------------------------------------- TOTAL LIABILITIES 57,605,000 59,969,000 ------------------------------------- Commitments and Contingencies Warrants to Purchase Common Stock 3,569,000 3,569,000 SHAREHOLDERS' EQUITY: Common Stock 823,000 822,000 Capital in Excess of Par Value 78,323,000 78,285,000 Retained Earnings 15,840,000 16,189,000 Treasury Stock (818,000) (789,000) Receivable from the Sale of Stock (97,000) (97,000) Excess Additional Pension Liability (159,000) (159,000) ------------------------------------- TOTAL SHAREHOLDERS' EQUITY 93,912,000 94,251,000 ------------------------------------- ------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 155,086,000 $ 157,789,000 -------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. 6 AMERICAN PACIFIC CORPORATION Condensed Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------------------------------------- FOR THE THREE-MONTHS FOR THE NINE-MONTHS ENDED JUNE 30, ENDED JUNE 30, 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------------------------- Cash Provided by (Used for) Operating Activities $ (288,000) $ 467,000 $ 4,727,000 $ 2,109,000 ------------------------------------------------------------------ Cash Flows Used for Investing Activities: Capital Expenditures, Development Property Additions and Real Estate Equity Investments (405,000) (1,572,000) (5,027,000) (7,154,000) Treasury Stock Acquired (377,000) (29,000) (747,000) ------------------------------------------------------------------ Net Cash Used For Investing Activities (405,000) (1,949,000) (5,056,000) (7,901,000) ------------------------------------------------------------------ Cash Flows From Financing Activities: Principal Payments on Debt (5,000,000) Issuance of Common Stock 31,000 39,000 73,000 ------------------------------------------------------------------ Net Cash Provided By (Used For) Financing Activities 31,000 (4,961,000) 73,000 ------------------------------------------------------------------ Net Increase (Decrease) in Cash and Cash Equivalents (693,000) (1,451,000) (5,290,000) (5,719,000) Cash and Cash Equivalents, Beginning of Period 19,943,000 18,616,000 24,540,000 22,884,000 ------------------------------------------------------------------ Cash and Cash Equivalents, End of Period $ 19,250,000 $ 17,165,000 $ 19,250,000 $ 17,165,000 ------------------------------------------------------------------ Supplemental Disclosure of Cash Flow Information: Interest Paid (net of amounts capitalized) $ 1,230,000 $ 1,230,000 ------------------------------------------------------------------
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, 1995 was derived from the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 1995. The Condensed Consolidated Financial Statements for the three-month and nine- month periods ended June 30, 1996 and 1995 are unaudited. 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, 1995. In the opinion of Management, however, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included. 2. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share for the three-month and nine-month periods ended June 30, 1996 and 1995 is determined based upon the weighted average number of common and common equivalent shares (if such shares are dilutive) outstanding. Common share equivalents consist of outstanding stock options and warrants. 3. INVENTORIES Inventories consist of the following:
June 30, September 30, 1996 1995 ----------- ------------- Work-in-process $ 7,503,000 $3,828,000 Raw materials and supplies 4,372,000 3,266,000 ----------- ---------- Total $11,875,000 $7,094,000 ----------- ----------
4. COMMITMENTS AND CONTINGENCIES In fiscal 1993, three shareholder lawsuits, purporting to be class actions, were filed in the United States District Court for the District of Nevada against the Company and certain of its directors and officers. The complaints, 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 neither the Company nor its directors and officers made misleading or inadequate statements regarding Halotron. The plaintiffs have 8 appealed the summary judgment ruling and portions of the trial proceedings to the Ninth Circuit of the United States District Court of Appeals. The specific appeal process is currently expected to take between one and two years although the duration is subject to significant change based on factors beyond the Company's control. As a result of the above-described shareholder lawsuits, the Company has incurred legal and other costs and may incur material legal and other costs associated with the ultimate resolution of the shareholder lawsuits in future periods. Certain of these costs may be reimbursable under policies providing for insurance coverage. The Company has adopted certain policies in its Charter and Bylaws as a result of which the Company may have the obligation to indemnify its affected officers and directors to the extent, if at all, the existing insurance coverages are insufficient. The Company's insurance carriers have reserved the right to exclude or disclaim coverage under certain circumstances. The Company is currently unable to predict or quantify the amount or the range of such costs, if any, or the period of time during which such costs will be incurred. During the third quarter of fiscal 1996, the Company settled certain matters with its insurance carrier relating to legal fees and other costs associated with the successful defense of the shareholder lawsuits. Under this settlement, the Company was reimbursed for approximately $450,000 in costs that had previously been expensed and incurred in connection with the defense. Such amount has been recognized as a reduction in operating expenses in the third quarter of fiscal 1996. The insurance carrier has agreed to pay attorneys fees and other defense costs related to the plaintiffs' appeal of the case referred to above. The Company was served with a complaint on December 10, 1993 in a lawsuit brought by limited partners in a partnership of which one of the Company's former subsidiaries, divested in 1985, was a general partner. The plaintiffs allege that the Company is liable to them in the amount of approximately $5.9 million, plus interest, on a guarantee executed in 1982. The Company believes that the claim against it is wholly without merit. The Company and its subsidiaries are also involved in other lawsuits. The Company believes that these other lawsuits, individually or in the aggregate, will not have a material adverse effect on the Company or any of its subsidiaries. 5. SODIUM AZIDE AGREEMENTS In July 1990, the Company entered into certain agreements (the "Azide Agreements") with Dynamit Nobel. The Azide Agreements provide for a royalty of 5% of net sodium azide sales to be paid to Dynamit Nobel for a period of 15 years. In July 1996, the Company and Dynamit Nobel agreed to suspend the royalty payment effective as of July 1, 1995. As a result, in the third quarter of fiscal 1996, the Company recognized an increase in net sodium azide sales of approximately $600,000. This amount had previously been recognized as a reduction of net sodium azide sales during the period July 1, 1995 through June 30, 1996. 9 6. EQUITY IN EARNINGS OF REAL ESTATE VENTURE During the third quarter of fiscal 1996, the Company recognized its share of the equity in earnings of Gibson Ranch Limited Liability Company ("GRLLC"). Profits and losses of GRLLC are split equally between the Company and its venture partner, a local real estate development group. GRLLC's profits increased substantially during the three months ended June 30, 1996 principally as a result of the sale of improved land zoned for an apartment site to an outside developer. 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 $10,617,000 and $8,179,000 during the three- month periods ended June 30, 1996 and 1995, and $31,373,000 and $26,396,000 during the nine-month periods ended June 30, 1996 and 1995. Gross profit as a percentage of sales and operating revenues was 22 percent in the first nine months of fiscal 1996 and fiscal 1995. A discussion of sales and operating revenues and gross profit percentages relating to the Company's principal operating activities is provided below. PERCHLORATE CHEMICAL OPERATIONS In May 1994, Western Electrochemical Company ("WECCO"), an indirect wholly-owned subsidiary of the Company, and Thiokol executed an amendment (the "Amendment") to an existing long-term purchase contract for the sale of ammonium perchlorate ("AP"). The Amendment confirmed that the purchase contract had a continuous term commencing with the first production of AP at the WECCO plant in August 1989 and ending September 30, 1996, (approximately two months subsequent to the estimated original term of the Advance Agreement). The Amendment provided that WECCO would receive revenues from sales of AP of approximately $33 million, $28 million and $20 million during the fiscal years ended and ending September 30, 1994, 1995 and 1996, respectively. Sales of all perchlorate chemicals amounted to approximately $5,410,000 and $7,213,000 during the three-month periods ended June 30, 1996 and 1995, and $15,899,000 and $21,700,000 during the nine-month periods ended June 30, 1996 and 1995. In October 1995, WECCO received a purchase order for the delivery of AP from October 1996 through 1999 having a value in the range of $8 million to $10 million. This contract includes options that could increase the total order substantially during the 1997-1999 period, and that could extend the contract to the year 2005. Other than this purchase order, WECCO has no significant backlog of perchlorate chemical sales subsequent to September 30, 1996. The Company has responded to a request for quotation relating to a significant portion of the requirements for AP for the space shuttle program for the period October 1, 1996 through September 30, 1997. The Company currently expects this procurement process to be completed on or about September 30, 1996. SODIUM AZIDE OPERATIONS Net sodium azide sales were $3,325,000 and $330,000 during the three-month periods ended June 30, 1996 and 1995, and $9,355,000 and $2,465,000 during the nine-month periods ended June 30, 1996 and 1995. Commercial shipments of sodium azide began in April 1994. The level of sodium azide sales has not been sufficient to absorb operational costs (including depreciation) associated with the production and sale of sodium azide. The operation has however, recently begun to generate positive cash flow and earnings before interest, taxes, depreciation and amortization ("EBITDA"). The Company's plans with respect to its sodium azide project continue to be grounded in the Company's objective of becoming the primary supplier to the U.S. automotive airbag inflator market. The Company believes that the level of sodium azide sales will continue to increase. There can be no assurance in that regard however, and, as a consequence, the Company cannot predict over what period of time, if at all, such increases in sales levels will occur. In 11 addition, by reason of a highly competitive market environment there continues to be considerable market pressure on the price of sodium azide. At the time the Company began this project in 1990, prices for sodium azide to the airbag market were approximately $8.00 per pound. Prices currently appear to be in the range of $4.50 to $6.00 per pound. The Company believes the price reduction in sodium azide is due to the unlawful pricing practices of Japanese producers. In response to such practices, in January 1996, the Company filed an antidumping petition with the United States International Trade Commission and the United States Department of Commerce. The Company currently expects a finding in this matter in late August, 1996. As discussed in Note 5 of Notes to Condensed Consolidated Financial Statements, the Company and Dynamit Nobel agreed to suspend royalty payments on sodium azide sales effective July 1, 1995. As a result, in the third quarter of fiscal 1996, the Company recognized an increase in net sodium azide sales of approximately $600,000. Depreciation expense relating to sodium azide production increased in the third quarter of fiscal 1995 as the sodium azide facility completed its transition from construction to production activities. On an annualized basis, cost of sales associated with sodium azide activities increased by approximately $3 million beginning April 1, 1995, as a result of this increase in depreciation expense. The Company expects depreciation expense related to sodium azide production to approximate $6 million in fiscal 1996. REAL ESTATE OPERATIONS The Company's real estate development properties consist of approximately 4,700 acres in Iron County, Utah near Cedar City, Utah and a 380-acre tract (Gibson Business Park) in Clark County, Nevada. All development property is held in fee simple. Substantially all of the Gibson Business Park land is pledged as collateral for certain debt (the "Azide Notes"). The Company is actively marketing its Nevada property for sale and development. About 240 acres of its Clark County land has been transferred to GRLLC for the purpose of residential development, construction, and sale. The Iron County site is primarily dedicated to the Company's growth and diversification. Real estate and related sales amounted to $4,565,000 and $526,000 during the nine-month periods ended June 30, 1996 and 1995, 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. During the third quarter of fiscal 1996, the Company recognized its share of the equity in earnings of GRLLC. Profits and losses of GRLLC are split equally between the Company and its venture partner, a local real estate development group. GRLLC's profits increased substantially during the three months ended June 30, 1996 principally as a result of the sale of improved land zoned for an apartment site to an outside developer. ENVIRONMENTAL PROTECTION EQUIPMENT OPERATIONS Environmental protection equipment sales were approximately $1,138,000 and $1,536,000 during the nine-month periods ended June 30, 1996 and 1995, respectively. As of July 31, 1996, this segment had a backlog of approximately $1,100,000. In addition, the Company has submitted a number of bids, although there can be no assurance that any of these bids will result in future orders. 12 HALOTRON OPERATIONS Sales of Halotron amounted to approximately $321,000 in the first nine months of fiscal 1996 compared to $162,000 in 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. The Company and Buckeye signed an agreement that calls for the Company to supply Buckeye's requirements of Halotron I during calendar 1996. Although actual requirements to date have been substantially less than those estimated in the agreement, the Company remains optimistic about the prospects for Halotron sales. OPERATING EXPENSES Operating expenses were $2,035,000 and $2,789,000 during the three-month periods ended June 30, 1996 and 1995, and $6,941,000 and $8,300,000 during the nine- month periods ended June 30, 1996 and 1995. The decreases are primarily due to the Company's implementation of cost control, containment and reduction measures. As discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, during the third quarter of fiscal 1996, the Company settled certain matters with its insurance carrier relating to legal fees and other costs associated with the successful defense of the shareholder lawsuits. Under this settlement, the Company was reimbursed for approximately $450,000 in costs that had previously been expensed and incurred in connection with the defense. Such amount has been recognized as a reduction in operating expenses in the third quarter of fiscal 1996. The insurance carrier has agreed to pay attorneys fees and other defense costs related to the plaintiffs' appeal of the case referred to above. During the third quarter of fiscal 1995, the Company reduced total full-time employee equivalents by approximately ten percent through involuntary terminations and an offering of enhanced retirement benefits to a certain class of employees. The Company recognized a charge to operating expense of approximately $226,000 as a result of these terminations and the acceptance of the offer of enhanced retirement benefits by certain employees. NET INTEREST AND OTHER EXPENSE (INCOME) The increase in net interest and other expense in the first nine months of fiscal 1996 compared to the first nine months of fiscal 1995 is primarily due to the fact that, in the third quarter of fiscal 1995, interest capitalization ceased on the remaining portion of the sodium azide facility undergoing construction activities. CREDIT FOR INCOME TAXES The Company's effective income tax rates were approximately 34% during the three-month and nine-month periods ended June 30, 1996 and 1995. NET INCOME (LOSS) PER COMMON SHARE AND OPERATING RESULTS Although the Company's net income (loss) and net income (loss) per common share have not been subject to seasonal fluctuations, they have been and are expected to continue to be subject to variations from quarter to quarter and year to year due to the following 13 factors, among others; (i) as discussed in Note 4, the Company may incur material legal and other costs associated with litigation; (ii) the timing of real estate and related sales is not predictable; (iii) the recognition of revenues from environmental protection equipment orders not accounted for as long-term contracts depends upon the timing of shipment of the equipment; (iv) weighted average common and common equivalent shares for purposes of calculating net income (loss) per common share are subject to significant fluctuations based upon changes in the market price of the Company's Common Stock due to outstanding warrants and options; and (v) as discussed above, the magnitude of AP, sodium azide, and Halotron orders in the future is uncertain. The Company's efforts to produce, market and sell Halotron are dependent upon the political climate and environmental regulations that exist and may vary from country to country. Although the Company is satisfied with the progress and performance characteristics of Halotron, the magnitude of orders received, if any, in the future will be dependent to a large degree upon political issues and environmental regulations that are not within the Company's control, as well as additional testing and qualification in certain jurisdictions and the ultimate extent of market acceptance. The Company believes, however, that cash flows from its Halotron operations will be sufficient to recover its recorded investment in the Halotron project. As a result of the uncertainties with respect to volume and price of sodium azide and the outcome of the antidumping petition referred to above, the Company may experience significant variations in sodium azide sales and related operating results from quarter to quarter. The Company continues to believe, however, that, notwithstanding these uncertainties, revenues and associated cash flows from its sodium azide operations will be sufficient to recover the Company's investment in its sodium azide facility, although there can be no assurance in that regard. LITIGATION See Note 4 of Notes to Condensed Consolidated Financial Statements for a discussion of litigation. INFLATION Inflation did not have a significant effect on the Company's sales and operating revenues or costs during the nine-month periods ended June 30, 1996 or 1995. The Company does not expect inflation to have a material effect on gross profit in the future, because any increases in production costs should be recovered through increases in product prices, although there can be no assurance in that regard. LIQUIDITY AND CAPITAL RESOURCES On July 29, 1994, the Board of Directors of the Company authorized the repurchase of up to 1.5 million shares of the Company's common stock through open market purchases and private transactions. Such authorization was briefly suspended. As of July 31, 1996, the Company had repurchased approximately 116,000 shares through this program. As a result of the litigation described in Note 4 of Notes to Condensed Consolidated Financial Statements, the Company may incur material legal and other costs associated with the resolution of these matters in future periods. Certain of the costs, if any, related to the shareholder lawsuits may be reimbursable under policies providing for insurance 14 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 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 this 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 costs associated with litigation, if any, or the period of time that such costs will be incurred. Cash flows provided by operating activities were $4,727,000 during the first nine months of fiscal 1996 compared to $2,109,000 during the first nine months of fiscal 1995. The increase in cash flows is principally due to an increase in sodium azide operating income before depreciation and the increase in real estate sales referred to 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 satisfactory resolution of the lawsuits discussed in Note 4, the timing, pricing and magnitude of the receipt of orders for AP, sodium azide and Halotron, and the Company's ability to achieve further cost reductions may have an effect on the use and availability of cash. In February 1992, the Company concluded a $40,000,000 financing for the design, construction and start-up of a sodium azide facility. As a result of the Company's decision to increase the production capacity of the plant and construction cost overruns, the Company's cost estimates for the sodium azide facility increased significantly during the construction process. The majority of the increase relates to the Company's decision to increase the productive capacity of the plant, as discussed above. In addition, certain estimates increased throughout the construction process as a result of the highly automated and technical nature of the operation. Design and construction also occurred over a longer period of time than was originally estimated, which increased actual expenditures. Although production and sales have recently increased, the facility has not been operated at significant production levels in comparison to capacity and greater-than-expected capital costs have been and may continue to be incurred. Subject to the ongoing receipt and magnitude of orders for sodium azide, the avoidance of further erosion of the selling price per pound of sodium azide, and the outcome of the Company's antidumping petition the Company believes that the increased costs associated with the sodium azide facility will be recovered through future sodium azide sales, although there can be no assurance in this regard. 15 CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Certain statements made in this report and future statements ("Statements") that are, or may be construed to be, "forward looking" within the meaning of applicable provisions of the Private Securities Litigation Reform Act of 1995, the Securities Exchange Act of 1934, the Securities Act of 1933, or other statutes (including state statutes), or within the meaning of applicable provisions or regulations adopted by the Securities and Exchange Commission, state regulatory agencies, or self-regulating bodies within the securities industry such as the National Association of Securities Dealers, Inc., or various stock exchanges. Statements may be made directly by authorized representatives of the Company either in written or oral form (e.g., press releases, periodic conference calls with the investment community, conferences or discussions with analysts or investors), or may be made by analysts or other third parties based in whole or in part on information provided to such persons by the Company. The Company takes this opportunity to identify to all persons who may receive Statements, important risk factors that could cause the Company's actual results to differ materially from results predicted by Statements, whether the predictive character of Statements is direct, implied, or inferred, and whether any such predictive quality is in the form of a forecast, a projection, an estimate, or otherwise. The Company therefore cautions recipients of Statements that the following important risk factors, among others, in some cases have caused, and in the future may cause, the Company's results to differ materially from results predicted in or on the basis of Statements relating to the Company: - - Declining demand or downward pricing pressure for the Company's products as a result of general or specific economic conditions, governmental budget decreases affecting DOD or NASA which would cause a continued decrease in demand for AP, 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 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. - - 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. - - Underutilization of the Company's manufacturing facilities resulting in production inefficiencies and increased costs, the inability to recover facility costs and reductions in margins. - - Difficulties in procuring raw materials, supplies, power and natural gas used in the production of perchlorates, sodium azide or Halotron products or used in the engineering and assembly process for environmental protection equipment products. - - 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. 16 - - 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 specific economic conditions, interest rate fluctuations affecting the availability and the cost of financing, the performance of the managing partner of the GRLLC (Ventana Canyon Joint Venture) and regulatory and environmental matters that may have a negative impact on sales. - - 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. - - The cost and affects of legal and administrative proceedings, settlements and investigations, particularly those described in the "Commitments and Contingencies" note to the Company's financial statements contained in the most current periodic SEC report, and assertions made by or against the Company relative to patents or property rights. - - The adoption of new (or changes in existing) accounting policies and practices. 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS SEP-30-1996 JUN-30-1996 19,250 2,000 6,595 0 11,875 40,973 90,748 12,289 155,086 16,713 0 0 0 823 0 155,086 31,373 31,373 24,346 31,287 0 0 1,215 (529) (180) (349) 0 0 0 (349) (.04) (.04)
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