-----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, OItcsgzivhoXahMrTEUOoySMB3bgCeU/cbVUPGywL4kV4NBi/s4vrEWBumR6MctI Kz2MztZ5jAA/gNmyDoZa/A== 0000898430-98-002744.txt : 19980805 0000898430-98-002744.hdr.sgml : 19980805 ACCESSION NUMBER: 0000898430-98-002744 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980804 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PACIFIC CORP CENTRAL INDEX KEY: 0000350832 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 596490478 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21046 FILM NUMBER: 98676739 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 JUNE 30, 1998 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: 8,249,537 AS OF JULY 31, 1998. -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 12 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 13 through 18 of this Report on Form 10-Q. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ----------------- None. ITEM 2. Changes in Securities --------------------- None. ITEM 3. Defaults Upon Senior Securities ------------------------------- None. ITEM 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. ITEM 5. Other Information ----------------- None. ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- a) The following Exhibit is filed in connection with the Registrant's electronic filing: 27. Financial 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 4, 1998 /S/ JOHN R. GIBSON ------------------ John R. Gibson Chief Executive Officer and President Date: August 4, 1998 /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 STATEMENTS OF OPERATIONS (unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED JUNE 30, ENDED JUNE 30, 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Sales and Operating Revenues $13,136,000 $12,767,000 $38,523,000 $30,545,000 Cost of Sales 9,047,000 10,434,000 26,282,000 25,542,000 ---------------------------------------------------------------------- Gross Profit 4,089,000 2,333,000 12,241,000 5,003,000 Operating Expenses 2,361,000 2,304,000 6,791,000 6,936,000 ---------------------------------------------------------------------- Operating Income (Loss) 1,728,000 29,000 5,450,000 (1,933,000) Equity in Earnings of Real Estate Venture 300,000 100,000 Net Interest and Other Expense 1,514,000 202,000 2,977,000 735,000 ---------------------------------------------------------------------- Income (Loss) Before Credit for Income Taxes 214,000 (173,000) 2,773,000 (2,568,000) Credit for Income Taxes (59,000) (875,000) ---------------------------------------------------------------------- Net Income (Loss) Before Extraordinary Loss 214,000 (114,000) 2,773,000 (1,693,000) Extraordinary Loss-Debt Extinguishment 5,005,000 ---------------------------------------------------------------------- Net Income (Loss) $ 214,000 $ (114,000) $(2,232,000) $(1,693,000) ---------------------------------------------------------------------- Basic Net Income (Loss) Per Share: Income (Loss) Before Extraordinary Loss $ .03 $ (.02) $ .34 $ (.21) Extraordinary Loss $ (.61) ---------------------------------------------------------------------- Net Income (Loss) $ .03 $ (.02) $ (.27) $ (.21) ---------------------------------------------------------------------- Average Shares Outstanding 8,250,000 8,098,000 8,184,000 8,098,000 ---------------------------------------------------------------------- Diluted Net Loss Per Share: Income (Loss) Before Extraordinary Loss $ .02 $ (.02) $ .33 $ (.21) Extraordinary Loss $ (.60) ---------------------------------------------------------------------- Net Income (Loss) $ .02 $ (.02) $ (.27) $ (.21) ---------------------------------------------------------------------- Diluted Shares 8,563,000 8,098,000 8,384,000 8,098,000 ----------------------------------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. -4- AMERICAN PACIFIC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
- ------------------------------------------------------------------------------------------------------------ JUNE 30, SEPTEMBER 30, 1998 1997 - ------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash and Cash Equivalents $27,731,000 $18,881,000 Accounts and Notes Receivable 6,031,000 5,551,000 Related Party Notes Receivable 565,000 637,000 Inventories 13,864,000 11,116,000 Prepaid Expenses and Other Assets 1,292,000 979,000 ---------------------------------------------- TOTAL CURRENT ASSETS 49,483,000 37,164,000 Property, Plant and Equipment, Net 19,515,000 19,314,000 Intangible Assets, Net 39,286,000 1,540,000 Development Property 7,003,000 7,362,000 Real Estate Equity Investments 17,157,000 20,248,000 Other Assets, Net 3,052,000 873,000 Restricted Cash 1,171,000 3,580,000 ---------------------------------------------- TOTAL ASSETS $136,667,000 $90,081,000 ----------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements. -5- AMERICAN PACIFIC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
- ---------------------------------------------------------------------------------------------------------- JUNE 30, SEPTEMBER 30, 1998 1997 - ---------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Accrued Liabilities $ 11,023,000 $ 7,519,000 Current Portion of Long-Term Debt 1,171,000 6,166,000 ------------------------------------- TOTAL CURRENT LIABILITIES 12,194,000 13,685,000 Long-Term Debt 75,000,000 24,900,000 Long-Term Payables 1,794,000 2,376,000 ------------------------------------- TOTAL LIABILITIES 88,988,000 40,961,000 ------------------------------------- Commitments and Contingencies Warrants to Purchase Common Stock 3,569,000 3,569,000 SHAREHOLDERS' EQUITY: Common Stock 840,000 829,000 Capital in Excess of Par Value 79,341,000 78,561,000 Accumulated Deficit (34,939,000) (32,707,000) Treasury Stock (1,035,000) (1,035,000) Receivable from the Sale of Stock (97,000) (97,000) ------------------------------------- TOTAL SHAREHOLDERS' EQUITY 44,110,000 45,551,000 ------------------------------------- ------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $136,667,000 $ 90,081,000 -------------------------------------
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, 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Cash Provided by (Used For) Operating Activities $ 8,916,000 $(1,153,000) $ 8,505,000 $ 5,190,000 ----------------------------------------------------------------------- Cash Flows Provided by (Used For) Investing Activities: Capital Expenditures (406,000) (275,000) (2,054,000) (1,576,000) Payment for Acquisition of Intangible (39,000,000) Real estate equity investment capital activity 360,000 (773,000) 3,091,000 (1,293,000) ---------------------------------------------------------------------- Net Cash Used For Investing Activities (46,000) (1,048,000) (37,963,000) (2,869,000) ---------------------------------------------------------------------- Cash Flows From Financing Activities: Principal Payments on Debt (31,166,000) (6,168,000) Issuance of Senior Notes 75,000,000 Premium Paid on Debt Extinguishment (3,250,000) Debt Issue Costs (360,000) (3,067,000) Issuance of Common Stock 192,000 791,000 70,000 Treasury Stock Acquired (156,000) ---------------------------------------------------------------------- Net Cash Provided by (Used For) Financing Activities (168,000) 38,308,000 (6,254,000) ---------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 8,702,000 (2,201,000) 8,850,000 (3,933,000) Cash and Cash Equivalents, Beginning of Period 19,029,000 16,769,000 18,881,000 18,501,000 Cash and Cash Equivalents, End of ----------------------------------------------------------------------- Period $27,731,000 $14,568,000 $ 27,731,000 $14,568,000 ----------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Interest Paid (net of amounts capitalized) $ $ $ 1,650,000 $ 851,000 -----------------------------------------------------------------------
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, 1997 was derived from the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 1997. Such statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1997. In the opinion of Management, however, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included. The operating results and cash flows for the three-month and nine-month periods ended June 30, 1998 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 estimate and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of 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 estimates. 2. NET INCOME (LOSS) PER COMMON SHARE During the first quarter of fiscal 1998, the Company adopted SFAS No. 128 "Earnings per Share." SFAS No. 128 requires the presentation of basic net income (loss) per share and diluted net income (loss) per share. Basic per share amounts are computed by dividing net income (loss) by average shares outstanding during the period. Diluted net income (loss) per share amounts are computed by dividing net income (loss) by average shares outstanding plus the dilutive effect of common share equivalents. Since the Company incurred a net loss before extraordinary loss during the three-month and nine-month periods ended June 30, 1997, diluted per share calculations are based upon average shares outstanding during these periods. Accordingly, the effect of stock options and warrants outstanding for 3,525,000 shares at June 30, 1997 was not included in diluted net loss per share calculations. Diluted net income (loss) per share amounts during the three-month and nine-month periods ended June 30, 1998 is determined considering the dilutive effect of stock options and warrants. The effect of stock options and warrants outstanding to purchase approximately 2,900,000 shares was not included in diluted per share calculations during the three-month and nine-month periods ended June 30, 1998 as the average exercise price of such options and warrants was greater than the average price of the Company's common stock. -8- 3. INVENTORIES Inventories consist of the following:
June 30, September 30, 1998 1997 ----------- ------------- Work-in-process $ 8,982,000 $ 3,349,000 Raw materials and supplies 4,882,000 7,767,000 ----------- ----------- Total $13,864,000 $11,116,000 ----------- -----------
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. -9- 5. INCOME TAXES The Company established a valuation allowance for deferred tax assets in the amount of $10.4 million as of September 30, 1997. The Company's effective tax rate will be 0% until its net operating losses expire or the Company has taxable income in an amount sufficient to eliminate the need for the valuation allowance. 6. FINANCING ACTIVITIES On March 12, 1998, the Company sold $75.0 million principal amount of unsecured senior notes (the "Notes"), consummated an acquisition (the "Acquisition") of certain assets from Kerr-McGee described below and repurchased the remaining $25.0 million principal amount balance outstanding of subordinated secured notes (the "Azide Notes"). The Notes mature on March 1, 2005. Interest on the Notes will be paid in cash at a rate of 9-1/4% per annum on each March 1 and September 1, commencing September 1, 1998. The indebtedness evidenced by the Notes represents a senior unsecured obligation of the Company, ranks pari passu in right of payment with all existing and future senior indebtedness of the Company and is senior in right of payment to all future subordinated indebtedness of the Company. The Indenture under which the Notes were issued contains various limitations and restrictions including (i) change in control provisions, (ii) limitations on indebtedness and (iii) limitations on restricted payments such as dividends, stock repurchases and investments. Management believes the Company has complied with these limitations and restrictions. Under the Indenture, the Company was obligated to exchange the Notes for identical notes registered with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended, within a specified period of time set forth in the Indenture. In April 1998 the Company filed a Form S-4 registration statement with the Commission for the purposes of effecting this exchange. The registration statement was declared effective by the Commission on July 29, 1998, with the consummation of the exchange scheduled for August 28, 1998. The Azide Notes were 11% noncallable subordinated secured term notes, which were issued and sold in February 1992 to finance the design, construction and start-up of the Company's sodium azide facility. A portion of the net proceeds from sale of the Notes was applied to repurchase the Azide Notes for approximately $28.2 million (approximately 113% of the outstanding principal amount thereof). In connection with the repurchase, the Company recognized an extraordinary loss on debt extinguishment of approximately $5.0 million. The extraordinary loss consisted of the cash premium paid of $3.2 million upon repurchase and a charge of $1.8 million to write-off the unamortized balance of debt issue and discount costs. 7. ACQUISITION On March 12, 1998 (the "Closing Date"), the Company acquired, pursuant to a purchase agreement (the "Purchase Agreement") with Kerr-McGee, certain intangible assets related to Kerr-McGee's production of AP (the "Rights") for a purchase price of $39.0 million. Under the Purchase Agreement, the Company acquired an option (the "Option") to purchase all or any portion of the inventory of AP stored at Kerr-McGee's premises on the Closing Date, which is not owned by, or identified to a firm order from, a Kerr-McGee customer (the "Inventory"). The Option is exercisable from time to time within the 12 month period commencing on the Closing Date (the "Option Period"). The Acquisition -10- did not include Kerr-McGee's production facilities (the "Production Facilities") and certain water and power supply agreements used by Kerr- McGee in the production of AP. Under the Purchase Agreement, Kerr-McGee ceased the production and sale of AP although the Production Facilities may continue to be used by Kerr-McGee for production of AP under certain limited circumstances described below. Under the Purchase Agreement, Kerr-McGee reserved a perpetual, royalty-free, nonexclusive license to use any of the technology forming part of the Rights as may be necessary or useful to use, repair or sell the Production Facilities (the "Reserved License"). Under the Purchase Agreement, Kerr-McGee reserved the right to sell the Inventory to the extent not purchased by the Company pursuant to the Option, to process and sell certain reclaimed AP that is not suitable for use in solid fuel rocket motors (the "Reclaimed Product"), and to produce and sell AP (i) to fulfill orders scheduled for delivery after the closing, subject to making payments to the Company with respect to such orders, as provided in the Purchase Agreement and (ii) in the event of the Company's inability to meet customer demand or requirements, breach of the Purchase Agreement or termination of the Company's AP business. The Purchase Agreement provides that, together with the Reserved License, Kerr-McGee is permitted in its discretion to (i) lease, sell, dismantle, demolish and/or scrap all or any portion of the Production Facilities, (ii) retain the Production Facilities for manufacture of Reclaimed Product and (iii) maintain the Production Facilities in a "standby" or "mothballed" condition so they will be capable of being used to produce AP under the limited circumstances referred to above. Under the Purchase Agreement, Kerr-McGee has agreed to indemnify the Company against loss or liability from claims associated with the ownership and use of the Rights prior to consummation of the Acquisition or resulting from any breach of its warranties, representations and covenants. The Company has agreed to indemnify Kerr-McGee against loss and liability from claims associated with the ownership and use of the Rights after consummation of the Acquisition or resulting from any breach of its warranties, representations and covenants. In addition, Kerr-McGee has agreed that it will, at the Company's request, store any Inventory as to which the Option is exercised until 90 days after the Option expires, introduce the Company to AP customers that are not currently customers of the Company, and consult with the Company regarding the production and marketing of AP. The Company has agreed that, at Kerr-McGee's request, it will use reasonable efforts to market Reclaimed Product on Kerr-McGee's behalf for up to three years following consummation of the Acquisition. The Company has determined that a business was not acquired in the Acquisition and that the Rights acquired have no independent value to the Company apart from the overall benefit of the transaction that, as a result thereof, Kerr-McGee has ceased production of AP (except in the limited circumstances referred to above), thereby leaving the Company as the sole North American supplier of AP. Since they have no independent value to the Company, the Company has assigned no value to an unidentified intangible consisting of the benefit referred to above. The Company intends to amortize the purchase price for the unidentified intangible over ten years, the length of the terms of pricing contracts with two principal AP customers referred to below. In connection with the Acquisition, the Company entered into an agreement with Thiokol Corporation ("Thiokol") with respect to the supply of AP through the year 2008. The agreement, which was contingent upon consummation of the Acquisition, provides that during its term Thiokol will make all of its AP purchases from the Company. The -11- agreement also establishes a pricing matrix under which AP unit prices vary inversely with the quantity of AP sold by the Company to all of its customers. The Company understands that, in addition to the AP purchased from the Company, Thiokol may use AP inventoried by it in prior years and AP recycled by it from certain existing rocket motors. In connection with the Acquisition, the Company also entered into an agreement with Alliant Techsystems Incorporated ("Alliant") to extend an existing agreement through the year 2008. The agreement establishes prices for any AP purchased by Alliant from the Company during the term of the agreement as extended. Under this agreement Alliant agrees to use its efforts to cause the Company's AP to be qualified on all new and current programs served by Alliant's Bacchus Works. 8. 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 equity in GRLLC on a current quarterly basis. Summarized financial information for GRLLC as of and for the three-month and nine-month periods ended June 30, 1998 were as follows:
Three-Month Nine-Month Period Ended Period Ended June 30, 1998 June 30, 1998 ------------- ------------- Income Statement: Revenues $ 7,509,000 $23,289,000 Gross Profit 849,000 3,446,000 Operating Expenses 382,000 1,123,000 Net Income $ 473,000 $ 2,334,000 Balance Sheet: Assets $27,116,000 $27,116,000 Liabilities 13,196,000 13,196,000 Equity $13,919,000 $13,919,000
GRLLC's balance sheet is not classified. Assets consist principally of inventories and liabilities consist principally of Notes and accounts payable. Inventories were $25,039,000 at June 30, 1998. -12- 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 automotive airbag safety systems, and Halotron, a chemical used in fire suppression 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. The Company has incurred net losses during its last three fiscal years and operating losses during the fiscal years ended September 30, 1997 and 1995. As a result, pre-tax income has not been sufficient to recover interest charges. The Company believes that North American AP demand is currently approximately 22 to 24 million pounds annually. However, supply capacity has historically been substantially in excess of these estimated demand levels. In an effort to rationalize the economics of the existing AP market, the Company entered into the Purchase Agreement with Kerr-McGee. 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 63% and 49% of revenues during the nine-month periods ended June 30, 1998 and 1997, 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 23% and 27% of revenues during the nine-month periods ended June 30, 1998 and 1997, respectively. The Company has incurred significant operating losses in its sodium azide operation during the last three fiscal years. Although the Company has achieved significant gains in market share that appear to relate to an anti-dumping petition filed by the Company against three Japanese sodium azide producers and the resulting suspension agreement, the Company believes that these factors were fully incorporated into the market by the end of fiscal 1997. The Company's evaluation of the sodium azide market indicated that the cash flows associated with sodium azide operations would not be sufficient to recover the Company's investment in sodium azide related fixed assets and, as a result, the Company recognized an impairment charge with respect to those assets of $52.6 million in the fourth quarter of fiscal 1997. Depreciation expense is expected to decrease annually by approximately $4.0 million as a result of the impairment charge. In June and July of this year, shipments of sodium azide were negatively impacted by the recent labor strike at certain General Motor's ("GM") facilities. Although this strike has recently been reported to have been settled, the Company is unable to predict the impact this strike may have on its sodium azide operations in the future. Sales of Halotron amounted to approximately 3% and 5% of revenues during the nine-month periods ended June 30, 1998 and 1997, respectively. Halotron is designed to replace halon-based fire suppression systems. Accordingly, demand for Halotron depends upon a number of -13- 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 12% of revenues during the nine-month periods ended June 30, 1998 and 1997, 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 5% and 7% of revenues during the nine-month periods ended June 30, 1998 and 1997, respectively. It is currently anticipated that sales of this segment will be adversely affected in fiscal 1999 by the continuing adverse economic developments and conditions in the Company's foreign markets (particularly Asian markets). COST OF SALES. The principal elements comprising the Company's cost of sales - -------------- are 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 the raw materials used in the Company's manufacturing processes have historically been available in commercial quantities, and the Company has had no difficulty obtaining necessary raw materials. Raw material, electric power and labor costs have not changed significantly recently. The costs of operating the Company's specialty chemical plants are, however, largely fixed. Accordingly, the Company believes that the potential additional AP sales volume resulting from the Acquisition should generate significant incremental cash flow because of the operating leverage associated with the perchlorate plant. However, amortization of the Acquisition costs is expected to amount to approximately $4.0 million annually. INCOME TAXES. The Company's effective income tax rates were 0% during the three - ------------ and nine-month periods ended June 30, 1998 and 34% during the three and nine- month periods ended June 30, 1997. The Company's effective income tax rate decreased to 17% for the entire 1997 fiscal year as a result of the establishment of a $10.4 million deferred tax valuation allowance in the fourth quarter. The Company's effective tax rate will be 0% until the Company's net operating losses expire or the Company has taxable income in an amount sufficient to eliminate the need for the valuation allowance. NET INCOME (LOSS). Although the Company's net income (loss) and diluted net - ----------------- income (loss) per common share have not been subject to seasonal fluctuations, they have been and are expected to continue to be subject to variations from quarter to quarter and year to year due to the following factors, among others: (i) as discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, the Company may incur material costs associated with certain contingencies; (ii) timing of real estate and related sales and equity in earnings of real estate ventures is not predictable; (iii) the recognition of revenues from environmental protection equipment orders not accounted for as long-term contracts depends upon orders generated and the timing of shipment of the equipment; (iv) weighted average common and common equivalent shares for purposes of calculating diluted net income (loss) per common share are subject to significant fluctuations based upon changes in the market price of the Company's Common Stock due to outstanding warrants and options; and (v) the magnitude, pricing and timing of AP, sodium azide, Halotron, and environmental protection equipment sales in the future is uncertain. (See "Forward Looking Statements/Risk Factors" below.) -14- RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 SALES AND OPERATING REVENUES. Sales increased $0.3 million, or 3% during the - ---------------------------- three months ended June 30, 1998 to $13.1 million from $12.8 million in the corresponding period of the prior year. This increase was attributable to increased sales of specialty chemicals. Such increase was partially offset by decreases in environmental protection equipment and real estate sales. Perchlorate chemical sales increased approximately $4.6 million principally as a result of the consummation of the Acquisition. Real estate sales decreased approximately $3.2 million due to the fact that a significant land sale closed in the third quarter of fiscal 1997. Environmental protection equipment sales decreased approximately $0.5 million due principally to the timing of shipment of certain equipment. COST OF SALES. Cost of sales decreased $1.4 million, or 13% in the three months - ------------- ended June 30, 1998 to $9.0 million from $10.4 million in the corresponding period of the prior year. Such decrease was principally due to decreases in sodium azide and real estate costs offset by an increase in costs associated with perchlorate operations. The decrease in sodium azide cost of sales was attributable to a reduction in depreciation expense as a result of the sodium azide charge referred to above. The increase in perchlorate costs was due to increased volumes. As a percentage of sales, cost of sales decreased in the three months ended June 30, 1998 to 69% as compared to 82% in the corresponding period of the prior year. This decrease was due principally to the increase in perchlorate sales volume and the reduction in sodium azide related depreciation expense. OPERATING EXPENSES. Operating (selling, general and administrative) expenses - ------------------- increased $0.1 million, or 2%, in the three months ended June 30, 1998 to $2.4 million from $2.3 million in the corresponding period of 1997. NET INTEREST EXPENSE. Net interest and other expense increased to $1.5 million - -------------------- in the three months ended June 30, 1998 from $0.2 million in the corresponding period of the prior year as a result of the cessation of interest capitalization on the Company's Ventana Canyon residential joint venture project and the issuance of the Notes in March 1998. EQUITY IN EARNINGS OF REAL ESTATE VENTURE. The Company's share of equity in its - ----------------------------------------- Ventana Canyon joint venture was $0 million during the three-month periods ended June 30, 1998 and 1997. The joint venture has historically operated at or near a break-even point on residential activity and generated net income on sales of improved land (see below). NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997 SALES AND OPERATING REVENUES. Sales increased $8.0 million, or 26%, during the - ---------------------------- nine months ended June 30, 1998 to $38.5 million from $30.5 million in the corresponding period of the prior year. The increase was principally due to increased sales of specialty chemicals. Such increase was partially offset by a decrease in real estate sales. Perchlorate chemical sales increased approximately $9.6 million primarily as a result of the pending and ultimate consummation of the Acquisition. Real estate sales decreased approximately $1.2 million due to a difference in the timing and magnitude of land closings. COST OF SALES. Cost of sales increased $0.8 million, or 3%, in the nine months - ------------- ended June 30, 1998 to $26.3 million from $25.5 million in the corresponding period of the prior year. The increase in cost of sales was primarily due to increases in perchlorate sales volume. As a percentage of sales, cost of sales decreased in the nine months ended June 30, 1998 to 69% as compared to -15- 84% in the corresponding period of the prior year. The decrease was primarily attributable to the increase in perchlorate sales volume and a reduction in depreciation expense as a result of the sodium azide impairment charge referred to above. Cost of sales is expected to increase by approximately $4.0 million annually as a result of the amortization of capitalized Acquisition costs. OPERATING EXPENSES. Operating expenses were $6.8 million during the nine-month - ------------------ period ended June 30, 1998 compared to $6.9 million in the corresponding period of the prior year. NET INTEREST EXPENSE. Net interest and other expense increased to $3.0 million - -------------------- in the nine months ended June 30, 1998 from $0.7 million in the corresponding period of the prior year as a result of the cessation of interest capitalization on the Company's Ventana Canyon residential joint venture project and the issuance of the Notes in March, 1998. Interest expense will increase significantly in future periods as a result of the issuance of the Notes. (See Note 6 of Notes to Condensed Consolidated Financial Statements.) EQUITY IN EARNINGS OF REAL ESTATE VENTURE. The Company's share of equity in its - ----------------------------------------- Ventana Canyon joint venture was $0.3 million and $0.1 million during the nine months ended June 30, 1998 and 1997. The increase in the equity in earnings of Ventana Canyon relates principally to the sale of improved land to an outside developer in the first quarter of fiscal 1998. SEGMENT OPERATING INCOME (LOSS). Operating income (loss) of the Company's - -------------------------------- industry segments during the nine-month periods ended June 30, 1998 and 1997 was as follows:
1998 1997 ---------- ----------- Specialty chemicals $3,882,000 $(3,433,000) Environmental protection equipment 36,000 (352,000) Real Estate 1,155,000 1,630,000 ---------- ----------- Total $5,073,000 $(2,155,000) ========== ===========
The increase in operating income in the Company's specialty chemical industry segment was attributable to the increase in perchlorate sales in the second and third quarters of fiscal 1998 referred to above and a decrease in depreciation expense associated with sodium azide operations as a result of the impairment charge discussed above. The increase in environmental protection equipment segment operating income was primarily due to improved margins. The decrease in real estate segment operating income was attributable to a decrease in sales from $3.7 million during the nine months ended June 30, 1997 to $2.4 million during the same period in 1998. INFLATION 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, 1998 or 1997. 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 As discussed in Notes 6 and 7 of Notes to Condensed Consolidated Financial Statements, in March 1998, the Company sold Notes in the principal amount of $75.0 million, acquired certain -16- 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. Through June 30, 1998, the Company has incurred approximately $3.1 million in costs associated with the issuance of the Notes. In connection with the Azide Notes repurchase, the Company recognized an extraordinary loss on debt extinguishment of approximately $5.0 million. Cash flows provided by operating activities were $8.5 million and $5.2 million during the nine-months ended June 30, 1998 and 1997, respectively. Cash flows from operating activities increased in the first nine months of fiscal 1998 principally as a result of increased sales and margins in the Company's perchlorate operations. 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 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 $2.1 million during the nine months ended June 30, 1998 compared to $1.6 million during the same period last year. Capital expenditures are budgeted to amount to approximately $2.5 million in fiscal 1998 and relate principally to specialty chemical segment capital improvement projects. During the three-month and nine-month periods ended June 30, 1998, the Company received cash of approximately $0.4 million and $3.1 million, respectively, relating to the return of capital invested in the Ventana Canyon joint venture. 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. As a result of the litigation and contingencies discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, the Company has incurred legal and other costs, and it may incur material legal and other costs associated with the resolution of contingencies in future periods. Any such costs, to the extent borne by the Company and not recovered through insurance, would adversely affect the Company's liquidity. The Company is currently unable to predict or quantify the amount or range of such costs, if any, or the period of time over which such costs will be incurred. The Company is currently in the process of evaluating its computer software and databases to determine whether or not modifications will be required to prevent problems related to the Year 2000. These problems, which have been widely reported in the media, could cause malfunctions in certain software and databases with respect to dates on or after January 1, 2000, unless corrected. Based upon its evaluation to date, the Company does not believe that the costs of any modifications required to correct for Year 2000 problems will have a material impact on operations, although there can be no assurance given with respect thereto. FORWARD-LOOKING STATEMENTS/RISK FACTORS Certain matters discussed in this Report may be forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, the risk factors set forth below. The following 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) -17- governmental budget decreases affecting the Department of Defense or NASA that would cause a continued decrease in demand for AP, (c) the results achieved by the Suspension Agreement resulting from the Company's anti-dumping petition and the possible termination of such agreement and the continued impact of the GM labor strike, (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 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 AP and sodium azide markets and the development or penetration of competing new products, particularly in the propulsion, airbag inflation and fire suppression businesses. 3. Underutilization of the Company's manufacturing facilities resulting in production inefficiencies and increased costs, the inability to recover facility costs and reductions in margins. 4. Risks associated with the Company's real estate activities, including, but not limited to, dependence upon the Las Vegas commercial, industrial and residential real estate markets, changes in general or local economic conditions, interest rate fluctuations affecting the availability and the cost of financing, the performance of the managing partner of its residential real estate joint venture (Ventana Canyon Joint Venture) and regulatory and environmental matters that may have a negative impact on sales or costs. 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 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. -18- EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS SEP-30-1998 JUN-30-1998 27,731 0 6,596 0 13,864 49,483 25,255 5,740 136,667 12,194 75,000 0 0 840 43,270 136,667 38,523 38,523 26,282 33,073 0 0 2,977 2,773 0 2,773 0 5,005 0 (2,232) (.27) (.27)
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