<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
-
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED DECEMBER 31, 1994
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: 8,152,291 AS OF JANUARY 31,
1995.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
--------------------
The information required by Rule 10-01 of Regulation S-X is provided
on pages 4 through 13 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 14 through 20 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 11 of this Report on Form 10-Q.
ITEM 2. through ITEM 5.
Not applicable or 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
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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: February 10, 1995 s/c C. Keith Rooker
--------------------
C. Keith Rooker
Executive Vice President
Secretary/General Counsel
Date: February 10, 1995 s/c David N. Keys
-----------------
David N. Keys
Vice President,
Chief Financial Officer and
Treasurer; Principal
Financial and Accounting
Officer
3
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AMERICAN PACIFIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31,
(UNAUDITED)
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------
1994 1993
- - - --------------------------------------------------------------------
<S> <C> <C>
Sales and Operating Revenues $ 9,309,000 $ 14,374,000
Cost of Sales 7,736,000 5,185,000
---------------------------
Gross Profit 1,573,000 9,189,000
Selling, General and Administrative
Expenses 2,564,000 2,816,000
Research and Development 44,000 21,000
---------------------------
Operating Income (Loss) (1,035,000) 6,352,000
Net Interest and Other Expense
(Income) (307,000) 1,494,000
---------------------------
Income (Loss) Before Provision (Credit)
for Income Taxes (728,000) 4,858,000
Provision (Credit) for Income Taxes (248,000) 1,680,000
---------------------------
Net Income (Loss) $ (480,000) $ 3,178,000
---------------------------
Net Income (Loss) Per Common Share $ (.06) $ 0.39
---------------------------
Weighted Average Common and Common
Equivalent Shares Outstanding 8,246,000 8,251,000
---------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
4
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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------
December 31, September 30,
1994 1994
- - - --------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 19,989,000 $ 22,884,000
Short-term Investments 2,000,000 2,000,000
Accounts and Notes Receivable 8,876,000 8,005,000
Related Party
Notes Receivable 1,007,000 942,000
Inventories 5,026,000 5,683,000
Prepaid Expenses and Other Assets 1,448,000 1,062,000
--------------------------------
Total Current Assets 38,346,000 40,576,000
Property, Plant and Equipment, Net 82,616,000 81,606,000
Development Property 11,766,000 11,525,000
Real Estate Equity Investments 15,146,000 14,526,000
Other Assets 4,996,000 5,105,000
Restricted Cash 1,591,000 1,584,000
--------------------------------
TOTAL ASSETS $ 154,461,000 $ 154,922,000
--------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
5
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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
- - - -------------------------------------------------------------------------
December 31, September 30,
1994 1994
- - - -------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 6,193,000 $ 5,689,000
Notes Payable and Current Portion of
Long-Term Debt 504,000 504,000
--------------------------------
Total Current Liabilities 6,697,000 6,193,000
Long-Term Debt 42,283,000 42,176,000
Deferred Income Taxes 5,150,000 5,398,000
Minimum Pension Liability 1,740,000 1,740,000
--------------------------------
TOTAL LIABILITIES 55,870,000 55,507,000
--------------------------------
Commitments and Contingencies
Warrants to Purchase Common Stock 3,569,000 3,569,000
SHAREHOLDERS' EQUITY:
Common Stock 820,000 820,000
Capital in Excess of Par Value 78,231,000 78,205,000
Retained Earnings 17,245,000 17,725,000
Treasury Stock (412,000) (42,000)
Receivable from the Sale of Stock (97,000) (97,000)
Excess Additional Pension Liability (765,000) (765,000)
--------------------------------
Total Shareholders' Equity 95,022,000 95,846,000
--------------------------------
--------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 154,461,000 $ 154,922,000
--------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
6
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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Cash Flows
For the Three Months ended December 31,
(Unaudited)
<TABLE>
<CAPTION>
- - - ----------------------------------------------------------------------------
1994 1993
- - - ----------------------------------------------------------------------------
<S> <C> <C>
Cash Provided by Operating Activities $ 53,000 $ 6,906,000
--------------------------------
Cash Flows Used for Investing
Activities:
Capital Expenditures, Development
Property Additions and Real Estate
Equity Investments (2,604,000) (1,966,000)
Treasury Stock Acquired (370,000)
--------------------------------
Net Cash Used For Investing Activities (2,974,000) (1,966,000)
--------------------------------
Cash Flows From Financing Activities:
Principal Payments on Debt (3,286,000)
Issuance of Common Stock 26,000
--------------------------------
Net Cash Provided By (Used For)
Financing Activities 26,000 (3,286,000)
--------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents (2,895,000) 1,654,000
Cash and Cash Equivalents, Beginning of
Period 22,884,000 12,787,000
--------------------------------
Cash and Cash Equivalents, End of Period $19,989,000 $14,441,000
--------------------------------
Supplemental Disclosure of Cash Flow
Information:
Interest Paid (net of amounts
capitalized) $ 1,706,000
--------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
7
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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, 1994 was
derived from the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended September 30, 1994. The
Condensed Consolidated Financial Statements for the three-month periods
ended December 31, 1994 and 1993 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, 1994. 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 PER COMMON SHARE
Net income per common share for the three-month periods ended December 31,
1994 and 1993 is determined based upon the weighted average number of common
and common equivalent shares outstanding. Common share equivalents consist
of outstanding stock options and warrants.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1994 1994
------------ -------------
<S> <C> <C>
Work-in-process $1,897,000 $2,884,000
Raw materials and supplies 3,129,000 2,799,000
---------- ----------
Total $5,026,000 $5,683,000
---------- ----------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
In December 1992, Thiokol Corporation ("Thiokol") issued a Request for
Quotation, inviting Western Electrochemical Company ("WECCO"), a wholly-
owned indirect subsidiary of the Company, to submit a proposal for the sale
of NASA-related ammonium perchlorate ("AP") over a period extending through
mid-1998, approximately two years after the expiration of a Surcharge
Agreement (the "Surcharge Agreement") and other agreements with Thiokol (the
"NASA/Thiokol agreements"). To enable WECCO to submit a proposal which did
not prejudice the NASA/Thiokol agreements, Thiokol and WECCO signed an
agreement to the effect that WECCO and Thiokol would deal with the Request
for Quotation and WECCO's responsive proposal without reference to the
NASA/Thiokol agreements or any effects thereon, but WECCO reserved its
rights under the NASA/Thiokol agreements. Based upon the Request for
Quotation and the agreement, WECCO submitted a proposal calculated to win
the NASA-related AP business of Thiokol through the extended period covered
by the proposal. At the time it submitted its proposal,
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WECCO also offered to negotiate a termination of the NASA/Thiokol
agreements, subject to the consent and approval of NASA and Seafirst Bank
(the bank that provided financing, in the form of a term loan (the "WECCO
loan"), for the AP plant facility). As a result of its proposal and
discussions with Thiokol, WECCO was optimistic that it would succeed in
achieving its objective of extending its base contractual assurances for AP
sales set forth in the NASA/Thiokol agreements. At a meeting in Ogden, Utah
on June 11, 1993, Thiokol delivered to a Company representative a draft
memorandum that, if executed by WECCO, would have effectively released
Thiokol from its obligations under the NASA/Thiokol agreements. Thiokol also
delivered a proposed purchase order that covered AP sales only over a period
approximately corresponding to the remaining term of the NASA/Thiokol
agreements, rather than through mid-1998, as contemplated by the Request for
Quotation, but for a lower quantity although at higher prices than were
offered by WECCO over the longer term. Thiokol advised WECCO that it had
made a similar proposal to the other producer of AP. At the June 11 meeting
Thiokol also advised WECCO that it had commenced a legal action against
WECCO in Weber County (Ogden), State of Utah, seeking declaratory relief to
the effect that once the principal and interest balance owing by WECCO to
Seafirst Bank was fully paid, Thiokol would have no further obligation to
purchase AP from WECCO under the NASA/Thiokol agreements, and to the effect
that there existed an agreement among NASA, Thiokol, WECCO and Seafirst Bank
to prepay the WECCO loan on or about October 1, 1993. Thiokol also advised
WECCO that it intended to proceed with the declaratory relief action only if
negotiations underway between the parties were not concluded in a manner
satisfactory to Thiokol.
Thiokol's complaint alleged that Thiokol, WECCO, NASA and Seafirst Bank had
agreed that Thiokol would prepay WECCO's Seafirst Bank loan in October 1993,
and that upon prepayment Thiokol's obligation to purchase AP from WECCO
under the NASA/Thiokol agreements would cease. In fact, there neither was
nor is any such agreement. Moreover, before submitting its responsive
proposal to Thiokol's Request for Quotation, WECCO sought and obtained from
a nationally recognized law firm specializing in government contract law,
opinions to the effect that (i) only WECCO had the right to prepay the
balance owing to Seafirst Bank and (ii) even if the balance owing had been
so prepaid, Thiokol would have continued to be obligated to purchase AP from
WECCO under the NASA/Thiokol agreements through August 1996.
On July 8, 1993, Thiokol dismissed, without prejudice, its declaratory
relief lawsuit against WECCO. A dismissal "without prejudice" operates as a
dismissal of the lawsuit, but does not prevent its re-filing at a later
date, nor did it constitute a final resolution of the dispute. According to
a "Standstill Agreement" between the parties,"... Thiokol [could] not [have]
re-file[d] its action nor commence[d] a new action against WECCO without
first giving WECCO five days' notice of its intent to do so and WECCO
[could] not [have] file[d] an action against Thiokol without first giving
Thiokol 20 days' notice of its intent to do so; and (3) any such litigation
[could have been] filed only in state or federal court in Salt Lake County,
Utah."
On March 29, 1994, WECCO and Thiokol agreed to a draft amendment to the 1989
Advance Agreement. On May 10, 1994, the amendment (the "Amendment") was
executed. The Amendment fully resolved all issues between Thiokol and WECCO
9
<PAGE>
relating to the interpretation and application of the NASA/Thiokol
agreements. Thiokol separately agreed not to refile its declaratory relief
lawsuit. (See Note 5.)
Following and because of the announcement of Thiokol's lawsuit against WECCO
described above, and the consequent decline in the trading prices of the
Company's Common Stock, 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 have since been consolidated, allege that the Company's
public statements violated Federal securities laws by inadequately
disclosing information concerning its agreements with Thiokol and the
Company's operations. Management of the Company believes that the
allegations of the consolidated complaint are without merit and the Company
and other defendants are vigorously defending the lawsuits.
No specific amount of damages has been claimed in the shareholder lawsuits,
which will involve extended discovery, multiple legal and factual issues and
significant uncertainties. Accordingly, a reliable estimate of the amount
of potential damages, if any, to the Company cannot be made at the present
time. The Company has in force substantial insurance covering this risk.
However, defense costs and any potential settlement or judgment associated
with this litigation, to the extent borne by the Company and not recovered
through insurance, may adversely affect the Company's liquidity.
As a result of the above-described dispute with Thiokol and the resulting
shareholder lawsuits, the Company has incurred legal and other costs and may
incur material legal and other costs associated with the 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.
In connection with the discontinuance of certain operations in 1985, the
Company was contingently liable for certain indebtedness. The company which
acquired the operations indemnified the Company for any liability that might
result from this contingency. In October 1992, the Company paid $1,500,000
to settle all claims related to this indebtedness. The indemnitor executed
a note to the Company in the principal amount of $1,500,000 bearing interest
at prime plus two percent. The note is secured by a pledge of the Company's
note payable to an affiliated company of the indemnitor in the principal
amount of $504,000 at December 31, 1994 and is guaranteed by the affiliated
company. As a result, the Company is no longer contingently liable for this
indebtedness.
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 on a
10
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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. AMENDMENT TO ADVANCE AGREEMENT
In January 1994, WECCO concluded negotiations with Thiokol relating to the
revenue requirement under the NASA/Thiokol agreements for the period March
1, 1993 through September 30, 1993. WECCO and Thiokol agreed that the
amount due for this period, in excess of amounts previously paid, was
approximately $7.6 million. This amount included $5.5 million relating to
the order quarter ended August 31, 1993. The Company recognized the
difference between the $7.6 million and the $5.5 million as revenues in the
first quarter of its fiscal year ended September 30, 1994, since such
difference applied to the third order quarter ended November 30, 1993 under
the NASA/Thiokol agreements. WECCO has collected the $7.6 million.
On May 10, 1994, WECCO and Thiokol executed the Amendment. The Amendment
fully resolved all issues between Thiokol and WECCO relating to the
interpretation and application of the NASA/Thiokol agreements. Under and
because of the resolution of its dispute with Thiokol completed by the
Amendment, WECCO exercised the contractual right reserved solely to it in
the WECCO loan agreement to direct that the funds in the cash collateral
account and default account be used to repay the WECCO loan, including
accrued interest, any interest rate swap termination fee, and any other
costs relating to the repayment. Under the terms of the Amendment,
additional funds required for these purposes of approximately $600,000 were
provided by NASA/Thiokol, and, on May 10, 1994, such prepayment was
completed. Upon early repayment in full of the WECCO loan, the Amendment
provided for the termination as fulfilled of the Surcharge Agreement and
termination of certain other agreements relating to the repayment of
advances (the Working Capital Agreement and the Repayment Plan).
The Amendment confirms that the 1989 Advance Agreement has 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 provides
for WECCO to 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. Prior to the effective
date of the Amendment, WECCO was indebted to Thiokol for approximately
$10,208,000 under the Working Capital Agreement and Repayment Plan. The
Amendment required WECCO to pay $750,000 of this amount ratably as
deliveries of AP were made over the remainder of the fiscal year ended
September 30, 1994. The remaining obligation under the Working Capital
Agreement and Repayment Plan will be repaid by WECCO through delivery of AP.
The Company estimated that the cost of producing such AP would be
approximately $3.5 million. Such amount is included in long-term debt at
December 31, 1994. Thiokol separately agreed not to refile the declaratory
relief lawsuit referred to in Note 4.
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The Company believes that the Amendment to the 1989 Advance Agreement
represents a fully satisfactory commercial resolution of its dispute with
Thiokol. The Company believes that AP revenues under the NASA/Thiokol
agreements will result in net cash flows to WECCO from AP operations during
the fiscal years ending September 30, 1995 and 1996 substantially the same
as those that would have been generated under the NASA/Thiokol agreements
for the same periods. As the Company has previously reported, however, the
following changes, which would have occurred in any event under the
NASA/Thiokol agreements, have occurred:
Cash collateral account and default account balances were used to repay
the WECCO loan. Accordingly, there will be no interest earnings
associated with these accounts in the future.
The Surcharge was eliminated. The Surcharge ends in any event when
amounts sufficient in the aggregate to pay principal and interest on
the WECCO loan have been paid through the Surcharge. As previously
reported, this was expected to occur during the calendar year 1994
under the NASA/Thiokol agreements, and has now occurred. As a result
and as expected, revenues from AP operations will be substantially less
than historical AP revenues. In addition, Surcharge revenues have
historically been in excess of depreciation and amortization and
interest expense related to the AP manufacturing facility. See
Management's Discussion and Analysis of Financial Condition and Results
of Operations for information with respect to historical Surcharge
revenues and the excess referred to above.
The default account payment of $0.05 per pound of AP, or $1 million per
year, formerly included in the AP price, is no longer part of the AP
price because there will no longer be a default account required under
the WECCO loan, the contents of the default account having been
dedicated to payments of principal and interest under and as collateral
for the WECCO loan.
The technology transfer fee of $0.05 per pound of AP, or $1 million per
year, formerly included in the AP price, is no longer part of the AP
price.
6. 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 factors, among others; (i) order quarters
under the NASA/Thiokol agreements did not coincide with the Company's fiscal
quarters; (ii) as discussed in Note 4, the Company may incur material legal
and other costs associated with litigation; (iii) the timing of real estate
and related sales is not predictable; (iv) 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; (v) 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
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Common Stock due to outstanding warrants and options; (vi) interest expense
(net of amounts capitalized) will increase due to interest expense
associated with the Azide Notes which will no longer be capitalized; and
(vii) certain changes in the Company's AP business have occurred and will
occur as a result of the Amendment to the 1989 Advance Agreement (see Note
5).
The results of the Company's operations will also be affected by the timing
and magnitude of orders, and pricing thereof, for the Company's new
products, sodium azide and Halotron. Such orders are dependent upon actions
of customers and potential customers and the political and regulatory
environment.
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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 $9,309,000 and $14,374,000 during the three-
month periods ended December 31, 1994 and 1993. The decrease is primarily due
to the elimination of the Surcharge related to AP sales (see below). Such
decrease was partially offset by sales of sodium azide.
The Company's perchlorate chemicals operations have historically accounted for
in excess of 85 percent of total revenues. There have as yet been no
significant sales of Halotron.
Gross profit as a percentage of sales and operating revenues was 17 percent in
the first quarter of fiscal 1995 compared to 64 percent in the first quarter of
fiscal 1994. The significant decrease in gross profit percentage is due to a
number of factors. As discussed below, the Surcharge was eliminated from AP
pricing. In addition, depreciation expense associated with AP plant assets was
substantially lower in the first three months of fiscal 1995 as a result of the
impairment charge discussed below. The elimination of Surcharge revenues,
offset by the reduction in depreciation expense, contributed significantly to
the reduction in gross profit percentage. The results of sodium azide
operations in the first quarter of fiscal 1995 also added to the reduction in
comparable gross profit percentages. The level of sodium azide sales during the
three-month period ended December 31, 1994 were not sufficient to absorb
operational (fixed and variable) costs associated with the production of sodium
azide at relatively low amounts in comparison to the productive capacity of the
plant. The Company expects gross profit percentages to improve as sodium azide
sales increase, although there can be no assurance in that regard since any
improvement will be dependent upon, among other things, the pricing of sodium
azide (see below) and the level of plant utilization.
PERCHLORATE CHEMICAL OPERATIONS
In 1988, NASA issued Determinations and Findings that included a determination
that it was essential to planned space exploration and to national security that
AP production capacity be replaced as quickly as possible and that a reliable
supply of AP again be available from two domestic manufacturers. Surcharge
revenues were provided by the agreements entered into to implement this
determination.
As part of the NASA/Thiokol agreements, WECCO entered into a Surcharge Agreement
with Thiokol pursuant to which a Surcharge was imposed on all purchases of AP by
Thiokol and others. The Surcharge Agreement required Thiokol to place
sufficient AP orders which, when combined with WECCO's other AP sales, would
assure WECCO revenues in respect of not less than 5,000,000 pounds of AP per
quarter, 20,000,000 per year and 140,000,000 in the aggregate over a seven-year
period. (See below and Note 5 of Notes to Condensed Consolidated Financial
Statements for a discussion of an amendment to the Advance Agreement that, in
May 1994, terminated the Surcharge Agreement and certain other agreements.) All
Surcharge payments were deposited into a cash collateral account and $.05 per
pound of the AP base price payments was deposited into a default account under
the WECCO loan. The Surcharge Agreement was approved and consented to by NASA.
NASA and Thiokol entered into separate agreements regarding Thiokol's
obligations
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for AP orders under the Surcharge Agreement. Surcharge revenues were $4,712,000
during the three-month period ended December 31, 1993. The net difference
between Surcharge revenues, and depreciation and amortization and interest
expense related to the AP manufacturing facility, was approximately $600,000
during the three months ended December 31, 1993.
In January 1994, WECCO concluded negotiations with Thiokol relating to the
revenue requirement for the period March 1, 1993 through September 30, 1993.
WECCO and Thiokol agreed that the amount due for this period, in excess of
amounts previously paid, was approximately $7.6 million. This amount included
$5.5 million relating to the order quarter ended August 31, 1993. The Company
recognized the difference between the $7.6 million and the $5.5 million as
revenues in the first quarter of its fiscal year ended September 30, 1994, since
such difference applied to the third order quarter ended November 30, 1993.
WECCO has collected the $7.6 million.
As discussed in Note 4 of Notes to Consolidated Financial Statements, in
December 1992, Thiokol issued a Request for Quotation, inviting WECCO to submit
a proposal for the sale of NASA-related AP over a period extending through mid-
1998, approximately three years after the expiration of the NASA/Thiokol
agreements. To enable WECCO to submit a proposal which did not prejudice the
NASA/Thiokol agreements, Thiokol and WECCO signed an agreement to the effect
that WECCO and Thiokol would deal with the Request for Quotation and WECCO's
responsive proposal without reference to the NASA/Thiokol agreements or any
effects thereon, but WECCO reserved its rights under the NASA/Thiokol
agreements. At the time it submitted its proposal WECCO also offered to
negotiate a termination of the NASA/Thiokol agreements, subject to the consent
and approval of NASA and Seafirst Bank.
At a meeting on June 11, 1993, Thiokol advised WECCO that it had commenced a
legal action against WECCO in Weber County (Ogden) Utah, seeking declaratory
relief to the effect that once the principal and interest balance owing by WECCO
to Seafirst Bank was fully paid, Thiokol would have no further obligation to
purchase AP from WECCO under the NASA/Thiokol agreements, and to the effect that
there existed an alleged agreement among NASA, Thiokol, WECCO and Seafirst Bank
to prepay the WECCO loan on or about October 1, 1993. Thiokol also advised
WECCO that it intended to proceed with the declaratory relief action only if
negotiations underway between the parties were not concluded in a manner
satisfactory to Thiokol.
On July 8, 1993, Thiokol dismissed, without prejudice, its declaratory relief
lawsuit against WECCO. A dismissal "without prejudice" operates as a dismissal
of the lawsuit, but does not prevent its re-filing at a later date, nor does it
constitute a final resolution of the dispute. On May 10, 1994, WECCO and
Thiokol executed the Amendment. The Amendment fully resolved all issues between
Thiokol and WECCO relating to the interpretation of the NASA/Thiokol agreements.
Thiokol has separately agreed not to refile its declaratory relief lawsuit.
(See Note 5 of Notes to Condensed Consolidated Financial Statements.)
Under and because of the resolution of its dispute with Thiokol completed by the
Amendment, WECCO exercised the contractual right reserved solely to it in the
WECCO loan agreement to direct that the funds in the cash collateral account and
default account be used to repay the WECCO loan. Under the terms of the
Amendment, additional funds required for these purposes of approximately
$600,000 were provided by NASA/Thiokol, and, on May 10, 1994, such prepayment
was completed. Upon repayment in
15
<PAGE>
full of the WECCO loan, the Amendment provided for the termination as fulfilled
of the Surcharge Agreement, the Working Capital Agreement and the Repayment
Plan.
The Amendment confirms that the 1989 Advance Agreement has 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 provides for WECCO to
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 perchlorate chemicals amounted to
approximately $7,100,000 during the three-month period ended December 31, 1994.
Prior to the effective date of the Amendment, WECCO was indebted to Thiokol for
approximately $10,208,000 under the Working Capital Agreement and Repayment
Plan. Under the terms of the Amendment, WECCO paid $750,000 of this amount
ratably as deliveries of AP were made over the remainder of the fiscal year
ended September 30, 1994 . The remaining obligation under the Working Capital
Agreement and Repayment Plan will be repaid by WECCO through delivery of AP.
The Company estimated that the cost of producing such AP will be approximately
$3.5 million and has included this amount in long-term debt at December 31,
1994.
The Company believes that the Amendment represents a fully satisfactory
commercial resolution of its dispute with Thiokol and that AP revenues under the
Amendment will result in net cash flows to WECCO from AP operations during the
fiscal years ending September 30, 1995 and 1996, substantially the same as those
that would have been generated under the NASA/Thiokol agreements absent the
Amendment. As the Company has previously reported, however, certain changes in
revenues and cash flows, which would have also been present under the
NASA/Thiokol agreements absent the Amendment, have occurred with the cessation
of Surcharge receipts. (See Note 5 of Notes to Condensed Consolidated Financial
Statements.)
In 1988-89, the government indicated that the yearly demand for AP was
approximately 60 million pounds. Since then, there has been a considerable
decline in AP demand. The Company recognized a non-recurring impairment charge
of $39,401,000 relating to the WECCO fixed assets as of March 31, 1994. Such
charge resulted principally from the effects of the change in the AP market.
Operating income, net income and earnings per share, before the non-recurring
fixed asset impairment charge of $39,401,000, were $12,354,000, $6,640,000 and
$.82, respectively, during the fiscal year ended September 30, 1994.
SODIUM AZIDE OPERATIONS
Commercial shipments of sodium azide began in April, 1994. Sodium azide sales
(net of a five percent royalty) were approximately $1,111,000 during the three-
month period ended December 31, 1994. 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. airbag inflator market. As a result,
the Company believes that the level of sodium azide sales will 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 addition, by reason of a competitive market environment,
there appears to be considerable market pressure on the price of sodium azide.
At the time the Company began this project, prices for sodium azide were
16
<PAGE>
approximately $8.00 per pound. Prices currently appear to be in the range of
$5.00 to $7.00 per pound.
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 460-acre tract (Gibson
Business Park) in Clark County, Nevada. All development property is held in fee
simple. Approximately 420 acres of the Gibson Business Park are 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 a limited liability corporation 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 $42,000 and $24,000 for the three-month
periods ended December 31, 1994 and 1993, 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.
ENVIRONMENTAL PROTECTION EQUIPMENT OPERATIONS
Environmental protection equipment sales were approximately $992,000, and
$919,000 during the three-month periods ended December 31, 1994 and 1993,
respectively. The Company is continuing its evaluation of future operating
activities in this business segment. At December 31, 1994, this segment had
virtually no backlog. Effective December 31, 1994, the Company laid off the
work force associated with assembly activities (approximately 4 hourly
employees) and terminated the assembly facility lease (approximately $67,000 in
annual operating rents). However, the Company has recently submitted bids
totaling approximately $16,000,000 although there can be no assurance that any
of these bids will result in future firm orders.
OPERATING EXPENSE
Operating (selling, general and administrative) expenses were $2,564,000 and
$2,816,000 during the three-month periods ended December 31, 1994 and 1993,
respectively. The decrease is primarily due to the Company's emphasis on cost
control, containment and reduction.
RESEARCH AND DEVELOPMENT
The Company incurred approximately $44,000 and $21,000 in research and
development costs related to its specialty chemicals segment in the first
quarters of fiscal 1995 and 1994, respectively. The Company expects to increase
its research and development activities as its new products are developed.
NET INTEREST AND OTHER EXPENSE (INCOME)
The decrease in net interest and other expense (income) in the first quarter of
fiscal 1995 compared to the first quarter of fiscal 1994 is primarily a result
of WECCO's election to use the funds in the cash collateral and default accounts
to repay the WECCO loan. The Company expects interest expense to increase
significantly as compared to the first quarter of fiscal 1995 at the time that
interest capitalization ceases on the remaining portion of the
17
<PAGE>
sodium azide facility undergoing construction activities (presently estimated to
occur in the third quarter of fiscal 1995).
PROVISIONS FOR INCOME TAXES
The Company's effective income tax rates were approximately 34% during the
three-month periods ended December 31, 1994 and 1993.
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 factors, among others; (i) order quarters under the
NASA/Thiokol agreements did not coincide with the Company's fiscal quarters;
(ii) as discussed in Note 4, the Company may incur material legal and other
costs associated with litigation; (iii) the timing of real estate and related
sales is not predictable; (iv) 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; (v) 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; (vi) interest expense (net of amounts capitalized) will increase due to
interest expense associated with the Azide Notes (see above); and (vii) certain
changes described in Note 5 in the Company's AP business have occurred and will
occur as a result of the Amendment to the 1989 Advance Agreement and the
eventual expiration thereof in September, 1996.
The Company's efforts to produce, market and sell Halotron I and Halotron II are
dependent upon the political climate and environmental regulations that exist
and may vary from country to country. Halotron I has been extensively and
successfully tested. These products continue to undergo testing. Although the
Company is satisfied with the progress and performance characteristics of
Halotron I and Halotron II, 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.
As a result of the uncertainties with respect to volume and price of sodium
azide 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
Following the announcement of Thiokol's lawsuit against WECCO described above,
and the consequent decline in the trading prices of the Company's common stock,
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 have since been
consolidated, allege that the Company's
18
<PAGE>
public statements violated federal securities laws by inadequately disclosing
information concerning its agreements with Thiokol and the Company's operations.
The Company believes that the allegations of the consolidated complaint are
without merit and the Company and other defendants are vigorously defending the
lawsuits. (See Note 4 of Notes to Condensed Consolidated Financial Statements.)
INFLATION
Inflation did not have a significant effect on the Company's sales and operating
revenues or costs during the three-month periods ended December 31, 1994 or
1993. 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. As of December 31, 1994, the
Company had repurchased approximately 50,000 shares through this program. In
light of the net loss incurred in the first quarter of fiscal 1995, the Company
has determined to suspend its stock repurchase program in order to conserve
cash. The Company may, however, resume stock repurchases without notice, but is
not obligated to do so. The Board of Directors also made the decision to
broaden and re-focus a pending investment banking engagement to advise the Board
of Directors on measures that may be available to enhance shareholder value, and
to assist the Company in the implementation of selected measures. The Company
engaged CS First Boston to evaluate and help implement appropriate shareholder
value enhancement measures, including but not limited to dispositions,
restructuring, acquisitions and mergers.
Management of the Company is also considering areas where cost reductions can be
made that are consistent with maintaining the highest level of product quality
and service for customers. This evaluation and effort is continuing.
As a result of the above described shareholder lawsuits, the Company may incur
material legal and other costs associated with the resolution of this matter 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 be required to
indemnify its affected officers and directors to the extent, if at all, that
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 range of such costs, if any, or the period of time that such costs
will be incurred.
No specific amount of damages has been claimed in the shareholder lawsuits,
which will involve extended discovery, and the ultimate resolution of multiple
legal and factual issues. Accordingly, a reliable estimate of the amount of
potential damages, if any, to the Company cannot be made at the present time.
The Company has in force substantial insurance covering this risk. However, as
indicated above, defense costs and any potential settlement or judgment costs
associated with this litigation, to the extent borne by the
19
<PAGE>
Company and not recovered through insurance, may adversely affect the Company's
liquidity. (See Note 4 of Notes to Condensed Consolidated Financial Statements.)
Cash flows provided by operating activities were $53,000 during the three-month
period ended December 31, 1994 compared to $6,906,000 during the three months
ended December 31, 1993. The significant reduction in cash flows provided by
operating activities is principally due to the results of sodium azide
operations as discussed 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 shareholder lawsuits, and the timing, pricing and magnitude of
the receipt of orders for its new products, sodium azide and Halotron, may have
an effect on the use and availability of cash.
As discussed above, on May 10, 1994, WECCO elected to use the funds in the cash
collateral and default accounts to repay the WECCO loan.
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 and the difficulty in assigning
cost estimates to such an operation. Design and construction also occurred over
a longer period of time than was originally estimated which increased actual
expenditures. The facility has not been operated at significant production
levels and greater-than-expected capital costs have been and may continue to be
incurred to achieve design capacity. Subject to the ongoing receipt and
magnitude of orders for sodium azide and the avoidance of further erosion of the
selling price per pound of sodium azide, 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.
In February 1992, the Company exercised an option to acquire the worldwide
rights, including the development, manufacture and market applications, to
Halotron I. Halotron products are intended to replace halons, which have been
found to be ozone depleting chemicals. The Company may also engage in
operations to acquire, reclaim, store and distribute halons. The option
required the Company to pay $1,000,000 upon exercise, plus an additional
$1,500,000, all of which has been paid. Amounts paid toward the exercise price
of the option, and for testing and evaluation of Halotron I through December 31,
1991 were included in selling, general and administrative expenses as there was
no assurance that the option would be exercised. Amounts paid for technology
and other rights related to Halotron I after December 31, 1991 have been
capitalized as intangible assets and are being amortized. Periodic costs
associated with both Halotron I and Halotron II continue to be expensed as
incurred.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE-MONTH PERIOD ENDED
DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 19,989
<SECURITIES> 2,000
<RECEIVABLES> 9,883
<ALLOWANCES> 0
<INVENTORY> 5,026
<CURRENT-ASSETS> 38,346
<PP&E> 85,669
<DEPRECIATION> 3,052
<TOTAL-ASSETS> 154,461
<CURRENT-LIABILITIES> 55,870
<BONDS> 0
<COMMON> 820
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 154,461
<SALES> 9,309
<TOTAL-REVENUES> 9,309
<CGS> 7,736
<TOTAL-COSTS> 10,344
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (307)
<INCOME-PRETAX> (728)
<INCOME-TAX> (248)
<INCOME-CONTINUING> (480)
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