<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 JUNE 30, 1996
COMMISSION FILE NUMBER 1-8137
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
AMERICAN PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 59-6490478
(State or other jurisdiction (IRS Employer
of incorporation or Identification No.)
organization)
3770 HOWARD HUGHES PARKWAY, SUITE 300
LAS VEGAS, NV 89109
(Address of principal executive offices) (Zip Code)
(702) 735-2200
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X No__
-
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 8,105,621 AS OF JULY 31,
1996.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
-------------------------------------------
The information required by Rule 10-01 of Regulation S-X is provided on
pages 4 through 10 of this Report on Form 10-Q.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
The information required by Item 303 of Regulation S-K is provided on
pages 11 through 15 of this Report on Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The information required by Item 103 of Regulation S-K is provided on
pages 8 through 9 of this Report on Form 10-Q.
ITEM 2. Changes in Securities
---------------------
None.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
ITEM 5. Other Information
-----------------
A cautionary statement for purposes of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 is provided in
pages 16 through 17.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
a) The following Exhibit is filed in connection with the Registrant's
electronic filing:
27. Financial Statement Schedules.
b) None.
2
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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: August 9, 1996 /s/ C. Keith Rooker
-----------------------
C. Keith Rooker
Executive Vice President
Secretary/General Counsel
Date: August 9, 1996 /s/ David N. Keys
---------------------
David N. Keys
Vice President,
Chief Financial Officer and
Treasurer; Principal
Financial and Accounting
Officer
3
<PAGE>
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
FOR THE THREE-MONTHS FOR THE NINE-MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales and Operating Revenues $ 10,617,000 $ 8,179,000 $ 31,373,000 $ 26,396,000
Cost of Sales 8,293,000 6,226,000 24,346,000 20,682,000
----------------------------------------------------------------------
Gross Profit 2,324,000 1,953,000 7,027,000 5,714,000
Operating Expenses 2,035,000 2,789,000 6,941,000 8,300,000
Involuntary Terminations and
Enchanced Retirement Benefits 226,000 226,000
Equity in Earnings of Real Estate
Venture 600,000 600,000
----------------------------------------------------------------------
Operating Income (Loss) 889,000 (1,062,000) 686,000 (2,812,000)
Net Interest and Other
Expense (Income) 357,000 451,000 1,215,000 (324,000)
----------------------------------------------------------------------
Income (Loss) Before Provision
(Credit) for Income Taxes 532,000 (1,513,000) (529,000) (2,488,000)
Provision (Credit) for Income
Taxes 181,000 (515,000) (180,000) (846,000)
----------------------------------------------------------------------
Net Income (Loss) $ 351,000 $ (998,000) $ (349,000) $ (1,642,000)
----------------------------------------------------------------------
Net Income (Loss) Per
Common Share $ .04 $ (.12) $ (.04) $ (.20)
----------------------------------------------------------------------
Weighted Average Common
and Common Equivalent
Shares Outstanding 8,142,000 8,240,000 8,105,000 8,240,000
----------------------------------------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30,
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $ 19,250,000 $ 24,540,000
Short-term Investments 2,000,000 2,000,000
Accounts and Notes Receivable 3,137,000 2,534,000
Income Tax Receivable 2,570,000 2,570,000
Related Party Notes Receivable 888,000 888,000
Inventories 11,875,000 7,094,000
Prepaid Expenses and Other Assets 1,253,000 986,000
------------------------------------
TOTAL CURRENT ASSETS 40,973,000 40,612,000
Property, Plant and Equipment, Net 78,459,000 80,944,000
Development Property 8,744,000 10,296,000
Real Estate Equity Investments 18,786,000 17,725,000
Other Assets 4,048,000 4,469,000
Restricted Cash 4,076,000 3,743,000
------------------------------------
TOTAL ASSETS $ 155,086,000 $ 157,789,000
------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30,
1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 8,213,000 $ 5,672,000
Current Portion of Long-Term Debt 8,500,000 8,500,000
-------------------------------------
TOTAL CURRENT LIABILITIES 16,713,000 14,172,000
Long-Term Debt 29,329,000 34,054,000
Deferred Income Taxes 10,388,000 10,568,000
Minimum Pension Liability 1,175,000 1,175,000
-------------------------------------
TOTAL LIABILITIES 57,605,000 59,969,000
-------------------------------------
Commitments and Contingencies
Warrants to Purchase Common Stock 3,569,000 3,569,000
SHAREHOLDERS' EQUITY:
Common Stock 823,000 822,000
Capital in Excess of Par Value 78,323,000 78,285,000
Retained Earnings 15,840,000 16,189,000
Treasury Stock (818,000) (789,000)
Receivable from the Sale of Stock (97,000) (97,000)
Excess Additional Pension Liability (159,000) (159,000)
-------------------------------------
TOTAL SHAREHOLDERS' EQUITY 93,912,000 94,251,000
-------------------------------------
-------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 155,086,000 $ 157,789,000
-------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
FOR THE THREE-MONTHS FOR THE NINE-MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Provided by (Used for)
Operating Activities $ (288,000) $ 467,000 $ 4,727,000 $ 2,109,000
------------------------------------------------------------------
Cash Flows Used for
Investing Activities:
Capital Expenditures,
Development Property
Additions and Real Estate
Equity Investments (405,000) (1,572,000) (5,027,000) (7,154,000)
Treasury Stock Acquired (377,000) (29,000) (747,000)
------------------------------------------------------------------
Net Cash Used For
Investing Activities (405,000) (1,949,000) (5,056,000) (7,901,000)
------------------------------------------------------------------
Cash Flows From
Financing Activities:
Principal Payments on Debt (5,000,000)
Issuance of Common Stock 31,000 39,000 73,000
------------------------------------------------------------------
Net Cash Provided By (Used
For) Financing Activities 31,000 (4,961,000) 73,000
------------------------------------------------------------------
Net Increase (Decrease) in
Cash and Cash Equivalents (693,000) (1,451,000) (5,290,000) (5,719,000)
Cash and Cash Equivalents,
Beginning of Period 19,943,000 18,616,000 24,540,000 22,884,000
------------------------------------------------------------------
Cash and Cash Equivalents,
End of Period $ 19,250,000 $ 17,165,000 $ 19,250,000 $ 17,165,000
------------------------------------------------------------------
Supplemental Disclosure of
Cash Flow Information:
Interest Paid (net of amounts
capitalized) $ 1,230,000 $ 1,230,000
------------------------------------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
1. BASIS OF REPORTING
The accompanying Condensed Consolidated Financial Statements are unaudited
and do not include certain information and disclosures included in the
Annual Report on Form 10-K of American Pacific Corporation (the "Company").
The Condensed Consolidated Balance Sheet as of September 30, 1995 was
derived from the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended September 30, 1995. The
Condensed Consolidated Financial Statements for the three-month and nine-
month periods ended June 30, 1996 and 1995 are unaudited. Such statements
should therefore be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the Company's Annual Report on Form
10-K for the year ended September 30, 1995. In the opinion of Management,
however, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation have been included.
2. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share for the three-month and nine-month
periods ended June 30, 1996 and 1995 is determined based upon the weighted
average number of common and common equivalent shares (if such shares are
dilutive) outstanding. Common share equivalents consist of outstanding
stock options and warrants.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
----------- -------------
<S> <C> <C>
Work-in-process $ 7,503,000 $3,828,000
Raw materials and supplies 4,372,000 3,266,000
----------- ----------
Total $11,875,000 $7,094,000
----------- ----------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
In fiscal 1993, three shareholder lawsuits, purporting to be class actions,
were filed in the United States District Court for the District of Nevada
against the Company and certain of its directors and officers. The
complaints, which were consolidated, alleged that the Company's public
statements violated Federal securities laws by inadequately disclosing
information concerning its agreements with Thiokol Corporation ("Thiokol")
and the Company's operations. On November 27, 1995, the U.S. District Court
granted in part the Company's motion for summary judgment, ruling that the
Company had not violated the federal securities laws in relation to
disclosures concerning the Company's agreements with Thiokol. The remaining
claims, which related to allegedly misleading or inadequate disclosures
regarding Halotron, were the subject of a jury trial that ended on January
17, 1996. The jury reached a unanimous verdict that neither the Company nor
its directors and officers made misleading or inadequate statements
regarding Halotron. The plaintiffs have
8
<PAGE>
appealed the summary judgment ruling and portions of the trial proceedings
to the Ninth Circuit of the United States District Court of Appeals. The
specific appeal process is currently expected to take between one and two
years although the duration is subject to significant change based on
factors beyond the Company's control.
As a result of the above-described shareholder lawsuits, the Company has
incurred legal and other costs and may incur material legal and other costs
associated with the ultimate resolution of the shareholder lawsuits in
future periods. Certain of these costs may be reimbursable under policies
providing for insurance coverage. The Company has adopted certain policies
in its Charter and Bylaws as a result of which the Company may have the
obligation to indemnify its affected officers and directors to the extent,
if at all, the existing insurance coverages are insufficient. The Company's
insurance carriers have reserved the right to exclude or disclaim coverage
under certain circumstances. The Company is currently unable to predict or
quantify the amount or the range of such costs, if any, or the period of
time during which such costs will be incurred.
During the third quarter of fiscal 1996, the Company settled certain matters
with its insurance carrier relating to legal fees and other costs associated
with the successful defense of the shareholder lawsuits. Under this
settlement, the Company was reimbursed for approximately $450,000 in costs
that had previously been expensed and incurred in connection with the
defense. Such amount has been recognized as a reduction in operating
expenses in the third quarter of fiscal 1996. The insurance carrier has
agreed to pay attorneys fees and other defense costs related to the
plaintiffs' appeal of the case referred to above.
The Company was served with a complaint on December 10, 1993 in a lawsuit
brought by limited partners in a partnership of which one of the Company's
former subsidiaries, divested in 1985, was a general partner. The
plaintiffs allege that the Company is liable to them in the amount of
approximately $5.9 million, plus interest, on a guarantee executed in 1982.
The Company believes that the claim against it is wholly without merit.
The Company and its subsidiaries are also involved in other lawsuits. The
Company believes that these other lawsuits, individually or in the
aggregate, will not have a material adverse effect on the Company or any of
its subsidiaries.
5. SODIUM AZIDE AGREEMENTS
In July 1990, the Company entered into certain agreements (the "Azide
Agreements") with Dynamit Nobel. The Azide Agreements provide for a royalty
of 5% of net sodium azide sales to be paid to Dynamit Nobel for a period of
15 years. In July 1996, the Company and Dynamit Nobel agreed to suspend the
royalty payment effective as of July 1, 1995. As a result, in the third
quarter of fiscal 1996, the Company recognized an increase in net sodium
azide sales of approximately $600,000. This amount had previously been
recognized as a reduction of net sodium azide sales during the period July
1, 1995 through June 30, 1996.
9
<PAGE>
6. EQUITY IN EARNINGS OF REAL ESTATE VENTURE
During the third quarter of fiscal 1996, the Company recognized its share of
the equity in earnings of Gibson Ranch Limited Liability Company ("GRLLC").
Profits and losses of GRLLC are split equally between the Company and its
venture partner, a local real estate development group. GRLLC's profits
increased substantially during the three months ended June 30, 1996
principally as a result of the sale of improved land zoned for an apartment
site to an outside developer.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
SALES AND OPERATING REVENUES AND GROSS PROFIT
Sales and operating revenues were $10,617,000 and $8,179,000 during the three-
month periods ended June 30, 1996 and 1995, and $31,373,000 and $26,396,000
during the nine-month periods ended June 30, 1996 and 1995. Gross profit as a
percentage of sales and operating revenues was 22 percent in the first nine
months of fiscal 1996 and fiscal 1995. A discussion of sales and operating
revenues and gross profit percentages relating to the Company's principal
operating activities is provided below.
PERCHLORATE CHEMICAL OPERATIONS
In May 1994, Western Electrochemical Company ("WECCO"), an indirect wholly-owned
subsidiary of the Company, and Thiokol executed an amendment (the "Amendment")
to an existing long-term purchase contract for the sale of ammonium perchlorate
("AP"). The Amendment confirmed that the purchase contract had a continuous
term commencing with the first production of AP at the WECCO plant in August
1989 and ending September 30, 1996, (approximately two months subsequent to the
estimated original term of the Advance Agreement). The Amendment provided that
WECCO would receive revenues from sales of AP of approximately $33 million, $28
million and $20 million during the fiscal years ended and ending September 30,
1994, 1995 and 1996, respectively.
Sales of all perchlorate chemicals amounted to approximately $5,410,000 and
$7,213,000 during the three-month periods ended June 30, 1996 and 1995, and
$15,899,000 and $21,700,000 during the nine-month periods ended June 30, 1996
and 1995. In October 1995, WECCO received a purchase order for the delivery of
AP from October 1996 through 1999 having a value in the range of $8 million to
$10 million. This contract includes options that could increase the total order
substantially during the 1997-1999 period, and that could extend the contract to
the year 2005. Other than this purchase order, WECCO has no significant backlog
of perchlorate chemical sales subsequent to September 30, 1996. The Company has
responded to a request for quotation relating to a significant portion of the
requirements for AP for the space shuttle program for the period October 1, 1996
through September 30, 1997. The Company currently expects this procurement
process to be completed on or about September 30, 1996.
SODIUM AZIDE OPERATIONS
Net sodium azide sales were $3,325,000 and $330,000 during the three-month
periods ended June 30, 1996 and 1995, and $9,355,000 and $2,465,000 during the
nine-month periods ended June 30, 1996 and 1995. Commercial shipments of sodium
azide began in April 1994. The level of sodium azide sales has not been
sufficient to absorb operational costs (including depreciation) associated with
the production and sale of sodium azide. The operation has however, recently
begun to generate positive cash flow and earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The Company's plans with respect to
its sodium azide project continue to be grounded in the Company's objective of
becoming the primary supplier to the U.S. automotive airbag inflator market.
The Company believes that the level of sodium azide sales will continue to
increase. There can be no assurance in that regard however, and, as a
consequence, the Company cannot predict over what period of time, if at all,
such increases in sales levels will occur. In
11
<PAGE>
addition, by reason of a highly competitive market environment there continues
to be considerable market pressure on the price of sodium azide. At the time the
Company began this project in 1990, prices for sodium azide to the airbag market
were approximately $8.00 per pound. Prices currently appear to be in the range
of $4.50 to $6.00 per pound. The Company believes the price reduction in sodium
azide is due to the unlawful pricing practices of Japanese producers. In
response to such practices, in January 1996, the Company filed an antidumping
petition with the United States International Trade Commission and the United
States Department of Commerce. The Company currently expects a finding in this
matter in late August, 1996.
As discussed in Note 5 of Notes to Condensed Consolidated Financial Statements,
the Company and Dynamit Nobel agreed to suspend royalty payments on sodium azide
sales effective July 1, 1995. As a result, in the third quarter of fiscal 1996,
the Company recognized an increase in net sodium azide sales of approximately
$600,000.
Depreciation expense relating to sodium azide production increased in the third
quarter of fiscal 1995 as the sodium azide facility completed its transition
from construction to production activities. On an annualized basis, cost of
sales associated with sodium azide activities increased by approximately $3
million beginning April 1, 1995, as a result of this increase in depreciation
expense. The Company expects depreciation expense related to sodium azide
production to approximate $6 million in fiscal 1996.
REAL ESTATE OPERATIONS
The Company's real estate development properties consist of approximately 4,700
acres in Iron County, Utah near Cedar City, Utah and a 380-acre tract (Gibson
Business Park) in Clark County, Nevada. All development property is held in fee
simple. Substantially all of the Gibson Business Park land is pledged as
collateral for certain debt (the "Azide Notes"). The Company is actively
marketing its Nevada property for sale and development. About 240 acres of its
Clark County land has been transferred to GRLLC for the purpose of residential
development, construction, and sale. The Iron County site is primarily
dedicated to the Company's growth and diversification. Real estate and related
sales amounted to $4,565,000 and $526,000 during the nine-month periods ended
June 30, 1996 and 1995, respectively. The nature of real estate development and
sales is such that the Company is unable reliably to predict any pattern of
future real estate sales.
During the third quarter of fiscal 1996, the Company recognized its share of the
equity in earnings of GRLLC. Profits and losses of GRLLC are split equally
between the Company and its venture partner, a local real estate development
group. GRLLC's profits increased substantially during the three months ended
June 30, 1996 principally as a result of the sale of improved land zoned for an
apartment site to an outside developer.
ENVIRONMENTAL PROTECTION EQUIPMENT OPERATIONS
Environmental protection equipment sales were approximately $1,138,000 and
$1,536,000 during the nine-month periods ended June 30, 1996 and 1995,
respectively. As of July 31, 1996, this segment had a backlog of approximately
$1,100,000. In addition, the Company has submitted a number of bids, although
there can be no assurance that any of these bids will result in future orders.
12
<PAGE>
HALOTRON OPERATIONS
Sales of Halotron amounted to approximately $321,000 in the first nine months of
fiscal 1996 compared to $162,000 in the same period last year. In December
1995, the Company, in concert with Buckeye Fire Equipment Company, successfully
completed Underwriters Laboratories (UL) fire tests of a line of portable fire
extinguishers using Halotron I. Domestic distribution of the Buckeye Halotron
extinguisher line began in February, 1996. The Company and Buckeye signed an
agreement that calls for the Company to supply Buckeye's requirements of
Halotron I during calendar 1996. Although actual requirements to date have been
substantially less than those estimated in the agreement, the Company remains
optimistic about the prospects for Halotron sales.
OPERATING EXPENSES
Operating expenses were $2,035,000 and $2,789,000 during the three-month periods
ended June 30, 1996 and 1995, and $6,941,000 and $8,300,000 during the nine-
month periods ended June 30, 1996 and 1995. The decreases are primarily due to
the Company's implementation of cost control, containment and reduction
measures. As discussed in Note 4 of Notes to Condensed Consolidated Financial
Statements, during the third quarter of fiscal 1996, the Company settled certain
matters with its insurance carrier relating to legal fees and other costs
associated with the successful defense of the shareholder lawsuits. Under this
settlement, the Company was reimbursed for approximately $450,000 in costs that
had previously been expensed and incurred in connection with the defense. Such
amount has been recognized as a reduction in operating expenses in the third
quarter of fiscal 1996. The insurance carrier has agreed to pay attorneys fees
and other defense costs related to the plaintiffs' appeal of the case referred
to above.
During the third quarter of fiscal 1995, the Company reduced total full-time
employee equivalents by approximately ten percent through involuntary
terminations and an offering of enhanced retirement benefits to a certain class
of employees. The Company recognized a charge to operating expense of
approximately $226,000 as a result of these terminations and the acceptance of
the offer of enhanced retirement benefits by certain employees.
NET INTEREST AND OTHER EXPENSE (INCOME)
The increase in net interest and other expense in the first nine months of
fiscal 1996 compared to the first nine months of fiscal 1995 is primarily due to
the fact that, in the third quarter of fiscal 1995, interest capitalization
ceased on the remaining portion of the sodium azide facility undergoing
construction activities.
CREDIT FOR INCOME TAXES
The Company's effective income tax rates were approximately 34% during the
three-month and nine-month periods ended June 30, 1996 and 1995.
NET INCOME (LOSS) PER COMMON SHARE AND OPERATING RESULTS
Although the Company's net income (loss) and net income (loss) per common share
have not been subject to seasonal fluctuations, they have been and are expected
to continue to be subject to variations from quarter to quarter and year to year
due to the following
13
<PAGE>
factors, among others; (i) as discussed in Note 4, the Company may incur
material legal and other costs associated with litigation; (ii) the timing of
real estate and related sales is not predictable; (iii) the recognition of
revenues from environmental protection equipment orders not accounted for as
long-term contracts depends upon the timing of shipment of the equipment; (iv)
weighted average common and common equivalent shares for purposes of calculating
net income (loss) per common share are subject to significant fluctuations based
upon changes in the market price of the Company's Common Stock due to
outstanding warrants and options; and (v) as discussed above, the magnitude of
AP, sodium azide, and Halotron orders in the future is uncertain.
The Company's efforts to produce, market and sell Halotron are dependent upon
the political climate and environmental regulations that exist and may vary from
country to country. Although the Company is satisfied with the progress and
performance characteristics of Halotron, the magnitude of orders received, if
any, in the future will be dependent to a large degree upon political issues and
environmental regulations that are not within the Company's control, as well as
additional testing and qualification in certain jurisdictions and the ultimate
extent of market acceptance. The Company believes, however, that cash flows
from its Halotron operations will be sufficient to recover its recorded
investment in the Halotron project.
As a result of the uncertainties with respect to volume and price of sodium
azide and the outcome of the antidumping petition referred to above, the Company
may experience significant variations in sodium azide sales and related
operating results from quarter to quarter. The Company continues to believe,
however, that, notwithstanding these uncertainties, revenues and associated cash
flows from its sodium azide operations will be sufficient to recover the
Company's investment in its sodium azide facility, although there can be no
assurance in that regard.
LITIGATION
See Note 4 of Notes to Condensed Consolidated Financial Statements for a
discussion of litigation.
INFLATION
Inflation did not have a significant effect on the Company's sales and operating
revenues or costs during the nine-month periods ended June 30, 1996 or 1995.
The Company does not expect inflation to have a material effect on gross profit
in the future, because any increases in production costs should be recovered
through increases in product prices, although there can be no assurance in that
regard.
LIQUIDITY AND CAPITAL RESOURCES
On July 29, 1994, the Board of Directors of the Company authorized the
repurchase of up to 1.5 million shares of the Company's common stock through
open market purchases and private transactions. Such authorization was briefly
suspended. As of July 31, 1996, the Company had repurchased approximately
116,000 shares through this program.
As a result of the litigation described in Note 4 of Notes to Condensed
Consolidated Financial Statements, the Company may incur material legal and
other costs associated with the resolution of these matters in future periods.
Certain of the costs, if any, related to the shareholder lawsuits may be
reimbursable under policies providing for insurance
14
<PAGE>
coverage. The Company has adopted certain policies in its Charter and Bylaws as
a result of which the Company may be required to indemnify its affected officers
and directors to the extent, if at all, that existing insurance coverages are
insufficient. The Company has in force substantial insurance covering this risk.
The Company's insurance carriers have reserved the right to exclude or disclaim
coverage under certain circumstances. Defense costs and any potential settlement
or judgment costs associated with this litigation, to the extent borne by the
Company and not recovered through insurance, would adversely affect the
Company's liquidity. The Company is currently unable to predict or quantify the
amount or range of costs associated with litigation, if any, or the period of
time that such costs will be incurred.
Cash flows provided by operating activities were $4,727,000 during the first
nine months of fiscal 1996 compared to $2,109,000 during the first nine months
of fiscal 1995. The increase in cash flows is principally due to an increase in
sodium azide operating income before depreciation and the increase in real
estate sales referred to above. The Company believes that its cash flows from
operations and existing cash balances will be adequate for the foreseeable
future to satisfy the needs of its operations. However, the satisfactory
resolution of the lawsuits discussed in Note 4, the timing, pricing and
magnitude of the receipt of orders for AP, sodium azide and Halotron, and the
Company's ability to achieve further cost reductions may have an effect on the
use and availability of cash.
In February 1992, the Company concluded a $40,000,000 financing for the design,
construction and start-up of a sodium azide facility. As a result of the
Company's decision to increase the production capacity of the plant and
construction cost overruns, the Company's cost estimates for the sodium azide
facility increased significantly during the construction process. The majority
of the increase relates to the Company's decision to increase the productive
capacity of the plant, as discussed above. In addition, certain estimates
increased throughout the construction process as a result of the highly
automated and technical nature of the operation. Design and construction also
occurred over a longer period of time than was originally estimated, which
increased actual expenditures. Although production and sales have recently
increased, the facility has not been operated at significant production levels
in comparison to capacity and greater-than-expected capital costs have been and
may continue to be incurred. Subject to the ongoing receipt and magnitude of
orders for sodium azide, the avoidance of further erosion of the selling price
per pound of sodium azide, and the outcome of the Company's antidumping petition
the Company believes that the increased costs associated with the sodium azide
facility will be recovered through future sodium azide sales, although there can
be no assurance in this regard.
15
<PAGE>
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Certain statements made in this report and future statements ("Statements") that
are, or may be construed to be, "forward looking" within the meaning of
applicable provisions of the Private Securities Litigation Reform Act of 1995,
the Securities Exchange Act of 1934, the Securities Act of 1933, or other
statutes (including state statutes), or within the meaning of applicable
provisions or regulations adopted by the Securities and Exchange Commission,
state regulatory agencies, or self-regulating bodies within the securities
industry such as the National Association of Securities Dealers, Inc., or
various stock exchanges. Statements may be made directly by authorized
representatives of the Company either in written or oral form (e.g., press
releases, periodic conference calls with the investment community, conferences
or discussions with analysts or investors), or may be made by analysts or other
third parties based in whole or in part on information provided to such persons
by the Company.
The Company takes this opportunity to identify to all persons who may receive
Statements, important risk factors that could cause the Company's actual results
to differ materially from results predicted by Statements, whether the
predictive character of Statements is direct, implied, or inferred, and whether
any such predictive quality is in the form of a forecast, a projection, an
estimate, or otherwise. The Company therefore cautions recipients of Statements
that the following important risk factors, among others, in some cases have
caused, and in the future may cause, the Company's results to differ materially
from results predicted in or on the basis of Statements relating to the Company:
- - Declining demand or downward pricing pressure for the Company's products as
a result of general or specific economic conditions, governmental budget
decreases affecting DOD or NASA which would cause a continued decrease in
demand for AP, technological advances and improvements or new competitive
products causing a reduction or elimination of demand for AP, sodium azide
or Halotron, the ability and desire of purchasers to substitute other
products for the Company's products based upon perceived quality and
pricing, and the fact that perchlorate chemicals, sodium azide, Halotron and
the Company's environmental products have limited applications and highly
concentrated customer bases.
- - Competitive factors including, but not limited to, the Company's limitations
respecting financial resources and its ability to compete against companies
with substantially greater resources, significant excess market supply in
the AP and sodium azide markets and the development or penetration of
competing new products, particularly in the propulsion, airbag inflation and
fire suppression businesses.
- - Underutilization of the Company's manufacturing facilities resulting in
production inefficiencies and increased costs, the inability to recover
facility costs and reductions in margins.
- - Difficulties in procuring raw materials, supplies, power and natural gas
used in the production of perchlorates, sodium azide or Halotron products or
used in the engineering and assembly process for environmental protection
equipment products.
- - The Company's ability to control the amount of operating expenses and/or the
impact of any non-recurring or unusual items resulting from the Company's
continuing evaluation of its strategies, plans, organizational structure and
asset valuations.
16
<PAGE>
- - Risks associated with the Company's real estate activities, including but
not limited to, dependence upon the Las Vegas commercial, industrial and
residential real estate markets, changes in general or specific economic
conditions, interest rate fluctuations affecting the availability and the
cost of financing, the performance of the managing partner of the GRLLC
(Ventana Canyon Joint Venture) and regulatory and environmental matters that
may have a negative impact on sales.
- - The effects of, and changes in, trade, monetary and fiscal policies, laws
and regulations and other activities of governments, agencies or similar
organizations, including, but not limited to, environmental, safety and
transportation issues.
- - The cost and affects of legal and administrative proceedings, settlements
and investigations, particularly those described in the "Commitments and
Contingencies" note to the Company's financial statements contained in the
most current periodic SEC report, and assertions made by or against the
Company relative to patents or property rights.
- - The adoption of new (or changes in existing) accounting policies and
practices.
17
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