SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
-
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 1997
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: 8,098,537 AS OF JULY
31, 1997.
<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 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 17 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
None.
ITEM 6. Exhibits and Reports on Form 8 -K
(a) The following Exhibit was filed in connection with the Registrant's
original electronic filing:
27. Financial Statement Schedules.
(b) None.
2
<PAGE>
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: July 9, 1998 /s/ John R. Gibson
----------------------
John R. Gibson
President and Chief Executive
Officer
Date: July 9, 1998 /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
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE-MONTHS FOR THE NINE-MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales and Operating Revenues $12,767,000 $10,617,000 $30,545,000 $31,373,000
Cost of Sales 10,434,000 8,293,000 25,542,000 24,346,000
-------------------------------------------------------------------------
Gross Profit 2,333,000 2,324,000 5,003,000 7,027,000
Operating Expenses 2,304,000 2,035,000 6,936,000 6,941,000
-------------------------------------------------------------------------
Operating Income (Loss) 29,000 289,000 (1,933,000) 86,000
Equity in Earnings of Real Estate
Venture 600,000 100,000 600,000
Net Interest and Other
Expense 202,000 357,000 735,000 1,215,000
-------------------------------------------------------------------------
Income (Loss) Before Provision (Credit)
for Income Taxes (173,000) 532,000 (2,568,000) (529,000)
Provision (Credit) for Income Taxes (59,000) 181,000 (875,000) (180,000)
-------------------------------------------------------------------------
Net Income (Loss) $ (114,000) $ 351,000 $(1,693,000) $ (349,000)
-------------------------------------------------------------------------
Net Income (Loss) Per Common
Share $ (.02) $ .04 $ (.21) $ (.04)
-------------------------------------------------------------------------
Weighted Average Common and Common
Equivalent Shares Outstanding 8,098,000 8,142,000 8,098,000 8,105,000
------------------------------------------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
AMERICAN PACIFIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30,
1997 1996
- ----------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents $ 14,568,000 $ 18,501,000
Short-term Investments 2,000,000
Accounts and Notes Receivable 5,851,000 4,165,000
Related Party Notes Receivable 664,000 737,000
Inventories 12,837,000 11,297,000
Prepaid Expenses and Other Assets 1,214,000 946,000
-----------------------------------------------------------------
TOTAL CURRENT ASSETS 35,134,000 37,646,000
Property, Plant and Equipment, Net 73,725,000 77,217,000
Development Property 7,295,000 8,631,000
Real Estate Equity Investments 19,992,000 18,698,000
Other Assets 2,638,000 2,858,000
Restricted Cash 4,618,000 4,969,000
-----------------------------------------------------------------
TOTAL ASSETS $ 143,402,000 $ 150,019,000
-----------------------------------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
AMERICAN PACIFIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30,
1997 1996
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts Payable and Accrued Liabilities $ 7,277,000 $ 5,407,000
Current Portion of Long-Term Debt 6,166,000 7,334,000
-----------------------------------------------
TOTAL CURRENT LIABILITIES 13,443,000 12,741,000
Long-Term Debt 24,787,000 29,452,000
Deferred Income Taxes 9,226,000 10,101,000
-----------------------------------------------
TOTAL LIABILITIES 47,456,000 52,294,000
-----------------------------------------------
Commitments and Contingencies
Warrants to Purchase Common Stock 3,569,000 3,569,000
SHAREHOLDERS' EQUITY:
Common Stock 825,000 823,000
Capital in Excess of Par Value 78,399,000 78,331,000
Retained Earnings 14,285,000 15,978,000
Treasury Stock (1,035,000) (879,000)
Receivable from the Sale of Stock (97,000) (97,000)
-----------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 92,377,000 94,156,000
-----------------------------------------------
-----------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $143,402,000 $150,019,000
-----------------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
AMERICAN PACIFIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
FOR THE THREE-MONTHS FOR THE NINE-MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used for)
<S> <C> <C> <C> <C>
Operating Activities $(1,045,000) $ (288,000) $ 5,252,000 $ 4,727,000
-------------------------------------------------------------------------------
Cash Flows Used for
Investing Activities:
Capital Expenditures,
Development Property
Additions and Real Estate
Equity Investments (1,156,000) (405,000) (2,931,000) (5,027,000)
-------------------------------------------------------------------------------
Net Cash Used For
Investing Activities (1,156,000) (405,000) (2,931,000) (5,027,000)
-------------------------------------------------------------------------------
Cash Flows From
Financing Activities:
Principal Payments on Debt (6,168,000) (5,000,000)
Issuance of Common Stock 70,000 39,000
Treasury Stock Acquired (156,000) (29,000)
-------------------------------------------------------------------------------
Net Cash Used For Financing Activities
(6,254,000) (4,990,000)
-------------------------------------------------------------------------------
Net Decrease in Cash and
Cash Equivalents (2,201,000) (693,000) (3,933,000) (5,290,000)
Cash and Cash Equivalents, Beginning of
Period 16,769,000 19,943,000 18,501,000 24,540,000
-------------------------------------------------------------------------------
Cash and Cash Equivalents,
End of Period $14,568,000 $19,250,000 $14,568,000 $19,250,000
-------------------------------------------------------------------------------
Supplemental Disclosure of
Cash Flow Information:
Interest Paid (net of amounts capitalized)
$ 851,000 $ 1,230,000 $ 851,000 $ 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, 1996 was derived from
the Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended September 30, 1996. The Condensed Consolidated
Financial Statements for the three-month and nine-month periods ended June 30,
1997 and 1996 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, 1996. In the opinion of Management, however, all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
have been included.
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share." This
statement establishes standards for computing and presenting earnings per share
and is effective for financial statements issued for periods ending after
December 15, 1997. Earlier application of this statement is not permitted and
upon adoption requires restatement (as applicable) of all prior-period earnings
per share data presented. Management believes that the implementation of this
standard will not have a significant impact on earnings per share.
In February 1997 the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This statement establishes standards for disclosing
information about an entity's capital structure. Management intends to comply
with the disclosure requirements of this statement which are effective for
periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position, and is effective for financial statements issued for fiscal
years beginning after December 15, 1997. Management does not believe this
statement will have material impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management has not determined
the effect of this statement on the Company's financial statement disclosure.
2. NET LOSS PER COMMON SHARE
Net loss per common share for the three-month and nine-month periods ended
June 30, 1997 and 1996 is determined based upon the weighted average number of
common shares outstanding. Common share equivalents, although not considered
during net loss periods, consist of outstanding stock options and warrants.
8
<PAGE>
3. INVENTORIES
Inventories consist of the following:
June 30, September 30,
1997 1996
----------- -------------
Work-in-process $ 8,619,000 $ 5,011,000
Raw materials and supplies 4,218,000 6,286,000
----------- -----------
Total $12,837,000 $11,297,000
----------- -----------
4. COMMITMENTS AND CONTINGENCIES
In fiscal 1993, three shareholder lawsuits were filed in the United States
District Court for the District of Nevada against the Company and certain of
its directors and officers (the "Company Defendants"). 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 none of the Company Defendants made misleading or
inadequate statements regarding Halotron. The District Court thereafter
entered judgment in favor of the Company Defendants on the Halotron claims.
The plaintiffs appealed the summary judgment ruling and the judgment on the
jury verdict to the Ninth Circuit of the United States District Court of
Appeals. On June 5, 1997, the Court of Appeals affirmed the judgments of the
United States District Court in favor of the Company Defendants. On June 19,
1997, the plaintiffs filed an Appellants Petition for Rehearing and
Suggestion of Rehearing En Banc with the Court of Appeals.
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 was recognized as a reduction in operating expenses in
the third quarter of fiscal 1996. The insurance
9
<PAGE>
carrier has agreed to pay attorneys fees and other defense costs related to
the plaintiffs' appeals 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. In August
1996, the Company's cross-motion for summary judgment was granted, although
the plaintiffs filed an appeal in January 1997. 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
In July 1990, the Company entered into agreements (the "Azide Agreements")
pursuant to which Dynamit Nobel licensed to the Company on an exclusive
basis for the North American market its most advanced technology and know-
how for the production of sodium azide, the principal component of the gas
generant used in automotive airbag safety systems. In addition, Dynamit
Nobel has provided technical support for the design, construction and start-
up of the facility. The facility was constructed and is being operated by
American Azide Corporation ("AAC"), a wholly-owned subsidiary of the
Company.
Under the Azide Agreements, Dynamit Nobel was to receive, for the use of its
technology and know-how relating to its batch production process of
manufacturing sodium azide, quarterly royalty payments of 5% of the
quarterly net sales of sodium azide by AAC for a period of 15 years from the
date the Company began to produce sodium azide in commercial quantities. 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 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.
In May, 1997 the Company entered into a three-year contract with Autoliv
ASP, Inc. (formerly Morton International Automotive Safety Products). The
contract provides for the Company to supply sodium azide used by Autoliv in
the manufacture of automotive airbags. Deliveries under the contract
commenced in July 1997.
The estimated sales value of the contract is approximately $45 - $55 million
over the three-year period. This actual sales value, however, will depend
upon many factors beyond the control of the Company, such as the number of
automobiles and light trucks manufactured and competitive conditions in the
airbag market, that will influence the actual magnitude of Autoliv's sodium
azide requirements, and there can therefore be no assurance as to the actual
sales value of the contract. Management believes that the Autoliv contract
will result in improved performance of the Company's sodium azide
operations, although there can be no assurance in that regard.
10
<PAGE>
In accordance with the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of," Management periodically
reviews whether the anticipated net cash flows from sodium azide operations
will be sufficient to recover the Company's fixed asset investment in the
facility. Sales and related variable operating margins have historically not
been at a level sufficient to absorb fixed costs, including depreciation.
Such operating history was partially expected by the Company as a result of
the generally lengthy process of qualification for use of new material in
automotive safety equipment. As indicated above, Management believes that
the Autoliv agreement will result in improved performance of the sodium
azide operations. Capacity utilization rates are expected to increase as a
result of deliveries under this agreement. Management is cautiously
optimistic that sodium azide sales will continue to increase owing
principally to the expectation of continued market share gains and
additional positive developments resulting from the anti-dumping petition
referred to below.
The Company's future success in the sodium azide market will be dependent
upon, among other things:
o Sales of sodium azide to major users other than Autoliv;
o The rapidity of the pace of penetration of airbag inflation technology
that does not use sodium azide;
o The continued effects of the antidumping petition;
o Actions of other manufacturers of sodium azide;
o The relationship of the U.S. dollar to the home country currency of other
manufacturers of sodium azide.
As of June 30, 1997, Management believes that the Company's investment in
sodium azide fixed assets is recoverable under the requirements of SFAS No.
121. In light of the factors and uncertainties discussed above, however,
there can be no assurance that the results of the evaluation of
recoverability will remain the same in the future.
11
<PAGE>
Suspension Agreement requires that it make all necessary price revisions to
eliminate all United States sales at below "Normal Value," and that it
conform to the requirements of sections 732 and 733 of the Tariff Act of
1930, as amended (the Act), in connection with its future sales of sodium
azide in the United States.
The Suspension Agreement contemplates a cost-based determination of "Normal
Value" and establishes reporting and verification procedures to assure
compliance. Accordingly, the minimum pricing for sodium azide sold in the
United States by the remaining Japanese producer will be based primarily on
its actual costs, and may be affected by changes in the relevant exchange
rates.
Finally, the Suspension Agreement provides that it may be terminated by any
party on 60 days notice, in which event the anti-dumping proceeding would be
re-instituted at the stage to which it had advanced at the time the
Suspension Agreement became effective.
6. RESTRUCTURING UNDER CONSIDERATION
The Company is currently undergoing a planning process respecting its
structure, strategic direction and operational focus. This process may
result in the consolidation and/or relocation of operations and/or the
abandonment of operations or productive assets (including impairment issues
discussed in the Notes to Condensed Consolidated Financial Statements and
the Results of Operations section of Management's Discussion and Analysis of
Financial Condition and Results of Operations). The Company expects this
process to be completed in the fourth quarter of fiscal 1997. The
implementation of any plan may result in events that trigger, among other
things, the recognition of provisions for restructuring charges relating to
the termination and/or relocation of operations and employees.
12
<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 $12,767,000 and $10,617,000 during the three-
month periods ended June 30, 1997 and 1996, and $30,545,000 and $31,373,000
during the nine-month periods ended June 30, 1997 and 1996. Gross profit as a
percentage of sales and operating revenues was 16 percent in the first nine
months of fiscal 1997 compared to 22 percent during the same period in fiscal
1996. 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
Sales of all perchlorate chemicals amounted to approximately $4,450,000 and
$5,410,000 during the three-month periods ended June 30, 1997 and 1996, and
$14,709,000 and $15,899,000 during the nine-month periods ended June 30, 1997
and 1996. In September 1996, Western Electrochemical Company ("WECCO") an
indirect wholly-owned subsidiary of the Company, received a purchase order for
deliveries of AP to Thiokol during the fiscal year ending September 30, 1997.
The purchase order amounts to approximately $13.3 million. In October 1995, the
Company received a purchase order for the delivery of AP to another customer
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 order during
the 1997-1999 period, and that could extend the contract to the year 2000.
Based upon this backlog and negotiations currently in process, the Company
estimates that total perchlorate revenues, including sodium perchlorate and
potassium perchlorate, will range between $21 and $22 million during the fiscal
year ended September 30, 1997.
SODIUM AZIDE OPERATIONS
Sodium azide sales were $3,252,000 and $3,325,000 during the three-month periods
ended June 30, 1997 and 1996, and $8,370,000 and $9,355,000 during the nine-
month periods ended June 30, 1997 and 1996. Commercial shipments of sodium
azide began in April 1994. Sales and related variable operating margins have
historically not been at a level sufficient to absorb fixed costs. The
operation has however, been generating positive cash flow and earnings before
interest, taxes, depreciation and amortization ("EBITDA"). Management believes
that the Autoliv contract referred to in Note 5 of Notes to Condensed
Consolidated Financial Statements will result in improved performance of the
Company's sodium azide operations, although there can be no assurance thereof.
See Note 5 of Notes to Condensed Consolidated Financial Statements for a
discussion of the sodium azide market, the status of an antidumping petition the
Company filed against certain Japanese producers of sodium azide and a
description of the Autoliv contract.
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 improved land in Clark
County, Nevada. The Iron County site is primarily dedicated to the Company's
growth and diversification. Substantially all of the Clark County land is
pledged as collateral for certain debt (the "Azide Notes"). In 1994,
approximately 240 acres of its Clark County land was transferred to Gibson Ranch
Limited Liability Company ("GRLLC") for the purpose of residential development,
construction, and sale. In addition to this project, the Company has
13
<PAGE>
approximately 120 net acres of land in Clark County available for sale and/or
development.
Real estate and related sales amounted to $3,229,000 and $1,678,000 during the
three-month periods ended June 30, 1997 and 1996, and $3,582,000 and $4,565,000
during the nine-month periods ended June 30, 1997 and 1996. 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 equity in
earnings of GRLLC.
ENVIRONMENTAL PROTECTION EQUIPMENT OPERATIONS
Environmental protection equipment sales were approximately $1,103,000 and
$174,000 during the third quarter of fiscal 1997 and 1996, and $2,082,000 and
$1,138,000 during the nine-month periods ended June 30, 1997 and 1996. As of
June 30, 1997, this segment had a backlog of approximately $135,000. Two
equipment purchase orders, totaling approximately $750,000, were received in
July, 1997. The Company has submitted a number of bids on significant projects,
although there can be no assurance that any of these bids will result in future
orders.
HALOTRON OPERATIONS
Sales of Halotron amounted to approximately $703,000 and $48,000 during the
third quarter of fiscal 1997 and 1996, and $1,627,000 and $321,000 during the
first nine months of fiscal 1997 and 1996. 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.
OPERATING EXPENSES
Operating expenses were $2,304,000 and $2,035,000 during the three-month periods
ended June 30, 1997 and 1996, and $6,936,000 and $6,941,000 during the nine-
month periods ended June 30, 1997 and 1996. 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 was 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.
NET INTEREST AND OTHER EXPENSE
The decrease in net interest and other expense in the first three and nine
months of fiscal 1997 compared to the same periods in fiscal 1996 is primarily
due to the reduction in debt balances.
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, 1997 and 1996.
14
<PAGE>
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) as discussed in Note 4 of Notes
to Condensed Consolidated Financial Statements, the Company may incur material
legal and other costs associated with certain litigation; (ii) the 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 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.
The Company's efforts to produce, market and sell Halotron I and Halotron II
are, among other factors, 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 I and Halotron II, the magnitude of additional 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 the sodium azide business
referred to above, the Company may experience significant variations in sodium
azide sales and related operating results from quarter to quarter.
In accordance with the provisions of SFAS No. 121, Management periodically
reviews whether the anticipated net cash flows from Halotron and sodium azide
operations will be sufficient to recover the Company's investment in each of
such facilities/projects. At June 30, 1997, the Company had approximately $65
million and $6 million in recorded net long-lived assets associated with sodium
azide and Halotron, respectively. A number of factors are considered in the
evaluation of recoverability, including, but not limited to, anticipated
pricing and volume and the duration thereof, and expected costs associated with
production. Management believes that such net asset balances are recoverable
under the requirements of SFAS No. 121, although, in light of the uncertainties
discussed above, there can be no assurance that the results of the evaluation of
recoverability will remain the same in the future. (See Note 5 of Notes to
Condensed Consolidated Financial Statements.)
As discussed in Note 6 to Notes to Condensed Consolidated Financial Statements,
the Company is engaged in a planning process that may, upon implementation of
the plan, result in the recognition of restructuring charges.
LITIGATION
See Note 4 of Notes to Condensed Consolidated Financial Statements for a
discussion of litigation.
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INFLATION
Inflation did not have a significant effect on the Company's sales and operating
revenues or costs during the six-month periods ended June 30, 1997 or 1996. 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 June 30, 1997, the Company had repurchased approximately
140,000 shares through this program.
As a result of the litigation described in Note 4 of Notes to Condensed
Consolidated Financial Statements, the Company has incurred legal and other
costs and may incur material legal and other costs associated with the
resolution of these matters in future periods. Certain of the costs, if any,
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 relating
to the shareholder lawsuits 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 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 such costs, if
any, or the period of time that litigation related costs will be incurred.
Cash flows from operating activities were $5,252,000 and $4,727,000 during the
nine-month periods ended June 30, 1997 and 1996, respectively. The increase in
cash flows from operating activities is principally due to changes in working
capital balances.
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 litigation, 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.
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 important risk
factors, among others, may cause the Company's operating results and/or
financial position to be adversely affected from time to time:
1. Declining demand or downward pricing pressure for the Company's
products as a result of general or specific economic conditions,
further governmental budget decreases affecting the Department of
Defense or NASA which would cause a continued decrease in demand for
AP, the results achieved by the Suspension Agreement resulting from
the Company's anti-dumping petition and the possible termination of
such agreement, technological advances and improvements or new
competitive products causing a reduction or elimination
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of demand of AP, sodium azide or Halotron, 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 the fact that perchlorate chemicals, sodium azide, Halotron and
the Company's environmental products have limited applications and
highly concentrated customer bases. Reference is also made to Notes 5
and 6 of Notes to Condensed Consolidated Financial Statements.
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. Difficulties in procuring raw materials, supplies, power and natural
gas used in the production of perchlorates, sodium azide and Halotron
products and used in the engineering and assembly process for
environmental protection equipment products.
5. 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.
6. 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 the GRLLC (Ventana Canyon Joint Venture) and
regulatory and environmental matters that may have a negative impact
on sales.
7. 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.
8. 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 contained in
this report and Note 10 in the Report on Form 10-K, and claims made by
or against the Company relative to patents or property rights.
9. The adoption of new, or changes in existing, accounting policies and
practices.
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