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 MARCH 31, 1998
COMMISSION FILE NUMBER 1-8137
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
AMERICAN PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 59-6490478
(State or other jurisdiction (IRS Employer
of incorporation or Identification No.)
organization)
3770 HOWARD HUGHES PARKWAY, SUITE 300
LAS VEGAS, NV 89109
(Address of principal executive offices) (Zip Code)
(702) 735-2200
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ No / /
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 8,219,537 AS OF
APRIL 30, 1998.
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<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 5 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 14 through 19 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 page 10 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
The following matters were submitted to a vote of Security
Holder's at the Registrant's Annual Meeting of Stockholders held
on March 10, 1998:
1) Election of the following four Class A Directors to
serve for a term of three years expiring in 2001:
Number of
Nominee Votes For Number of Votes Withheld
------- --------- ------------------------
Thomas A. Turner 6,719,289 410,614
John R. Gibson 6,727,099 402,804
David N. Keys 6,730,179 399,724
Eugene A. Cafiero 6,342,167 787,736
2) Approval of the adoption of the Registrant's 1997
Stock Option Plan:
Number of Number of Number of Number of Broker
Votes for Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
3,258,898 1,744,958 30,709 2,095,338
3) Approval of the grant of non-qualified stock options
to the non-employee members of the Board of Directors currently
holding office:
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<PAGE>
Number of Number of Number of Number of Broker
Votes for Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
4,027,804 972,921 33,840 2,095,338
4) Approval of the grant of non-qualified stock options
to John R. Gibson, Chief Executive Officer and President and
David N. Keys, Executive Vice President and Chief Financial
Officer:
Number of Number of Number of Number of Broker
Votes for Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
4,312,448 970,066 30,185 1,817,204
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) (i) The following Exhibits were filed with the
Registrant's original filing, portions of each of
which were omitted pursuant to a request for
confidential treatment:
10.1 Long-Term Pricing Agreement dated as of
December 12, 1997 between Thiokol
Corporation-Propulsion Group and the
Registrant.
10.2 Partnershipping Agreement between Alliant
Techsystems Incorporated ("Alliant") and
Western Electrochemical Company and letter
dated November 24, 1997 from the Registrant to
Alliant and revised Exhibit B with respect
thereto.
(ii) The following exhibit was filed in connection with
the Registrant's original electronic filing:
27. Financial Data Schedule.
b) The following Reports on Form 8-K were filed during the
three-month period ended March 31, 1998:
1) Form 8-K dated February 19, 1998, reporting the
Registrant's intention to effect a private
placement offering of $75 million principal amount
of senior notes during March 1998.
2) Form 8-K dated February 19, 1998, reporting
certain pro forma financial information.
3) Form 8-K dated March 27, 1998, reporting the
acquisition of certain assets and the completion
of a private placement of $75 million principal
amount of senior notes.
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<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: June 12, 1998 /S/ JOHN R. GIBSON
------------------
John R. Gibson
Chief Executive Officer and President
Date: June 12, 1998 /S/ DAVID N. KEYS
-----------------
David N. Keys
Executive Vice President,
Chief Financial Officer, Secretary
and Treasurer; Principal Financial
and Accounting Officer
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AMERICAN PACIFIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales and Operating Revenues $14,119,000 $9,382,000 $ 25,387,000 $ 17,778,000
Cost of Sales 9,129,000 8,025,000 17,235,000 15,108,000
-----------------------------------------------------------------------------
Gross Profit 4,990,000 1,357,000 8,152,000 2,670,000
Operating Expenses 2,247,000 2,269,000 4,430,000 4,632,000
Equity in Earnings of Real Estate Venture
100,000 300,000 100,000
-----------------------------------------------------------------------------
Operating Income (Loss) 2,743,000 (812,000) 4,022,000 (1,862,000)
Net Interest and Other
Expense 750,000 293,000 1,463,000 533,000
-----------------------------------------------------------------------------
Income (Loss) Before Credit
for Income Taxes 1,993,000 (1,105,000) 2,559,000 (2,395,000)
Credit for Income Taxes (376,000) (816,000)
-----------------------------------------------------------------------------
Net Income (Loss) Before Extraordinary Loss
$ 1,993,000 $ (729,000) $ 2,559,000 $ (1,579,000)
Extraordinary Loss-Debt Extinguishment
5,005,000 5,005,000
-----------------------------------------------------------------------------
Net Loss $(3,012,000) $ (729,000) $(2,446,000) $ (1,579,000)
-----------------------------------------------------------------------------
Basic Net Loss Per Share:
Income (Loss) Before Extraordinary Loss
$ .24 $ (.09) $ .31 $ (.19)
Extraordinary Loss $ (.61) $ (.61)
-----------------------------------------------------------------------------
Net Loss $ (.37) $ (.09) $ (.30) $ (.19)
-----------------------------------------------------------------------------
Average Shares Outstanding 8,165,000 8,098,000 8,151,000 8,098,000
-----------------------------------------------------------------------------
Diluted Net Loss Per Share:
Income (Loss) Before Extraordinary Loss
$ .24 $ (.09) $ .31 $ (.19)
Extraordinary Loss $ (.60) $ (.61)
-----------------------------------------------------------------------------
Net Loss $ (.36) $ (.09) $ (.30) $ (.19)
-----------------------------------------------------------------------------
Diluted Shares 8,337,000 8,098,000 8,280,000 8,098,000
------------------------ ----------------------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN PACIFIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
MARCH 31, SEPTEMBER 30,
1998 1997
- -------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents $ 19,029,000 $18,881,000
Accounts and Notes Receivable 9,297,000 5,551,000
Related Party Notes Receivable 588,000 637,000
Inventories 12,217,000 11,116,000
Prepaid Expenses and Other Assets 1,083,000 979,000
------------------------------------
TOTAL CURRENT ASSETS 42,214,000 37,164,000
Property, Plant and Equipment, Net 19,212,000 19,314,000
Intangible Acquisition Assets 40,279,000 1,540,000
Development Property 6,945,000 7,362,000
Real Estate Equity Investments 17,517,000 20,248,000
Other Assets 2,793,000 873,000
Restricted Cash 1,168,000 3,580,000
------------------------------------
TOTAL ASSETS $ 130,128,000 $90,081,000
------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN PACIFIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
MARCH 31, SEPTEMBER 30,
1998 1997
- -------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts Payable and Accrued Liabilities $ 3,993,000 $ 7,519,000
Current Portion of Long-Term Debt 1,168,000 6,166,000
-------------------------------------
TOTAL CURRENT LIABILITIES 5,161,000 13,685,000
Long-Term Debt 75,000,000 24,900,000
Long-Term Payables 2,694,000 2,376,000
-------------------------------------
TOTAL LIABILITIES 82,855,000 40,961,000
-------------------------------------
Commitments and Contingencies
Warrants to Purchase Common Stock 3,569,000 3,569,000
SHAREHOLDERS' EQUITY:
Common Stock 837,000 829,000
Capital in Excess of Par Value 79,152,000 78,561,000
Accumulated Deficit (35,153,000) (32,707,000)
Treasury Stock (1,035,000) (1,035,000)
Receivable from the Sale of Stock (97,000) (97,000)
-------------------------------------
TOTAL SHAREHOLDERS' EQUITY 43,704,000 45,551,000
-------------------------------------
-------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $130,128,000 $90,081,000
-------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN PACIFIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
FOR THE THREE-MONTHS FOR THE SIX-MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used For)
<S> <C> <C> <C> <C>
Operating Activities $ 5,059,000 $ 7,197,000 $ (411,000) $ 6,343,000
-------------------------------------------------------------------------
Cash Flows Provided by (Used for)
Investing Activities:
Capital Expenditures (679,000) (389,000) (1,648,000) (1,301,000)
Payment for Acquisition of Intangible (39,000,000) (39,000,000)
Real estate equity investment
capital activity 1,018,000 (248,000) 2,731,000 (520,000)
-------------------------------------------------------------------------
Net Cash Used For
Investing Activities (38,661,000) (637,000) (37,917,000) (1,821,000)
-------------------------------------------------------------------------
Cash Flows From
Financing Activities:
Principal Payments on Debt (30,000,000) (6,168,000) (31,166,000) (6,168,000)
Issuance of Senior Notes 75,000,000 75,000,000
Premium Paid on Debt
Extinguishment (3,250,000) (3,250,000)
Debt Issue Costs (2,707,000) (2,707,000)
Issuance of Common Stock 599,000 599,000 70,000
Treasury Stock Acquired (156,000)
-------------------------------------------------------------------------
Net Cash Provided by (Used For)
Financing Activities 39,642,000 (6,168,000) 38,476,000 (6,254,000)
-------------------------------------------------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents 6,040,000 392,000 148,000 (1,732,000)
Cash and Cash Equivalents,
Beginning of Period 12,989,000 16,377,000 18,881,000 18,501,000
-------------------------------------------------------------------------
Cash and Cash Equivalents, End of
Period $ 19,029,000 $16,769,000 $ 19,029,000 $ 16,769,000
------------------------------------------------------------------------
Supplemental Disclosure of Cash
Flow Information:
Interest Paid (net of amounts
capitalized) $ 1,650,000 $ 851,000 $ 1,650,000 $ 851,000
-------------------------------------------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
1. BASIS OF REPORTING
The accompanying Condensed Consolidated Financial Statements are
unaudited and do not include certain information and disclosures
included in the Annual Report on Form 10-K of American Pacific
Corporation (the "Company"). The Condensed Consolidated Balance
Sheet as of September 30, 1997 was derived from the Consolidated
Financial Statements included in the Company's Annual Report on Form
10-K for the year ended September 30, 1997. Such statements should
therefore be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the Company's Annual Report
on Form 10-K for the year ended September 30, 1997. In the opinion
of Management, however, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation have been
included. The operating results and cash flows for the three-month
and six-month periods ended March 31, 1998 are not necessarily
indicative of the results that will be achieved for the full fiscal
year or for future periods.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimate
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant
estimates used by the Company include estimated useful lives for
depreciable and amortizable assets, the estimated valuation
allowance for deferred tax assets, and estimated cash flows in
assessing the recoverability of long-lived assets. Actual results
may differ from estimates.
2. NET INCOME (LOSS) PER COMMON SHARE
During the first quarter of fiscal 1998, the Company adopted SFAS
No. 128 "Earnings per Share." SFAS No. 128 requires the presentation
of basic net income (loss) per share and diluted net income (loss)
per share. Basic per share amounts are computed by dividing net
income (loss) by average shares outstanding during the period.
Diluted net income (loss) per share amounts are computed by dividing
net income (loss) by average shares outstanding plus the dilutive
effect of common share equivalents. Since the Company incurred a net
loss before extraordinary loss during the three-month and six-month
periods ended March 31, 1997, diluted per share calculations are
based upon average shares outstanding during these periods.
Accordingly, the effect of stock options and warrants outstanding
for 3,525,000 shares at March 31, 1997 was not included in diluted
net loss per share calculations. Diluted net income before
extraordinary loss and diluted net loss per share during the
three-month and six-month periods ended March 31, 1998 is determined
considering the dilutive effect of stock options and warrants. The
effect of stock options and warrants outstanding to purchase
approximately 2,900,000 shares was not included in diluted per share
calculations during the three-month and six-month periods ended
March 31, 1998 as the average exercise price of such options and
warrants was greater than the average price of the Company's common
stock.
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3. INVENTORIES
Inventories consist of the following:
March 31, September 30,
1998 1997
---- ----
Work-in-process $ 7,963,000 $ 3,349,000
Raw materials and supplies 4,254,000 7,767,000
----------- -----------
Total $12,217,000 $11,116,000
----------- -----------
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 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. On September 3, 1997, the Court of
Appeals denied the Petition for Rehearing. In October 1997, the
plaintiffs filed a Petition for Writ of Certiorari with the Supreme
Court of the United States. On February 23, 1998, the Supreme Court
denied the Petition for Writ of Certiorari.
Trace amounts of perchlorate chemicals have been found in Lake Mead.
Clark County, Nevada, where Lake Mead is situated, is the location
of Kerr-McGee Chemical Corporation's ("Kerr-McGee") ammonium
perchlorate ("AP") operations, and was the location of the Company's
AP operations until May 1988. The Company is cooperating with State
and local agencies, and with Kerr-McGee and other interested firms,
in the investigation and evaluation of the source or sources of
these trace amounts, possible environmental impacts, and potential
remediation methods. Until these investigations and evaluations have
reached definitive conclusions, it will not be possible for the
Company to determine the extent to which, if at all, the Company may
be called upon to contribute to or assist with future remediation
efforts, or the financial impact, if any, of such cooperation,
contributions or assistance.
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<PAGE>
5. INCOME TAXES
The Company established a valuation allowance for deferred tax
assets in the amount of $10.4 million as of September 30, 1997. The
Company's effective tax rate will be 0% until its net operating
losses expire or the Company has taxable income in an amount
sufficient to eliminate the need for the valuation allowance.
6. FINANCING ACTIVITIES
On March 12, 1998, the Company sold $75.0 million principal amount
of unsecured senior notes (the "Notes"), consummated an acquisition
(the "Acquisition") of certain assets from Kerr-McGee described
below and repurchased the remaining $25.0 million principal amount
balance outstanding of subordinated secured notes (the "Azide
Notes").
The Notes mature on March 1, 2005. Interest on the Notes will be
paid in cash at a rate of 9-1/4% per annum on each March 1 and
September 1, commencing September 1, 1998. The indebtedness
evidenced by the Notes represents a senior unsecured obligation of
the Company, ranks pari passu in right of payment with all existing
and future senior indebtedness of the Company and is senior in right
of payment to all future subordinated indebtedness of the Company.
The Indenture under which the Notes were issued contains various
limitations and restrictions including (i) change in control
provisions, (ii) limitations on indebtedness and (iii) limitations
on restricted payments such as dividends, stock repurchases and
investments. The Company is obligated to register and have declared
effective the Notes, or exchange them for identical notes that have
been registered, with the Securities and Exchange Commission within
certain predefined time parameters. In April 1998, the Company filed
a Form S-4 under the Securities Exchange Act of 1933 for the purpose
of registering the Notes. The registration is in process and has not
been declared effective. If the Company does not consummate an
effective registration of the Notes within the required time frame,
certain additional interest will accrue at a rate of 0.50% per
annum.
The Azide Notes were 11% noncallable subordinated secured term
notes, which were issued and sold in February 1992 to finance the
design, construction and start-up of the Company's sodium azide
facility. A portion of the net proceeds from sale of the Notes was
applied to repurchase the Azide Notes for approximately $28.2
million (approximately 113% of the outstanding principal amount
thereof). In connection with the repurchase, the Company recognized
an extraordinary loss on debt extinguishment of approximately $5.0
million. The extraordinary loss consisted of the cash premium paid
of $3.2 million upon repurchase and a charge of $1.8 million to
write-off the unamortized balance of debt issue and discount costs.
7. ACQUISITION
On March 12, 1998 (the "Closing Date"), the Company acquired,
pursuant to a purchase agreement (the "Purchase Agreement") with
Kerr-McGee, certain process data, technical information, customer
lists, marketing contracts and related expertise of Kerr-McGee
related its production of AP (the "Rights") for a purchase price of
$39.0 million. Under the Purchase Agreement, the Company acquired an
option (the "Option") to purchase all or any portion of the
inventory of AP stored at Kerr-McGee's premises on the Closing Date,
which is not owned by, or identified to a firm order from, a
Kerr-McGee customer (the "Inventory"). The Option is exercisable
from time to time within the 12
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<PAGE>
month period commencing on the Closing Date (the "Option Period").
The Acquisition did not include Kerr-McGee's production facilities
(the "Production Facilities") and certain water and power supply
agreements used by Kerr-McGee in the production of AP. Under the
Purchase Agreement, Kerr-McGee ceased the production and sale of AP
although the Production Facilities may continue to be used by
Kerr-McGee for production of AP under certain limited circumstances
described below. Under the Purchase Agreement, Kerr-McGee reserved a
perpetual, royalty-free, nonexclusive license to use any of the
technology forming part of the Rights as may be necessary or useful
to use, repair or sell the Production Facilities (the "Reserved
License").
Under the Purchase Agreement, Kerr-McGee reserved the right to sell
the Inventory to the extent not purchased by the Company pursuant to
the Option, to process and sell certain reclaimed AP that is not
suitable for use in solid fuel rocket motors (the "Reclaimed
Product"), and to produce and sell AP (i) to fulfill orders
scheduled for delivery after the closing, subject to making payments
to the Company with respect to such orders, as provided in the
Purchase Agreement and (ii) in the event of the Company's inability
to meet customer demand or requirements, breach of the Purchase
Agreement or termination of the Company's AP business.
The Purchase Agreement provides that, together with the Reserved
License, Kerr-McGee is permitted in its discretion to (i) lease,
sell, dismantle, demolish and/or scrap all or any portion of the
Production Facilities, (ii) retain the Production Facilities for
manufacture of Reclaimed Product and (iii) maintain the Production
Facilities in a "standby" or "mothballed" condition so they will be
capable of being used to produce AP under the limited circumstances
referred to above.
Under the Purchase Agreement, Kerr-McGee has agreed to indemnify the
Company against loss or liability from claims associated with the
ownership and use of the Rights prior to consummation of the
Acquisition or resulting from any breach of its warranties,
representations and covenants. The Company has agreed to indemnify
Kerr-McGee against loss and liability from claims associated with
the ownership and use of the Rights after consummation of the
Acquisition or resulting from any breach of its warranties,
representations and covenants. In addition, Kerr-McGee has agreed
that it will, at the Company's request, store any Inventory as to
which the Option is exercised until 90 days after the Option
expires, introduce the Company to AP customers that are not
currently customers of the Company, and consult with the Company
regarding the production and marketing of AP. The Company has agreed
that, at Kerr-McGee's request, it will use reasonable efforts to
market Reclaimed Product on Kerr-McGee's behalf for up to three
years following consummation of the Acquisition.
The purchase price of $39.0 million was recognized as an Intangible
Acquisition Asset and is being amortized to cost of sales on a
straight line basis over a ten-year period.
8. AGREEMENTS WITH AP CUSTOMERS
In December 1997, in connection with the Acquisition, the Company
entered into an agreement with Thiokol with respect to the supply of
AP through the year 2008. The agreement, which was contingent upon
consummation of the Acquisition, provides that during its term
Thiokol will make all of its AP purchases from the Company. The
agreement also establishes a pricing matrix under which AP unit
prices vary inversely with
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<PAGE>
the quantity of AP sold by the Company to all of its customers. The
Company understands that, in addition to the AP purchased from the
Company, Thiokol may use AP inventoried by it in prior years and AP
recycled by it from certain existing rocket motors.
In December 1997, in connection with the Acquisition, the Company
entered into an agreement with Alliant Techsystems Incorporated
("Alliant") to extend an existing agreement through the year 2008.
The agreement establishes prices for any AP purchased by Alliant
from the Company during the term of the agreement as extended. Under
this agreement Alliant agrees to use its efforts to cause the
Company's AP to be qualified on all new and current programs served
by Alliant's Bacchus Works.
9. REAL ESTATE EQUITY INVESTMENTS
The Company's interest in Gibson Ranch Limited Liability Company
("GRLLC") is accounted for using the equity method. GRLLC operates
on a calendar year. The Company recognizes its share of the equity
in GRLLC on a current quarterly basis. Summarized financial
information for GRLLC as of and for the six-month period ended March
31, 1998 was as follows:
Income Statement:
Revenues $15,780,000
Gross Profit 2,597,000
Operating Expenses 741,000
Net Income $ 1,861,000
Balance Sheet:
Assets $27,245,000
Liabilities 12,952,000
Equity $14,293,000
GRLLC's balance sheet is not classified. Assets consist principally of
inventories and liabilities consist principally of Notes and accounts payable.
Inventories were $25,576,000 at March 31, 1998.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company is principally engaged in the production of AP for the aerospace and
national defense industries. In addition, the Company produces and sells sodium
azide, the primary component of a gas generant used in automotive airbag safety
systems, and Halotron, a chemical used in fire suppression systems ranging from
portable fire extinguishers to airport firefighting vehicles. The perchlorate,
sodium azide and Halotron facilities are located on the Company's property in
Southern Utah and the chemicals produced and sold at these facilities
collectively represent the Company's specialty chemical segment. The Company's
other lines of business include the development of real estate in Nevada and the
production of environmental protection equipment, including waste and seawater
treatment systems.
The Company has incurred net losses during its last three fiscal years and
operating losses during the fiscal years ended September 30, 1997 and 1995. As a
result, pre-tax income has not been sufficient to recover interest charges.
The Company believes that North American AP demand is currently approximately 22
to 24 million pounds annually. However, supply capacity has historically been
substantially in excess of these estimated demand levels. In an effort to
rationalize the economics of the existing AP market, the Company entered into
the Purchase Agreement with Kerr-McGee. Upon consummation of the Acquisition,
the Company effectively became the sole North American producer of AP.
SALES AND OPERATING REVENUES. Sales of the Company's perchlorate chemical
products, consisting almost entirely of AP sales, accounted for approximately
61% and 56% of revenues during the six-month periods ended March 31, 1998 and
1997, respectively. In general, demand for AP is driven by a relatively small
number of DOD and NASA contractors; as a result, any one individual AP customer
usually accounts for a significant portion of the Company's revenues.
Sodium azide sales accounted for approximately 24% and 29% of revenues during
the six-month periods ended March 31, 1998 and 1997, respectively. The Company
has incurred significant operating losses in its sodium azide operation during
the last three fiscal years. Although the Company has achieved significant gains
in market share that appear to relate to an anti-dumping petition filed by the
Company against three Japanese sodium azide producers and the resulting
suspension agreement, the Company believes that these factors were fully
incorporated into the market by the end of fiscal 1997. The Company's evaluation
of the sodium azide market indicated that the cash flows associated with sodium
azide operations would not be sufficient to recover the Company's investment in
sodium azide related fixed assets and, as a result, the Company recognized an
impairment charge with respect to those assets of $52.6 million in the fourth
quarter of fiscal 1997. Depreciation expense is expected to decrease annually by
approximately $4.0 million as a result of the impairment charge.
Sales of Halotron amounted to approximately 1% and 5% of revenues during the
six-month periods ended March 31, 1998 and 1997, respectively. Halotron is
designed to replace halon-based fire suppression systems. Accordingly, demand
for Halotron depends upon a number of factors including the willingness of
consumers to switch from halon-based systems, as well as existing and potential
governmental regulations.
Real estate and related sales amounted to approximately 9% and 4% of revenues
during the six-month periods ended March 31, 1998 and 1997, respectively. The
nature of real estate development and sales is such that the Company is unable
to reliably to predict any pattern of future real estate sales or the
recognition of the equity in earnings of real estate ventures.
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Environmental protection equipment sales accounted for approximately 5% and 6%
of revenues during the six-month periods ended March 31, 1998 and 1997,
respectively.
COST OF SALES. The principal elements comprising the Company's cost of sales are
raw materials, electric, power, labor, manufacturing overhead and the basis in
real estate sold. The major raw materials used by the Company in its production
processes are graphite, sodium chlorate, ammonia, hydrochloric acid, sodium
metal, and nitrous oxide. Significant increases in the cost of raw materials may
have an adverse impact on margins if the Company is unable to pass along such
increases to its customers, although all the raw materials used in the Company's
manufacturing processes have historically been available in commercial
quantities, and the Company has had no difficulty obtaining necessary raw
materials.
Raw material, electric power and labor costs have not changed significantly
recently. The costs of operating the Company's specialty chemical plants are,
however, largely fixed. Accordingly, the Company believes that the potential
additional AP sales volume resulting from the Acquisition should generate
significant incremental cash flow because of the operating leverage associated
with the perchlorate plant. However, amortization of the Acquisition costs is
expected to amount to approximately $4.0 million annually.
INCOME TAXES. The Company's effective income tax rates were 0% during the three
and six-month periods ended March 31, 1998 and 34% during the three and
six-month periods ended March 31, 1997. The Company's effective income tax rate
decreased to 17% for the entire 1997 fiscal year as a result of the
establishment of a $10.4 million deferred tax valuation allowance in the fourth
quarter. The Company's effective tax rate will be 0% until the Company's net
operating losses expire or the Company has taxable income in an amount
sufficient to eliminate the need for the valuation allowance.
NET INCOME (LOSS). Although the Company's net income (loss) and diluted net
income (loss) per common share have not been subject to seasonal fluctuations,
they have been and are expected to continue to be subject to variations from
quarter to quarter and year to year due to the following factors, among others:
(i) as discussed in Note 4 of Notes to Condensed Consolidated Financial
Statements, the Company may incur material costs associated with certain
contingencies; (ii) timing of real estate and related sales and equity in
earnings of real estate ventures is not predictable; (iii) the recognition of
revenues from environmental protection equipment orders not accounted for as
long-term contracts depends upon orders generated and the timing of shipment of
the equipment; (iv) weighted average common and common equivalent shares for
purposes of calculating diluted net income (loss) per common share are subject
to significant fluctuations based upon changes in the market price of the
Company's Common Stock due to outstanding warrants and options; and (v) the
magnitude, pricing and timing of AP, sodium azide, Halotron, and environmental
protection equipment sales in the future is uncertain.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
SALES AND OPERATING REVENUES. Sales increased $4.7 million, or 50% during the
three months ended March 31, 1998 to $14.1 million from $9.4 million in the
corresponding period of the prior year. This increase was attributable to
increased sales of perchlorate, sodium azide, real estate and environmental
protection equipment. Such increase was partially offset by a decrease in
Halotron sales. Approximately $3.5 million of the $4.7 million increase in sales
was attributable to
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increases in perchlorate sales. This increase was primarily attributable to the
pendency and ultimate consummation of the Acquisition.
COST OF SALES. Cost of sales increased $1.1 million, or 14%, in the three months
ended March 31, 1998 to $9.1 million from $8.0 million in the corresponding
period of the prior year. This increase was principally due to increases in
perchlorate and sodium azide sales volume. As a percentage of sales, cost of
sales decreased in the three months ended March 31, 1998 to 65% as compared to
86% in the corresponding period of the prior year. This decrease was due
principally to the increase in perchlorate and sodium azide sales volume and a
reduction in depreciation expense as a result of the sodium azide impairment
charge referred to above.
OPERATING EXPENSES. Operating (selling, general and administrative) expenses
decreased $.1 million, or 1%, in the three months ended March 31, 1998 to $2.2
million from $2.3 million in the corresponding period of 1997.
NET INTEREST EXPENSE. Net interest and other expense increased to $.75 million
in the three months ended March 31, 1998 from $.3 million in the corresponding
period of the prior year principally as a result of the cessation of interest
capitalization on the Company's Ventana Canyon residential joint venture
project.
EQUITY IN EARNINGS OF REAL ESTATE VENTURE. The Company's share of equity in its
Ventana Canyon joint venture was $0 and $.1 million during the three-month
periods ended March 31, 1998 and 1997. The joint venture has historically
operated at or near a break-even point on residential activity and generated net
income on sales of improved land (see below).
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
SALES AND OPERATING REVENUES. Sales increased $7.6 million, or 43%, during the
six months ended March 31, 1998 to $25.4 million from $17.8 million in the
corresponding period of the prior year. The increase was principally due to
increased sales of perchlorate, sodium azide, real estate and environmental
protection equipment. Such increase was partially offset by a decrease in
Halotron sales. Approximately $5.0 million of the $7.6 million increase in sales
was attributable to increases in perchlorate sales. This increase was primarily
attributable to the pendency and ultimate consummation of the Acquisition.
COST OF SALES. Cost of sales increased $2.2 million, or 14%, in the six months
ended March 31, 1998 to $17.2 million from $15.1 million in the corresponding
period of the prior year. The increase in cost of sales was primarily due to
increases in perchlorate and sodium azide volume. As a percentage of sales, cost
of sales decreased in the six months ended March 31, 1998 to 68% as compared to
85% in the corresponding period of the prior year. The decrease was attributable
to the increase in perchlorate and sodium azide sales volume and a reduction in
depreciation expense as a result of the sodium azide impairment charge referred
to above. Cost of sales is expected to increase by approximately $4.0 million
annually as a result of the amortization of capitalized Acquisition costs.
OPERATING EXPENSES. Operating expenses were $4.4 million during the six-month
period ended March 31, 1998 compared to $4.6 million in the corresponding period
of the prior year.
NET INTEREST EXPENSE. Net interest and other expense increased to $1.5 million
in the six months ended March 31, 1998 from $.5 million in the corresponding
period of the prior year principally as a result of the cessation of interest
capitalization on the Company's Ventana Canyon residential joint venture
project. Interest expense will increase significantly in future periods as a
result of the issuance of the Notes described in Note 6 of Notes to Condensed
Consolidated Financial Statements.
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EQUITY IN EARNINGS OF REAL ESTATE VENTURE. The Company's share of equity in its
Ventana Canyon joint venture was $.3 million and $.1 million during the
six-months ended March 31, 1998 and 1997. The increase in the equity in earnings
of Ventana Canyon relates principally to the sale of improved land to an outside
developer in the first quarter of fiscal 1998.
Segment Operating Income (Loss). Operating income (loss) of the Company's
industry segments during the six-month periods ended March 31, 1998 and 1997 was
as follows:
1998 1997
---- ----
Specialty chemicals $ 2,102,000 $(1,650,000)
Environmental protection equipment 60,000 (362,000)
Real Estate 1,271,000 64,000
----------- -----------
Total $ 3,433,000 $(1,948,000)
=========== ===========
The increase in operating income in the Company's specialty chemical industry
segment was attributable to the increase in perchlorate sales in the second
quarter of fiscal 1998 referred to above and a decrease in depreciation expense
associated with sodium azide operations as a result of the impairment charge
discussed above. The increase in environmental protection equipment segment
operating income was primarily due to an increase in revenues. The increase in
real estate segment operating income was attributable to an increase in sales
from $.4 million during the six months ended March 31, 1997 to $1.3 million
during the same period in 1998.
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INFLATION
Inflation did not have a significant effect on the Company's sales and operating
revenues or costs during the three-month or six-month periods ended March 31,
1998 or 1997. Inflation may have an effect on gross profit in the future as
certain of the Company's agreements with AP and sodium azide customers require
fixed prices, although certain of such agreements contain escalation features
that should somewhat insulate the Company from increases in costs associated
with inflation.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in Notes 6 and 7 of Notes to Condensed Consolidated Financial
Statements, in March 1998, the Company sold Notes in the principal amount of
$75.0 million, acquired certain assets from Kerr-McGee for a cash purchase price
of $39.0 million and paid $28.2 million to repurchase the remaining $25.0
million principal amount outstanding of the Azide Notes. Through March 31, 1998,
the Company has incurred approximately $2.7 million in costs associated with the
issuance of the Notes. In connection with the Azide Notes repurchase, the
Company recognized an extraordinary loss on debt extinguishment of approximately
$5.0 million.
Cash flows provided by (used for) operating activities were ($.4) million and
$6.3 million during the six-months ended March 31, 1998 and 1997, respectively.
Cash flows from operating activities declined in the first six months of fiscal
1998 principally as a result of changes in certain working capital balances,
most notably a significant increase in receivables related to AP shipments in
late March 1998. Such receivables are scheduled to be collected in the third
quarter of fiscal 1998. The Company believes that its cash flows from operations
and existing cash balances will be adequate for the foreseeable future to
satisfy the needs of its operations. However, the resolution of contingencies,
and the timing, pricing and magnitude of orders for AP, sodium azide and
Halotron, may have an effect on the use and availability of cash.
Capital expenditures were $1.6 million during the six months ended March 31,
1998 compared to $1.3 million during the same period last year. Capital
expenditures are budgeted to amount to approximately $2.5 million in fiscal 1998
and relate principally to specialty chemical segment capital improvement
projects.
During the three-month and six-month periods ended March 31, 1998, the Company
received cash of approximately $2.7 million and $1.0 million, respectively,
relating to the return of capital invested in the Ventana Canyon joint venture.
The Company currently anticipates that cash returns of invested capital and
equity in earnings will continue through the conclusion of the project currently
projected by the end of calendar 2001.
As a result of the litigation and contingencies discussed in Note 4 of Notes to
Condensed Consolidated Financial Statements, the Company has incurred legal and
other costs, and it may incur material legal and other costs associated with the
resolution of contingencies in future periods. Any such costs, to the extent
borne by the Company and not recovered through insurance, would adversely affect
the Company's liquidity. The Company is currently unable to predict or quantify
the amount or range of such costs, if any, or the period of time over which such
costs will be incurred.
The Company is currently in the process of evaluating its computer software and
databases to determine whether or not modifications will be required to prevent
problems related to the Year 2000. These problems, which have been widely
reported in the media, could cause
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malfunctions in certain software and databases with respect to dates on or after
January 1, 2000, unless corrected. Based upon its evaluation to date, the
Company does not believe that the costs of any modifications required to correct
for Year 2000 problems will have a material impact on operations, although there
can be no assurance given with respect thereto.
FORWARD-LOOKING STATEMENTS/RISK FACTORS
Certain matters discussed in this Report may be forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, but are
not limited to, the risk factors set forth below.
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The following risk factors, among others, may cause the Company's operating
results and/or financial position to be adversely affected from time to time:
1. (a) Declining demand or downward pricing pressure for the
Company's products as a result of general or specific
economic conditions, (b) governmental budget decreases
affecting the Department of Defense or NASA that would
cause a continued decrease in demand for AP, (c) the
results achieved by the Suspension Agreement resulting
from the Company's anti-dumping petition and the possible
termination of such agreement, (d) technological advances
and improvements or new competitive products causing a
reduction or elimination of demand for AP, sodium azide
or Halotron, (e) the ability and desire of purchasers to
change existing products or substitute other products for
the Company's products based upon perceived quality and
pricing, and (f) the fact that perchlorate chemicals,
sodium azide, Halotron and the Company's environmental
products have limited applications and highly
concentrated customer bases.
2. Competitive factors including, but not limited to, the
Company's limitations respecting financial resources and
its ability to compete against companies with
substantially greater resources, significant excess
market supply in the AP and sodium azide markets and the
development or penetration of competing new products,
particularly in the propulsion, airbag inflation and fire
suppression businesses.
3. Underutilization of the Company's manufacturing
facilities resulting in production inefficiencies and
increased costs, the inability to recover facility costs
and reductions in margins.
4. Risks associated with the Company's real estate
activities, including, but not limited to, dependence
upon the Las Vegas commercial, industrial and residential
real estate markets, changes in general or local economic
conditions, interest rate fluctuations affecting the
availability and the cost of financing, the performance
of the managing partner of its residential real estate
joint venture (Ventana Canyon Joint Venture) and
regulatory and environmental matters that may have a
negative impact on sales or costs.
5. The effects of, and changes in, trade, monetary and
fiscal policies, laws and regulations and other
activities of governments, agencies or similar
organizations, including, but not limited to,
environmental, safety and transportation issues.
6. The cost and effects of legal and administrative
proceedings, settlements and investigations, particularly
those described in Note 4 of Notes to Condensed
Consolidated Financial Statements and claims made by or
against the Company relative to patents or property
rights.
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7. Integration of new customers and the ability to meet
additional production and delivery requirements resulting
from the Acquisition.
8. The results of the Company's periodic review of
impairment issues under the provision of SFAS No. 121.
9. The dependence upon a single facility for the production
of most of the Company's products.
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