<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, 1998
COMMISSION FILE NUMBER 1-8137
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
AMERICAN PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 59-6490478
(State or other jurisdiction (IRS Employer
of incorporation or Identification No.)
organization)
3770 HOWARD HUGHES PARKWAY, SUITE 300
LAS VEGAS, NV 89109
(Address of principal executive offices) (Zip Code)
(702) 735-2200
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ No / /
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 8,249,537 AS
OF JULY 31, 1998.
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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 4 through 12 of this Report on Form 10-Q.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------
Results of Operations
---------------------
The information required by Item 303 of Regulation S-K is provided on
pages 13 through 18 of this Report on Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
None.
ITEM 2. Changes in Securities
---------------------
None.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
a) The following Exhibit is filed in connection with the Registrant's
electronic filing:
27. Financial Statement Schedules.
b) None.
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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: August 4, 1998 /S/ JOHN R. GIBSON
------------------
John R. Gibson
Chief Executive Officer and President
Date: August 4, 1998 /S/ DAVID N. KEYS
-----------------
David N. Keys
Executive Vice President,
Chief Financial Officer, Secretary
and Treasurer; Principal Financial
and Accounting Officer
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<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,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales and Operating Revenues $13,136,000 $12,767,000 $38,523,000 $30,545,000
Cost of Sales 9,047,000 10,434,000 26,282,000 25,542,000
----------------------------------------------------------------------
Gross Profit 4,089,000 2,333,000 12,241,000 5,003,000
Operating Expenses 2,361,000 2,304,000 6,791,000 6,936,000
----------------------------------------------------------------------
Operating Income (Loss) 1,728,000 29,000 5,450,000 (1,933,000)
Equity in Earnings of Real Estate
Venture 300,000 100,000
Net Interest and Other
Expense 1,514,000 202,000 2,977,000 735,000
----------------------------------------------------------------------
Income (Loss) Before Credit
for Income Taxes 214,000 (173,000) 2,773,000 (2,568,000)
Credit for Income Taxes (59,000) (875,000)
----------------------------------------------------------------------
Net Income (Loss) Before
Extraordinary Loss 214,000 (114,000) 2,773,000 (1,693,000)
Extraordinary Loss-Debt
Extinguishment 5,005,000
----------------------------------------------------------------------
Net Income (Loss) $ 214,000 $ (114,000) $(2,232,000) $(1,693,000)
----------------------------------------------------------------------
Basic Net Income (Loss) Per
Share:
Income (Loss) Before
Extraordinary Loss $ .03 $ (.02) $ .34 $ (.21)
Extraordinary Loss $ (.61)
----------------------------------------------------------------------
Net Income (Loss) $ .03 $ (.02) $ (.27) $ (.21)
----------------------------------------------------------------------
Average Shares Outstanding 8,250,000 8,098,000 8,184,000 8,098,000
----------------------------------------------------------------------
Diluted Net Loss Per Share:
Income (Loss) Before
Extraordinary Loss $ .02 $ (.02) $ .33 $ (.21)
Extraordinary Loss $ (.60)
----------------------------------------------------------------------
Net Income (Loss) $ .02 $ (.02) $ (.27) $ (.21)
----------------------------------------------------------------------
Diluted Shares 8,563,000 8,098,000 8,384,000 8,098,000
----------------------------------------------------------------------
</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>
- ------------------------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30,
1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $27,731,000 $18,881,000
Accounts and Notes Receivable 6,031,000 5,551,000
Related Party Notes Receivable 565,000 637,000
Inventories 13,864,000 11,116,000
Prepaid Expenses and Other Assets 1,292,000 979,000
----------------------------------------------
TOTAL CURRENT ASSETS 49,483,000 37,164,000
Property, Plant and Equipment, Net 19,515,000 19,314,000
Intangible Assets, Net 39,286,000 1,540,000
Development Property 7,003,000 7,362,000
Real Estate Equity Investments 17,157,000 20,248,000
Other Assets, Net 3,052,000 873,000
Restricted Cash 1,171,000 3,580,000
----------------------------------------------
TOTAL ASSETS $136,667,000 $90,081,000
----------------------------------------------
</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>
- ----------------------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30,
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 11,023,000 $ 7,519,000
Current Portion of Long-Term Debt 1,171,000 6,166,000
-------------------------------------
TOTAL CURRENT LIABILITIES 12,194,000 13,685,000
Long-Term Debt 75,000,000 24,900,000
Long-Term Payables 1,794,000 2,376,000
-------------------------------------
TOTAL LIABILITIES 88,988,000 40,961,000
-------------------------------------
Commitments and Contingencies
Warrants to Purchase Common Stock 3,569,000 3,569,000
SHAREHOLDERS' EQUITY:
Common Stock 840,000 829,000
Capital in Excess of Par Value 79,341,000 78,561,000
Accumulated Deficit (34,939,000) (32,707,000)
Treasury Stock (1,035,000) (1,035,000)
Receivable from the Sale of Stock (97,000) (97,000)
-------------------------------------
TOTAL SHAREHOLDERS' EQUITY 44,110,000 45,551,000
-------------------------------------
-------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $136,667,000 $ 90,081,000
-------------------------------------
</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 NINE-MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Provided by (Used For)
Operating Activities $ 8,916,000 $(1,153,000) $ 8,505,000 $ 5,190,000
-----------------------------------------------------------------------
Cash Flows Provided by (Used For)
Investing Activities:
Capital Expenditures (406,000) (275,000) (2,054,000) (1,576,000)
Payment for Acquisition of
Intangible (39,000,000)
Real estate equity investment
capital activity 360,000 (773,000) 3,091,000 (1,293,000)
----------------------------------------------------------------------
Net Cash Used For
Investing Activities (46,000) (1,048,000) (37,963,000) (2,869,000)
----------------------------------------------------------------------
Cash Flows From
Financing Activities:
Principal Payments on Debt (31,166,000) (6,168,000)
Issuance of Senior Notes 75,000,000
Premium Paid on Debt
Extinguishment (3,250,000)
Debt Issue Costs (360,000) (3,067,000)
Issuance of Common Stock 192,000 791,000 70,000
Treasury Stock Acquired (156,000)
----------------------------------------------------------------------
Net Cash Provided by (Used For)
Financing Activities (168,000) 38,308,000 (6,254,000)
----------------------------------------------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents 8,702,000 (2,201,000) 8,850,000 (3,933,000)
Cash and Cash Equivalents,
Beginning of Period 19,029,000 16,769,000 18,881,000 18,501,000
Cash and Cash Equivalents, End of -----------------------------------------------------------------------
Period $27,731,000 $14,568,000 $ 27,731,000 $14,568,000
-----------------------------------------------------------------------
Supplemental Disclosure of Cash
Flow Information:
Interest Paid (net of amounts
capitalized) $ $ $ 1,650,000 $ 851,000
-----------------------------------------------------------------------
</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
nine-month periods ended June 30, 1998 are not necessarily indicative of
the results that will be achieved for the full fiscal year or for future
periods.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimate and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates used by the Company include
estimated useful lives for depreciable and amortizable assets, the
estimated valuation allowance for deferred tax assets, and estimated cash
flows in assessing the recoverability of long-lived assets. Actual results
may differ from estimates.
2. NET INCOME (LOSS) PER COMMON SHARE
During the first quarter of fiscal 1998, the Company adopted SFAS No. 128
"Earnings per Share." SFAS No. 128 requires the presentation of basic net
income (loss) per share and diluted net income (loss) per share. Basic per
share amounts are computed by dividing net income (loss) by average shares
outstanding during the period. Diluted net income (loss) per share amounts
are computed by dividing net income (loss) by average shares outstanding
plus the dilutive effect of common share equivalents. Since the Company
incurred a net loss before extraordinary loss during the three-month and
nine-month periods ended June 30, 1997, diluted per share calculations are
based upon average shares outstanding during these periods. Accordingly,
the effect of stock options and warrants outstanding for 3,525,000 shares
at June 30, 1997 was not included in diluted net loss per share
calculations. Diluted net income (loss) per share amounts during the
three-month and nine-month periods ended June 30, 1998 is determined
considering the dilutive effect of stock options and warrants. The effect
of stock options and warrants outstanding to purchase approximately
2,900,000 shares was not included in diluted per share calculations during
the three-month and nine-month periods ended June 30, 1998 as the average
exercise price of such options and warrants was greater than the average
price of the Company's common stock.
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<PAGE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
----------- -------------
<S> <C> <C>
Work-in-process $ 8,982,000 $ 3,349,000
Raw materials and supplies 4,882,000 7,767,000
----------- -----------
Total $13,864,000 $11,116,000
----------- -----------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Trace amounts of perchlorate chemicals have been found in Lake Mead.
Clark County, Nevada, where Lake Mead is situated, is the location of
Kerr-McGee Chemical Corporation's ("Kerr-McGee") ammonium perchlorate
("AP") operations, and was the location of the Company's AP operations
until May 1988. The Company is cooperating with State and local
agencies, and with Kerr-McGee and other interested firms, in the
investigation and evaluation of the source or sources of these trace
amounts, possible environmental impacts, and potential remediation
methods. Until these investigations and evaluations have reached
definitive conclusions, it will not be possible for the Company to
determine the extent to which, if at all, the Company may be called upon
to contribute to or assist with future remediation efforts, or the
financial impact, if any, of such cooperation, contributions or
assistance.
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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. Management
believes the Company has complied with these limitations and
restrictions. Under the Indenture, the Company was obligated to exchange
the Notes for identical notes registered with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933,
as amended, within a specified period of time set forth in the
Indenture. In April 1998 the Company filed a Form S-4 registration
statement with the Commission for the purposes of effecting this
exchange. The registration statement was declared effective by the
Commission on July 29, 1998, with the consummation of the exchange
scheduled for August 28, 1998.
The Azide Notes were 11% noncallable subordinated secured term notes,
which were issued and sold in February 1992 to finance the design,
construction and start-up of the Company's sodium azide facility. A
portion of the net proceeds from sale of the Notes was applied to
repurchase the Azide Notes for approximately $28.2 million
(approximately 113% of the outstanding principal amount thereof). In
connection with the repurchase, the Company recognized an extraordinary
loss on debt extinguishment of approximately $5.0 million. The
extraordinary loss consisted of the cash premium paid of $3.2 million
upon repurchase and a charge of $1.8 million to write-off the
unamortized balance of debt issue and discount costs.
7. ACQUISITION
On March 12, 1998 (the "Closing Date"), the Company acquired, pursuant
to a purchase agreement (the "Purchase Agreement") with Kerr-McGee,
certain intangible assets related to Kerr-McGee's production of AP (the
"Rights") for a purchase price of $39.0 million. Under the Purchase
Agreement, the Company acquired an option (the "Option") to purchase all
or any portion of the inventory of AP stored at Kerr-McGee's premises on
the Closing Date, which is not owned by, or identified to a firm order
from, a Kerr-McGee customer (the "Inventory"). The Option is exercisable
from time to time within the 12 month period commencing on the Closing
Date (the "Option Period"). The Acquisition
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<PAGE>
did not include Kerr-McGee's production facilities (the "Production
Facilities") and certain water and power supply agreements used by Kerr-
McGee in the production of AP. Under the Purchase Agreement, Kerr-McGee
ceased the production and sale of AP although the Production Facilities
may continue to be used by Kerr-McGee for production of AP under certain
limited circumstances described below. Under the Purchase Agreement,
Kerr-McGee reserved a perpetual, royalty-free, nonexclusive license to
use any of the technology forming part of the Rights as may be necessary
or useful to use, repair or sell the Production Facilities (the
"Reserved License").
Under the Purchase Agreement, Kerr-McGee reserved the right to sell the
Inventory to the extent not purchased by the Company pursuant to the
Option, to process and sell certain reclaimed AP that is not suitable
for use in solid fuel rocket motors (the "Reclaimed Product"), and to
produce and sell AP (i) to fulfill orders scheduled for delivery after
the closing, subject to making payments to the Company with respect to
such orders, as provided in the Purchase Agreement and (ii) in the event
of the Company's inability to meet customer demand or requirements,
breach of the Purchase Agreement or termination of the Company's AP
business.
The Purchase Agreement provides that, together with the Reserved
License, Kerr-McGee is permitted in its discretion to (i) lease, sell,
dismantle, demolish and/or scrap all or any portion of the Production
Facilities, (ii) retain the Production Facilities for manufacture of
Reclaimed Product and (iii) maintain the Production Facilities in a
"standby" or "mothballed" condition so they will be capable of being
used to produce AP under the limited circumstances referred to above.
Under the Purchase Agreement, Kerr-McGee has agreed to indemnify the
Company against loss or liability from claims associated with the
ownership and use of the Rights prior to consummation of the Acquisition
or resulting from any breach of its warranties, representations and
covenants. The Company has agreed to indemnify Kerr-McGee against loss
and liability from claims associated with the ownership and use of the
Rights after consummation of the Acquisition or resulting from any
breach of its warranties, representations and covenants. In addition,
Kerr-McGee has agreed that it will, at the Company's request, store any
Inventory as to which the Option is exercised until 90 days after the
Option expires, introduce the Company to AP customers that are not
currently customers of the Company, and consult with the Company
regarding the production and marketing of AP. The Company has agreed
that, at Kerr-McGee's request, it will use reasonable efforts to market
Reclaimed Product on Kerr-McGee's behalf for up to three years following
consummation of the Acquisition.
The Company has determined that a business was not acquired in the
Acquisition and that the Rights acquired have no independent value to
the Company apart from the overall benefit of the transaction that, as a
result thereof, Kerr-McGee has ceased production of AP (except in the
limited circumstances referred to above), thereby leaving the Company as
the sole North American supplier of AP. Since they have no independent
value to the Company, the Company has assigned no value to an
unidentified intangible consisting of the benefit referred to above. The
Company intends to amortize the purchase price for the unidentified
intangible over ten years, the length of the terms of pricing contracts
with two principal AP customers referred to below.
In connection with the Acquisition, the Company entered into an
agreement with Thiokol Corporation ("Thiokol") with respect to the
supply of AP through the year 2008. The agreement, which was contingent
upon consummation of the Acquisition, provides that during its term
Thiokol will make all of its AP purchases from the Company. The
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<PAGE>
agreement also establishes a pricing matrix under which AP unit prices
vary inversely with the quantity of AP sold by the Company to all of its
customers. The Company understands that, in addition to the AP purchased
from the Company, Thiokol may use AP inventoried by it in prior years
and AP recycled by it from certain existing rocket motors.
In connection with the Acquisition, the Company also entered into an
agreement with Alliant Techsystems Incorporated ("Alliant") to extend an
existing agreement through the year 2008. The agreement establishes
prices for any AP purchased by Alliant from the Company during the term
of the agreement as extended. Under this agreement Alliant agrees to use
its efforts to cause the Company's AP to be qualified on all new and
current programs served by Alliant's Bacchus Works.
8. REAL ESTATE EQUITY INVESTMENTS
The Company's interest in Gibson Ranch Limited Liability Company
("GRLLC") is accounted for using the equity method. GRLLC operates on a
calendar year. The Company recognizes its share of the equity in GRLLC
on a current quarterly basis. Summarized financial information for GRLLC
as of and for the three-month and nine-month periods ended June 30, 1998
were as follows:
<TABLE>
<CAPTION>
Three-Month Nine-Month
Period Ended Period Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Income Statement:
Revenues $ 7,509,000 $23,289,000
Gross Profit 849,000 3,446,000
Operating Expenses 382,000 1,123,000
Net Income $ 473,000 $ 2,334,000
Balance Sheet:
Assets $27,116,000 $27,116,000
Liabilities 13,196,000 13,196,000
Equity $13,919,000 $13,919,000
</TABLE>
GRLLC's balance sheet is not classified. Assets consist principally of
inventories and liabilities consist principally of Notes and accounts
payable. Inventories were $25,039,000 at June 30, 1998.
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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
63% and 49% of revenues during the nine-month periods ended June 30, 1998 and
1997, respectively. In general, demand for AP is driven by a relatively small
number of DOD and NASA contractors; as a result, any one individual AP customer
usually accounts for a significant portion of the Company's revenues.
Sodium azide sales accounted for approximately 23% and 27% of revenues during
the nine-month periods ended June 30, 1998 and 1997, respectively. The Company
has incurred significant operating losses in its sodium azide operation during
the last three fiscal years. Although the Company has achieved significant
gains in market share that appear to relate to an anti-dumping petition filed by
the Company against three Japanese sodium azide producers and the resulting
suspension agreement, the Company believes that these factors were fully
incorporated into the market by the end of fiscal 1997. The Company's
evaluation of the sodium azide market indicated that the cash flows associated
with sodium azide operations would not be sufficient to recover the Company's
investment in sodium azide related fixed assets and, as a result, the Company
recognized an impairment charge with respect to those assets of $52.6 million in
the fourth quarter of fiscal 1997. Depreciation expense is expected to decrease
annually by approximately $4.0 million as a result of the impairment charge.
In June and July of this year, shipments of sodium azide were negatively
impacted by the recent labor strike at certain General Motor's ("GM")
facilities. Although this strike has recently been reported to have been
settled, the Company is unable to predict the impact this strike may have on its
sodium azide operations in the future.
Sales of Halotron amounted to approximately 3% and 5% of revenues during the
nine-month periods ended June 30, 1998 and 1997, respectively. Halotron is
designed to replace halon-based fire suppression systems. Accordingly, demand
for Halotron depends upon a number of
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<PAGE>
factors including the willingness of consumers to switch from halon-based
systems, as well as existing and potential governmental regulations.
Real estate and related sales amounted to approximately 6% and 12% of revenues
during the nine-month periods ended June 30, 1998 and 1997, respectively. The
nature of real estate development and sales is such that the Company is unable
reliably to predict any pattern of future real estate sales or the recognition
of the equity in earnings of real estate ventures.
Environmental protection equipment sales accounted for approximately 5% and 7%
of revenues during the nine-month periods ended June 30, 1998 and 1997,
respectively. It is currently anticipated that sales of this segment will be
adversely affected in fiscal 1999 by the continuing adverse economic
developments and conditions in the Company's foreign markets (particularly Asian
markets).
COST OF SALES. The principal elements comprising the Company's cost of sales
- --------------
are raw materials, electric, power, labor, manufacturing overhead and the basis
in real estate sold. The major raw materials used by the Company in its
production processes are graphite, sodium chlorate, ammonia, hydrochloric acid,
sodium metal, and nitrous oxide. Significant increases in the cost of raw
materials may have an adverse impact on margins if the Company is unable to pass
along such increases to its customers, although all the raw materials used in
the Company's manufacturing processes have historically been available in
commercial quantities, and the Company has had no difficulty obtaining necessary
raw materials.
Raw material, electric power and labor costs have not changed significantly
recently. The costs of operating the Company's specialty chemical plants are,
however, largely fixed. Accordingly, the Company believes that the potential
additional AP sales volume resulting from the Acquisition should generate
significant incremental cash flow because of the operating leverage associated
with the perchlorate plant. However, amortization of the Acquisition costs is
expected to amount to approximately $4.0 million annually.
INCOME TAXES. The Company's effective income tax rates were 0% during the three
- ------------
and nine-month periods ended June 30, 1998 and 34% during the three and nine-
month periods ended June 30, 1997. The Company's effective income tax rate
decreased to 17% for the entire 1997 fiscal year as a result of the
establishment of a $10.4 million deferred tax valuation allowance in the fourth
quarter. The Company's effective tax rate will be 0% until the Company's net
operating losses expire or the Company has taxable income in an amount
sufficient to eliminate the need for the valuation allowance.
NET INCOME (LOSS). Although the Company's net income (loss) and diluted net
- -----------------
income (loss) per common share have not been subject to seasonal fluctuations,
they have been and are expected to continue to be subject to variations from
quarter to quarter and year to year due to the following factors, among others:
(i) as discussed in Note 4 of Notes to Condensed Consolidated Financial
Statements, the Company may incur material costs associated with certain
contingencies; (ii) timing of real estate and related sales and equity in
earnings of real estate ventures is not predictable; (iii) the recognition of
revenues from environmental protection equipment orders not accounted for as
long-term contracts depends upon orders generated and the timing of shipment of
the equipment; (iv) weighted average common and common equivalent shares for
purposes of calculating diluted net income (loss) per common share are subject
to significant fluctuations based upon changes in the market price of the
Company's Common Stock due to outstanding warrants and options; and (v) the
magnitude, pricing and timing of AP, sodium azide, Halotron, and environmental
protection equipment sales in the future is uncertain. (See "Forward Looking
Statements/Risk Factors" below.)
-14-
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
SALES AND OPERATING REVENUES. Sales increased $0.3 million, or 3% during the
- ----------------------------
three months ended June 30, 1998 to $13.1 million from $12.8 million in the
corresponding period of the prior year. This increase was attributable to
increased sales of specialty chemicals. Such increase was partially offset by
decreases in environmental protection equipment and real estate sales.
Perchlorate chemical sales increased approximately $4.6 million principally as a
result of the consummation of the Acquisition. Real estate sales decreased
approximately $3.2 million due to the fact that a significant land sale closed
in the third quarter of fiscal 1997. Environmental protection equipment sales
decreased approximately $0.5 million due principally to the timing of shipment
of certain equipment.
COST OF SALES. Cost of sales decreased $1.4 million, or 13% in the three months
- -------------
ended June 30, 1998 to $9.0 million from $10.4 million in the corresponding
period of the prior year. Such decrease was principally due to decreases in
sodium azide and real estate costs offset by an increase in costs associated
with perchlorate operations. The decrease in sodium azide cost of sales was
attributable to a reduction in depreciation expense as a result of the sodium
azide charge referred to above. The increase in perchlorate costs was due to
increased volumes. As a percentage of sales, cost of sales decreased in the
three months ended June 30, 1998 to 69% as compared to 82% in the corresponding
period of the prior year. This decrease was due principally to the increase in
perchlorate sales volume and the reduction in sodium azide related depreciation
expense.
OPERATING EXPENSES. Operating (selling, general and administrative) expenses
- -------------------
increased $0.1 million, or 2%, in the three months ended June 30, 1998 to $2.4
million from $2.3 million in the corresponding period of 1997.
NET INTEREST EXPENSE. Net interest and other expense increased to $1.5 million
- --------------------
in the three months ended June 30, 1998 from $0.2 million in the corresponding
period of the prior year as a result of the cessation of interest capitalization
on the Company's Ventana Canyon residential joint venture project and the
issuance of the Notes in March 1998.
EQUITY IN EARNINGS OF REAL ESTATE VENTURE. The Company's share of equity in its
- -----------------------------------------
Ventana Canyon joint venture was $0 million during the three-month periods ended
June 30, 1998 and 1997. The joint venture has historically operated at or near
a break-even point on residential activity and generated net income on sales of
improved land (see below).
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
SALES AND OPERATING REVENUES. Sales increased $8.0 million, or 26%, during the
- ----------------------------
nine months ended June 30, 1998 to $38.5 million from $30.5 million in the
corresponding period of the prior year. The increase was principally due to
increased sales of specialty chemicals. Such increase was partially offset by a
decrease in real estate sales. Perchlorate chemical sales increased
approximately $9.6 million primarily as a result of the pending and ultimate
consummation of the Acquisition. Real estate sales decreased approximately $1.2
million due to a difference in the timing and magnitude of land closings.
COST OF SALES. Cost of sales increased $0.8 million, or 3%, in the nine months
- -------------
ended June 30, 1998 to $26.3 million from $25.5 million in the corresponding
period of the prior year. The increase in cost of sales was primarily due to
increases in perchlorate sales volume. As a percentage of sales, cost of sales
decreased in the nine months ended June 30, 1998 to 69% as compared to
-15-
<PAGE>
84% in the corresponding period of the prior year. The decrease was primarily
attributable to the increase in perchlorate sales volume and a reduction in
depreciation expense as a result of the sodium azide impairment charge referred
to above. Cost of sales is expected to increase by approximately $4.0 million
annually as a result of the amortization of capitalized Acquisition costs.
OPERATING EXPENSES. Operating expenses were $6.8 million during the nine-month
- ------------------
period ended June 30, 1998 compared to $6.9 million in the corresponding period
of the prior year.
NET INTEREST EXPENSE. Net interest and other expense increased to $3.0 million
- --------------------
in the nine months ended June 30, 1998 from $0.7 million in the corresponding
period of the prior year as a result of the cessation of interest capitalization
on the Company's Ventana Canyon residential joint venture project and the
issuance of the Notes in March, 1998. Interest expense will increase
significantly in future periods as a result of the issuance of the Notes. (See
Note 6 of Notes to Condensed Consolidated Financial Statements.)
EQUITY IN EARNINGS OF REAL ESTATE VENTURE. The Company's share of equity in its
- -----------------------------------------
Ventana Canyon joint venture was $0.3 million and $0.1 million during the nine
months ended June 30, 1998 and 1997. The increase in the equity in earnings of
Ventana Canyon relates principally to the sale of improved land to an outside
developer in the first quarter of fiscal 1998.
SEGMENT OPERATING INCOME (LOSS). Operating income (loss) of the Company's
- --------------------------------
industry segments during the nine-month periods ended June 30, 1998 and 1997 was
as follows:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Specialty chemicals $3,882,000 $(3,433,000)
Environmental protection equipment 36,000 (352,000)
Real Estate 1,155,000 1,630,000
---------- -----------
Total $5,073,000 $(2,155,000)
========== ===========
</TABLE>
The increase in operating income in the Company's specialty chemical industry
segment was attributable to the increase in perchlorate sales in the second and
third quarters of fiscal 1998 referred to above and a decrease in depreciation
expense associated with sodium azide operations as a result of the impairment
charge discussed above. The increase in environmental protection equipment
segment operating income was primarily due to improved margins. The decrease in
real estate segment operating income was attributable to a decrease in sales
from $3.7 million during the nine months ended June 30, 1997 to $2.4 million
during the same period in 1998.
INFLATION
Inflation did not have a significant effect on the Company's sales and operating
revenues or costs during the three-month or nine-month periods ended June 30,
1998 or 1997. Inflation may have an effect on gross profit in the future as
certain of the Company's agreements with AP and sodium azide customers require
fixed prices, although certain of such agreements contain escalation features
that should somewhat insulate the Company from increases in costs associated
with inflation.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in Notes 6 and 7 of Notes to Condensed Consolidated Financial
Statements, in March 1998, the Company sold Notes in the principal amount of
$75.0 million, acquired certain
-16-
<PAGE>
assets from Kerr-McGee for a cash purchase price of $39.0 million and paid $28.2
million to repurchase the remaining $25.0 million principal amount outstanding
of the Azide Notes. Through June 30, 1998, the Company has incurred
approximately $3.1 million in costs associated with the issuance of the Notes.
In connection with the Azide Notes repurchase, the Company recognized an
extraordinary loss on debt extinguishment of approximately $5.0 million.
Cash flows provided by operating activities were $8.5 million and $5.2 million
during the nine-months ended June 30, 1998 and 1997, respectively. Cash flows
from operating activities increased in the first nine months of fiscal 1998
principally as a result of increased sales and margins in the Company's
perchlorate operations. The Company believes that its cash flows from
operations and existing cash balances will be adequate for the foreseeable
future to satisfy the needs of its operations. However, the resolution of
contingencies, and the timing, pricing and magnitude of orders for AP, sodium
azide and Halotron, may have an effect on the use and availability of cash.
Capital expenditures were $2.1 million during the nine months ended June 30,
1998 compared to $1.6 million during the same period last year. Capital
expenditures are budgeted to amount to approximately $2.5 million in fiscal 1998
and relate principally to specialty chemical segment capital improvement
projects.
During the three-month and nine-month periods ended June 30, 1998, the Company
received cash of approximately $0.4 million and $3.1 million, respectively,
relating to the return of capital invested in the Ventana Canyon joint venture.
The Company currently anticipates that cash returns of invested capital and
equity in earnings will continue through the conclusion of the project currently
projected to be the end of calendar 2001.
As a result of the litigation and contingencies discussed in Note 4 of Notes to
Condensed Consolidated Financial Statements, the Company has incurred legal and
other costs, and it may incur material legal and other costs associated with the
resolution of contingencies in future periods. Any such costs, to the extent
borne by the Company and not recovered through insurance, would adversely affect
the Company's liquidity. The Company is currently unable to predict or quantify
the amount or range of such costs, if any, or the period of time over which such
costs will be incurred.
The Company is currently in the process of evaluating its computer software and
databases to determine whether or not modifications will be required to prevent
problems related to the Year 2000. These problems, which have been widely
reported in the media, could cause malfunctions in certain software and
databases with respect to dates on or after January 1, 2000, unless corrected.
Based upon its evaluation to date, the Company does not believe that the costs
of any modifications required to correct for Year 2000 problems will have a
material impact on operations, although there can be no assurance given with
respect thereto.
FORWARD-LOOKING STATEMENTS/RISK FACTORS
Certain matters discussed in this Report may be forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, but are
not limited to, the risk factors set forth below.
The following risk factors, among others, may cause the Company's operating
results and/or financial position to be adversely affected from time to time:
1. (a) Declining demand or downward pricing pressure for the
Company's products as a result of general or specific economic
conditions, (b)
-17-
<PAGE>
governmental budget decreases affecting the Department of Defense
or NASA that would cause a continued decrease in demand for AP,
(c) the results achieved by the Suspension Agreement resulting
from the Company's anti-dumping petition and the possible
termination of such agreement and the continued impact of the GM
labor strike, (d) technological advances and improvements with
respect to existing or new competitive products causing a
reduction or elimination of demand for AP, sodium azide or
Halotron, (e) the ability and desire of purchasers to change
existing products or substitute other products for the Company's
products based upon perceived quality and pricing, and (f) the
fact that perchlorate chemicals, sodium azide, Halotron and the
Company's environmental products have limited applications and
highly concentrated customer bases.
2. Competitive factors including, but not limited to, the Company's
limitations respecting financial resources and its ability to
compete against companies with substantially greater resources,
significant excess market supply in the AP and sodium azide
markets and the development or penetration of competing new
products, particularly in the propulsion, airbag inflation and
fire suppression businesses.
3. Underutilization of the Company's manufacturing facilities
resulting in production inefficiencies and increased costs, the
inability to recover facility costs and reductions in margins.
4. Risks associated with the Company's real estate activities,
including, but not limited to, dependence upon the Las Vegas
commercial, industrial and residential real estate markets,
changes in general or local economic conditions, interest rate
fluctuations affecting the availability and the cost of
financing, the performance of the managing partner of its
residential real estate joint venture (Ventana Canyon Joint
Venture) and regulatory and environmental matters that may have a
negative impact on sales or costs.
5. The effects of, and changes in, trade, monetary and fiscal
policies, laws and regulations and other activities of
governments, agencies or similar organizations, including, but
not limited to, environmental, safety and transportation issues.
6. The cost and effects of legal and administrative proceedings,
settlements and investigations, particularly those described in
Note 4 of Notes to Condensed Consolidated Financial Statements
and claims made by or against the Company relative to patents or
property rights.
7. Integration of new customers and the ability to meet additional
production and delivery requirements resulting from the
Acquisition.
8. The results of the Company's periodic review of impairment issues
under the provisions of SFAS No. 121.
9. The dependence upon a single facility for the production of most
of the Company's products.
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 27,731
<SECURITIES> 0
<RECEIVABLES> 6,596
<ALLOWANCES> 0
<INVENTORY> 13,864
<CURRENT-ASSETS> 49,483
<PP&E> 25,255
<DEPRECIATION> 5,740
<TOTAL-ASSETS> 136,667
<CURRENT-LIABILITIES> 12,194
<BONDS> 75,000
0
0
<COMMON> 840
<OTHER-SE> 43,270
<TOTAL-LIABILITY-AND-EQUITY> 136,667
<SALES> 38,523
<TOTAL-REVENUES> 38,523
<CGS> 26,282
<TOTAL-COSTS> 33,073
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,977
<INCOME-PRETAX> 2,773
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<INCOME-CONTINUING> 2,773
<DISCONTINUED> 0
<EXTRAORDINARY> 5,005
<CHANGES> 0
<NET-INCOME> (2,232)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
