<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 March 31, 1999
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: 8,131,037 as of April 30,
1999.
-1-
<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 9 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 10 through 15 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
---------------------------------------------------
The following matters were submitted to a vote of Security Holder's at
the Registrant's Annual Meeting of Stockholders held on March 16, 1999:
1) Election of the following Class B Directors to serve for a
term of three years expiring in 2002:
<TABLE>
<CAPTION>
Nominee Number of Votes For Number of Votes Withheld
------- ------------------- ------------------------
<S> <C> <C>
Jan H. Loeb 7,448,424 22,404
Norval F. Pohl 6,354,100 1,116,728
C. Keith Rooker 6,309,247 1,161,581
Jane L. Williams 6,355,157 1,115,671
</TABLE>
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
a) 27. Financial Data Schedules. This Exhibit is filed in connection
with the Registrant's electronic filing.
b) None.
-2-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN PACIFIC CORPORATION
Date: May 14, 1999 /S/ JOHN R. GIBSON
------------------
John R. Gibson
Chief Executive Officer and President
Date: May 14, 1999 /S/ DAVID N. KEYS
-----------------
David N. Keys
Executive Vice President,
Chief Financial Officer, Secretary
and Treasurer; Principal Financial
and Accounting Officer
-3-
<PAGE>
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
For the three months ended For the six months
March 31, ended March 31,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales and Operating Revenues $16,891,000 $14,119,000 $35,745,000 $25,387,000
Cost of Sales 10,970,000 9,129,000 22,558,000 17,235,000
----------------------------------------------------------------------
Gross Profit 5,921,000 4,990,000 13,187,000 8,152,000
Operating Expenses 2,465,000 2,247,000 4,957,000 4,430,000
----------------------------------------------------------------------
Operating Income 3,456,000 2,743,000 8,230,000 3,722,000
Equity in Earnings of Real Estate
Venture 300,000
Net Interest and Other
Expense 1,392,000 750,000 2,865,000 1,463,000
----------------------------------------------------------------------
Income Before Provision for Income
Taxes 2,064,000 1,993,000 5,365,000 2,559,000
Provision for Income Taxes
----------------------------------------------------------------------
Net Income Before Extraordinary Loss 2,064,000 1,993,000 5,365,000 2,559,000
Extraordinary Loss-Debt
Extinguishment 5,005,000 5,005,000
----------------------------------------------------------------------
Net Income (Loss) $ 2,064,000 $(3,012,000) $ 5,365,000 $(2,446,000)
----------------------------------------------------------------------
Basic Net Income (Loss) Per Share:
Income Before Extraordinary Loss $ .25 $ .24 $ .66 $ .31
----------------------------------------------------------------------
Extraordinary Loss $ $ (.61) $ $ (.61)
----------------------------------------------------------------------
Net Income (Loss) $ .25 $ (.37) $ .66 $ (.30)
----------------------------------------------------------------------
Average Shares Outstanding 8,144,000 8,165,000 8,167,000 8,151,000
----------------------------------------------------------------------
Diluted Net Income (Loss) Per Share:
Income Before Extraordinary Loss $ .25 $ .24 $ .65 $ .31
Extraordinary Loss $ $ (.60) $ $ (.61)
----------------------------------------------------------------------
Net Income (Loss) $ .25 $ (.36) $ .65 $ (.30)
----------------------------------------------------------------------
Diluted Shares 8,291,000 8,337,000 8,267,000 8,280,000
----------------------------------------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE>
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
March 31, September 30,
1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 29,667,000 $ 20,389,000
Accounts and Notes Receivable 10,284,000 8,927,000
Related Party Notes Receivable 480,000 536,000
Inventories 10,836,000 13,730,000
Prepaid Expenses and Other Assets 953,000 839,000
Restricted Cash 1,181,000 1,176,000
----------------------------------------
Total Current Assets 53,401,000 45,597,000
Property, Plant and Equipment, Net 20,004,000 19,529,000
Intangible Assets, Net 36,226,000 38,252,000
Development Property 6,781,000 7,036,000
Real Estate Equity Investments 15,732,000 17,112,000
Other Assets, Net 3,002,000 3,233,000
----------------------------------------
TOTAL ASSETS $135,146,000 $130,759,000
----------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
-5-
<PAGE>
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
March 31, September 30,
1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 9,665,000 $ 9,635,000
Current Portion of Long-Term Debt 1,181,000 1,176,000
-----------------------------------------
Total Current Liabilities 10,846,000 10,811,000
Long-Term Debt 70,000,000 70,000,000
Long-Term Payables 2,007,000 2,350,000
-----------------------------------------
TOTAL LIABILITIES 82,853,000 83,161,000
-----------------------------------------
Commitments and Contingencies
Warrants to Purchase Common Stock 3,569,000 3,569,000
Shareholders' Equity:
Common Stock 843,000 842,000
Capital in Excess of Par Value 79,532,000 79,488,000
Accumulated Deficit (29,353,000) (34,718,000)
Treasury Stock (2,211,000) (1,486,000)
Receivable from the Sale of Stock (87,000) (97,000)
-----------------------------------------
Total Shareholders' Equity 48,724,000 44,029,000
-----------------------------------------
-----------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $135,146,000 $130,759,000
-----------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
-6-
<PAGE>
AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the three months For the six months
ended March 31, ended March 31,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Provided by (Used For)
Operating Activities $ (591,000) $ 5,059,000 $10,670,000 $ (411,000)
---------------------------------------------------------------
Cash Flows Provided by (Used For) Investing
Activities:
Capital Expenditures (387,000) (679,000) (2,092,000) (1,648,000)
Payment for Acquisition of Intangible (39,000,000) (39,000,000)
Real Estate Equity Investment
Capital Activity 916,000 1,018,000 1,380,000 2,731,000
---------------------------------------------------------------
Net Cash Provided by (Used For) Investing
Activities 529,000 (38,661,000) (712,000) (37,917,000)
---------------------------------------------------------------
Cash Flows from Financing Activities:
Principal Payments on Debt (30,000,000) (31,166,000)
Issuance of 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 45,000 599,000 45,000 599,000
Treasury Stock Acquired (425,000) (725,000)
---------------------------------------------------------------
Net Cash Provided by (Used For)
Financing Activities (380,000) 39,642,000 (680,000) 38,476,000
---------------------------------------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents (442,000) 6,040,000 9,278,000 148,000
Cash and Cash Equivalents,
Beginning of Period 30,109,000 12,989,000 20,389,000 18,881,000
---------------------------------------------------------------
Cash and Cash Equivalents,
End of Period $29,667,000 $ 19,029,000 $29,667,000 $ 19,029,000
---------------------------------------------------------------
Supplemental Disclosure of Cash Flow
Information:
Interest Paid (Net of Amounts Capitalized) $ 3,238,000 $ 1,650,000 $ 3,238,000 $ 1,650,000
---------------------------------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.
-7-
<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, 1998 was
derived from the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended September 30, 1998.
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, 1998.
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, 1999 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 estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
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 these and other estimates.
2. NET INCOME (LOSS) PER COMMON SHARE
Basic per share amounts are computed by dividing net income (loss) by
average shares outstanding during the period. Diluted per share amounts
are computed by dividing net income (loss) by average shares outstanding
plus the dilutive effect of common share equivalents. The effect of stock
options and warrants outstanding to purchase approximately 2.9 million
shares of common stock were not included in diluted per share calculations
during the three-month and six-month periods ended March 31, 1999 and 1998,
since the average exercise price of such options and warrants was greater
than the average price of the Company's common stock during these periods.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
----------- -------------
<S> <C> <C>
Work-in-process $ 6,486,000 $ 8,685,000
Raw materials and supplies 4,350,000 5,045,000
----------- -----------
Total $10,836,000 $13,730,000
----------- -----------
</TABLE>
-8-
<PAGE>
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.
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. At September 30,
1998, the balance of the valuation allowance was $11.0 million. 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. 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 six-month periods ended March 31, 1999 was as follows:
<TABLE>
<CAPTION>
As of and for the As of and for the
Three-Month Period Ended Six-Month Period Ended
March 31, 1999 March 31, 1999
-------------- --------------
<S> <C> <C>
Income Statement:
Revenues $ 9,682,000 $23,232,000
Gross Profit 975,000 2,034,000
Operating Expenses 337,000 756,000
Net Income 684,000 1,346,000
Balance Sheet:
Assets $20,965,000 $20,965,000
Liabilities 8,782,000 8,782,000
Equity 12,183,000 12,183,000
</TABLE>
GRLLC's balance sheet is not classified. Assets consist principally of
inventories and liabilities consist principally of notes and accounts
payable. Inventories were $19.4 million at March 31, 1999.
-9-
<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 certain automotive airbag
safety systems, and Halotron(TM), a chemical used in fire suppression systems
ranging from portable fire extinguishers to airport firefighting vehicles. The
perchlorate, sodium azide and Halotron(TM) 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 believes that North American AP demand is currently approximately 20
to 25 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 AP market, the Company entered into a Purchase
Agreement with Kerr-McGee. On March 12, 1998, the Company sold $75.0 million of
unsecured senior notes (the "Notes"), consummated an acquisition (the
"Acquisition") of certain assets from Kerr-McGee and repurchased the remaining
$25.0 million principal amount balance outstanding of subordinated secured notes
(the "Azide Notes"). 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
72% and 61% of revenues during the six-month periods ended March 31, 1999 and
1998, 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 20% and 24% of revenues during
the six-month periods ended March 31, 1999 and 1998, respectively. In the
summer of 1998, shipments of sodium azide were negatively impacted by a labor
strike at certain General Motor's ("GM") facilities. Shipments of sodium azide
increased significantly in the first and second quarters of fiscal 1999 as
compared to the fourth quarter of fiscal 1998.
Sales of Halotron(TM) amounted to approximately 1% of revenues during the six-
month periods ended March 31, 1999 and 1998. Halotron(TM) is designed to replace
halon-based fire suppression systems. Accordingly, demand for Halotron(TM)
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 5% and 9% of revenues
during the six-month periods ended March 31, 1999 and 1998, 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 2% and 5%
of revenues during the six-month periods ended March 31, 1999 and 1998,
respectively. It is currently anticipated that sales of this segment will be
adversely affected in fiscal 1999 and perhaps beyond by the recent 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 of the raw materials used in
the Company's manufacturing processes have historically been available in
commercial quantities with relatively stable pricing, and the Company has had no
difficulty obtaining necessary raw materials.
-10-
<PAGE>
The costs of operating the Company's specialty chemical plants are, however,
largely fixed.
Income Taxes. The Company's effective income tax rates were 0% during the six-
- ------------
month periods ended March 31, 1999 and 1998. The Company's effective income tax
rate was 0% during these periods as a result of the establishment of a $10.4
million deferred tax valuation allowance in the fourth quarter of fiscal 1997.
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 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 the 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 per 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(TM), and environmental protection
equipment sales in the future is uncertain. (See "Forward Looking
Statements/Risk Factors" below.)
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Sales and Operating Revenues. Sales increased $2.8 million, or 20%, during the
- ----------------------------
three months ended March 31, 1999, to $16.9 million from $14.1 million in the
corresponding period of the prior year. This increase was principally
attributable to increased sales of specialty chemicals. Perchlorate chemical
sales increased approximately $3.5 million principally as a result of the
consummation of the Acquisition. Environmental protection equipment sales
decreased approximately $0.9 million due primarily to the timing of the shipment
of certain equipment. Real estate sales decreased approximately $0.6 million as
a result of reduced land sales.
Cost of Sales. Cost of sales increased $1.9 million, or 20%, in the three
- -------------
months ended March 31, 1999, to $11.0 million from $9.1 million in the
corresponding period of the prior year. Such increase was principally due to an
increase in costs associated with perchlorate operations. The increase in
perchlorate costs was due to increased sales volumes and amortization of costs
associated with the Acquisition.
Operating Expenses. Operating (selling, general and administrative) expenses
- ------------------
increased $0.3 million, or 14%, in the three months ended March 31, 1999, to
$2.5 million from $2.2 million in the corresponding period of 1998.
Net Interest Expense. Net interest and other expense increased to $1.4 million
- --------------------
in the three months ended March 31, 1999, from $0.8 million in the corresponding
period of the prior year as a result of the issuance of the Notes in March 1998.
Six Months Ended March 31, 1999 Compared to Six Months Ended March 31, 1998
Sales and Operating Revenues. Sales increased $10.3 million, or 41%, during the
- ----------------------------
six months ended March 31, 1999, to $35.7 million from $25.4 million in the
corresponding period of the prior year. This increase was principally due to
increased sales of perchlorate chemicals and sodium azide. Such increase was
partially offset by decreases in environmental protection equipment and real
estate sales. Perchlorate chemical sales increased approximately $10.3 million
during the six months ended March 31, 1999.
Cost of Sales. Cost of sales increased $5.4 million, or 31%, in the six months
- -------------
ended March 31, 1999, to $22.6 million from $17.2 million in the corresponding
period of the prior year. The increase in cost of sales
-11-
<PAGE>
was primarily due to increases in perchlorate and sodium azide volume. As a
percentage of sales, costs of sales decreased in the six months ended March 31,
1999 to 63% as compared to 68% in the corresponding period of the prior year.
The decrease was attributable to the increase in perchlorate and sodium azide
sales volume. Such decrease was partially offset by the amortization of $2.0
million in capitalized Acquisition costs.
Operating Expenses. Operating expenses were $5.0 million during the six-month
- ------------------
period ended March 31, 1999 compared to $4.4 million in the corresponding period
of the prior year.
Net Interest Expense. Net interest and other expense increased to $2.9 million
- --------------------
in the six months ended March 31, 1999, from $1.5 million in the corresponding
period of the prior year principally as a result of the issuance of the Notes.
Equity in Earnings of Real Estate Venture. The Company's share of equity in its
- -----------------------------------------
Ventana Canyon joint venture was $0 million and $0.3 million during the six-
month periods ended March 31, 1999 and 1998, respectively. The joint venture
has historically operated at or near a break-even point on residential activity
and has generated net income on sales of improved land.
Segment Operating Income (Loss). Operating income (loss) of the Company's
- -------------------------------
industry segments during the six-month periods ended December 31, 1999 and 1998
was as follows:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Specialty chemicals $7,911,000 $2,102,000
Environmental protection equipment (367,000) 60,000
Real Estate 1,217,000 1,271,000
------------- ------------
Total $8,761,000 $3,433,000
============= ============
</TABLE>
The increase in operating income in the Company's specialty chemical industry
segment was attributable to the increase in perchlorate sales referred to above.
The decrease in operating performance of the environmental protection equipment
segment was primarily due to decreased sales. The decrease in real estate
segment operating income was attributable to decreased land sales.
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,
1999 or 1998. 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
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.
Cash flows provided by operating activities were 10.7 million during the six-
months ended March 31, 1999. The Company used cash in operations of $0.4
million during the first six-months of last fiscal year. Cash flows from
operating activities increased principally as a result of increased sales and
margins in the Company's specialty chemical 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 six months ended March 31,
1999, compared to $1.7 million during the same period last year. Capital
expenditures are budgeted to amount to approximately
-12-
<PAGE>
$4.5 million in fiscal 1999 and relate principally to specialty chemical segment
capital improvement projects.
During the six-month period ended March 31, 1999, the Company received cash of
approximately $1.4 million 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 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 Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations.
The Company has completed an evaluation and is in the process of resolving the
problems that might be associated with the Year 2000 issue. The Company's Year
2000 project has four major components:
1. Evaluation of all major manufacturing and business computing systems to
determine which systems are Year 2000 compliant.
2. For each computing system found not to be Year 2000 compliant, development
of a strategy to replace, modify or upgrade the system to a Year 2000
compliant system.
3. Evaluation of core vendors for Year 2000 compliance.
4. Preparation of contingency plans.
The Company's evaluation found that the most critical digital control system,
which is used in the manufacture of specialty chemical products, is Year 2000
compliant. The Company has received a letter of certification from its vendor,
and the Company has tested the system by turning the dates forward on the
computers to the year 2000, and all systems functioned normally.
The Company's accounting system is being upgraded to a Year 2000 compliant
version. This upgrade is in process, and should be completed in the third
quarter of fiscal 1999. New maintenance and manufacturing (MRP) software
packages have been implemented, and each is certified and tested as Year 2000
compliant.
The majority of PC computers used by the Company are Pentium class, running
Microsoft's Windows 95 operating system, and are Year 2000 compliant. The
Company's file servers are running on Pentium computers with Microsoft NT 4.0,
and each of these is also certified Year 2000 compliant. The Company also uses
Microsoft's office suite, which is Year 2000 compliant.
During the evaluation phase of its Year 2000 project, the Company identified
certain potential issues related to many of its programmable logic controller
units used in the manufacturing process and certain of the Company's laboratory
instruments and the computers and software with which they operate. The Company
is in the process of updating the equipment that is not Year 2000 compliant and
expects this to be completed by the third quarter of fiscal 1999.
The Company has identified all critical vendors of raw materials, supplies and
services. Each such vendor has been contacted and notified of Year 2000 issues.
-13-
<PAGE>
Plant personnel have completed a contingency plan for plant operations that is
currently being reviewed by senior management. The Company expects to have a
complete Company contingency plan in place by the third quarter of fiscal 1999.
The Year 2000 issue and related risks could potentially have a material impact
on the Company's operations, working capital, results of operations and
financial condition. In a worst case situation, long delays or interruptions in
deliveries of critical raw materials, supplies or services could materially
impact the Company's ability to produce and deliver products. In addition,
problems encountered by the Company's customers could cause delays or possibly
cancellations of shipments and billings of the Company's products. The Company
is considering these risks, among others, in the preparation of its contingency
plan.
The Company recently reevaluated its estimates and assumptions of the costs
directly associated with its Year 2000 project and currently estimates that
approximately $0.5 million in costs will be incurred that are directly
associated with the project. Through March 31, 1999, the Company had incurred
approximately $0.3 million in costs that were directly related to its Year 2000
project.
Given the inherent risks for a project of this nature, the timing and costs
involved could differ materially from those anticipated by the Company. There
can be no assurance that the Year 2000 project will be completed on schedule or
within budget.
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) governmental budget decreases affecting the DOD
or NASA that would cause a decrease in demand for AP, (c) the
results achieved by the Suspension Agreement resulting from the
Company's anti-dumping petition against foreign sodium azide
producers and the possible termination of such agreement, (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(TM), (e) the ability and
desire of purchasers to change existing products or substitute
other products for the Company's products based upon perceived
quality, environmental effects and pricing, and (f) the fact that
perchlorate chemicals, sodium azide, Halotron(TM) 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 sodium azide market 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 cost of financing,
the performance of the managing partner of its residential real
estate joint venture (GRLLC) and
-14-
<PAGE>
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 investigations
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.
-15-
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