<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, 2000
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: 7,080,955 as of April 30,
2000.
-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 10 of this Report on Form 10-Q.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The information required by Item 303 of Regulation S-K is provided on
pages 11 through 15 of this Report on Form 10-Q.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
The Company has certain fixed-rate debt which it believes to have a
fair value that approximates reported amounts. The Company believes
that any market risk arising from these financial instruments is not
material.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The information required by Item 103 of Regulation S-K is provided on
pages 8 and 9 of this Report on Form 10-Q.
ITEM 2. Changes in Securities
---------------------
None.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The information required hereunder is incorporated by reference to the
Registrant's Current Report on Form 8-K dated March 14, 2000.
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) A Current Report on Form 8-K, dated March 14, 2000, was filed
during the Registrant's second quarter of fiscal 2000. The Form
8-K reported the voting results of matters submitted to a vote of
Security Holders at the Registrant's Annual Meeting of
Stockholders held March 14, 2000, and a change to an ammonium
perchlorate purchase order from a major customer.
-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 11, 2000 /S/ JOHN R. GIBSON
-----------------------------
John R. Gibson
Chief Executive Officer and President
Date: May 11, 2000 /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 Income Statements
(unaudited)
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________
For the three months ended For the six months
March 31, ended March 31,
2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales and Operating Revenues $16,319,000 $ 16,891,000 $ 37,295,000 $ 35,745,000
Cost of Sales 11,294,000 10,970,000 23,697,000 22,558,000
-------------------------------------------------------------------
Gross Profit 5,025,000 5,921,000 13,598,000 13,187,000
Operating Expenses 2,815,000 2,465,000 5,240,000 4,957,000
-------------------------------------------------------------------
Operating Income 2,210,000 3,456,000 8,358,000 8,230,000
Net Interest and Other Expense 984,000 1,392,000 2,108,000 2,865,000
-------------------------------------------------------------------
Income Before Provision for Income
Taxes 1,226,000 2,064,000 6,250,000 5,365,000
Provision for Income Taxes
-------------------------------------------------------------------
Net Income Before Extraordinary Loss 1,226,000 2,064,000 6,250,000 5,365,000
Extraordinary Loss-Debt Extinguishment 614,000 614,000
---------------------------------------------------------------------
Net Income $ 612,000 $ 2,064,000 $ 5,636,000 $ 5,365,000
---------------------------------------------------------------------
Basic Net Income (Loss) Per Share:
Income Before Extraordinary Loss $ .16 $ .25 $ .83 $ .66
Extraordinary Loss $ (.08) $ (.08)
---------------------------------------------------------------------
Net Income $ .08 $ .25 $ .75 $ .66
---------------------------------------------------------------------
Average Shares Outstanding 7,315,000 8,144,000 7,559,000 8,167,000
---------------------------------------------------------------------
Diluted Net Income (Loss) Per Share:
Income Before Extraordinary Loss $ .16 $ .25 $ .81 $ .65
Extraordinary Loss $ (.08) $ (.08)
---------------------------------------------------------------------
Net Income $ .08 $ .25 $ .73 $ .65
---------------------------------------------------------------------
Diluted Shares 7,473,000 8,291,000 7,673,000 8,267,000
---------------------------------------------------------------------
</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,
2000 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 35,932,000 $ 40,434,000
Accounts and Notes Receivable 11,094,000 8,859,000
Related Party Notes Receivable 423,000 447,000
Inventories 10,459,000 9,577,000
Prepaid Expenses and Other Assets 774,000 680,000
Restricted Cash 1,195,000
------------------------------------------------
Total Current Assets 58,682,000 61,192,000
Property, Plant and Equipment, Net 16,415,000 17,254,000
Intangible Assets, Net 32,007,000 34,210,000
Real Estate Equity Investments 8,543,000 11,237,000
Development Property 6,197,000 6,440,000
Other Assets, Net 2,001,000 2,549,000
------------------------------------------------
TOTAL ASSETS $123,845,000 $132,882,000
------------------------------------------------
</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,
2000 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 8,952,000 $ 6,909,000
Current Portion of Long-Term Debt 1,195,000
-------------------------------------
Total Current Liabilities 8,952,000 8,104,000
Long-Term Debt 58,175,000 67,000,000
Long-Term Payables 1,635,000 2,005,000
-------------------------------------
TOTAL LIABILITIES 68,762,000 77,109,000
-------------------------------------
Commitments and Contingencies
Warrants to Purchase Common Stock 3,569,000 3,569,000
Shareholders' Equity:
Common Stock 852,000 847,000
Capital in Excess of Par Value 80,094,000 79,757,000
Accumulated Deficit (17,643,000) (23,279,000)
Treasury Stock (11,722,000) (5,034,000)
Receivable from the Sale of Stock (67,000) (87,000)
-------------------------------------
Total Shareholders' Equity 51,514,000 52,204,000
-------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $123,845,000 $132,882,000
-------------------------------------
</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,
2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities $ 2,578,000 $ (591,000) $ 10,627,000 $10,670,000
---------------------------------------------------------------
Cash Flows From Investing Activities:
Capital Expenditures (989,000) (387,000) (1,155,000) (2,092,000)
Real Estate Equity Investment
Capital Activity 1,077,000 916,000 2,694,000 1,380,000
---------------------------------------------------------------
Net Cash Flows From Investing Activities 88,000 529,000 1,539,000 (712,000)
---------------------------------------------------------------
Cash Flows From Financing Activities:
Debt Related Payments (9,127,000) (10,322,000)
Issuance of Common Stock 21,000 45,000 342,000 45,000
Treasury Stock Acquired (5,946,000) (425,000) (6,688,000) (725,000)
---------------------------------------------------------------
Net Cash Flows From Financing Activities (15,052,000) (380,000) (16,668,000) (680,000)
---------------------------------------------------------------
Net Change in Cash and Cash Equivalents (12,386,000) (442,000) (4,502,000) 9,278,000
Cash and Cash Equivalents,
Beginning of Period 48,318,000 30,109,000 40,434,000 20,389,000
---------------------------------------------------------------
Cash and Cash Equivalents,
End of Period $ 35,932,000 $29,667,000 $ 35,932,000 $29,667,000
---------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 3,050,000 $ 3,238,000 $ 3,050,000 $ 3,238,000
---------------------------------------------------------------
</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, 1999 was
derived from the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended September 30, 1999.
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, 1999.
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, 2000 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 PER COMMON SHARE
Basic per share amounts are computed by dividing net income by average
shares outstanding during the period. Diluted per share amounts are
computed by dividing net income 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, 2000 and 1999, 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,
2000 1999
----------- -------------
<S> <C> <C>
Work-in-process $ 6,485,000 $5,938,000
Raw materials and supplies 3,974,000 3,639,000
----------- ----------
Total $10,459,000 $9,577,000
----------- ----------
</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
-8-
<PAGE>
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. Accordingly, no accrual for
potential costs has been made in the accompanying Condensed Consolidated
Financial Statements.
In 1999, two lawsuits were filed in Utah state court against the Company
and certain unrelated equipment and product manufacturers claiming
unspecified monetary damages as a result of a fire and explosion on July
30, 1997, at the Company's AP production facility that resulted in the
death of one employee and the injury of three employees. The Company
believes that it has statutory immunity as an employer under the applicable
worker's compensation laws of the State of Utah and that there was no
negligence on the part of the Company that contributed to the incident.
The lawsuits are currently in a discovery phase.
The Company is a party to an agreement with Utah Power and Light Company
("UPL") for its electrical requirements. The agreement provides for the
supply of power for a minimum of a ten-year period, which began in 1988,
and obligates the Company to purchase minimum amounts of power, while
assuring the Company competitive pricing for its electricity needs for the
duration of the agreement. Under the terms of the agreement, the Company's
minimum monthly charge for firm and interruptible demand is approximately
$22,000. The agreement has a three year notice of termination provision
and, on April 7, 1999, UPL provided written notice of termination effective
April 7, 2002. The Company is in the process of negotiating for its
expected power requirements beyond April 7, 2002.
5. INCOME TAXES
The Company established a valuation allowance for deferred tax assets at
September 30, 1997. The Company's effective tax rate will be approximately
0% until its net operating losses expire or the Company believes the
valuation allowance is no longer required.
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 earnings in GRLLC (after
amortization of differences in basis) on a current quarterly basis.
Summarized financial information for GRLLC as of and for the three-month
and six-month periods ended March 31, 2000 was as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Three-Month Period Ended Six-Month Period Ended
March 31, 2000 March 31, 2000
--------------------------------------------------------------------
<S> <C> <C>
Income Statement:
Revenues $8,108,000 $20,946,000
Gross Profit 900,000 2,433,000
Operating Expenses 313,000 730,000
Net Income 581,000 1,706,000
</TABLE>
7. SEGMENT INFORMATION
The Company's three reportable operating segments are specialty chemicals,
environmental protection equipment and real estate sales and development.
These segments are based upon business units that offer distinct products
and services, are operationally managed separately and produce products
using different production methods.
-9-
<PAGE>
The Company evaluates the performance of each operating segment and
allocates resources based upon operating income or loss before an
allocation of interest expense and income taxes. The accounting policies of
each reportable operating segment are the same as those of the Company.
The Company's specialty chemicals segment manufactures and sells
perchlorate chemicals used principally in solid rocket propellants for the
space shuttle and defense programs, sodium azide used principally in the
inflation of certain automotive airbag systems and Halotron (TM) I, a clean
gas fire extinguishing agent designed to replace Halon 1211. The specialty
chemicals segment production facilities are located in Iron County, Utah.
The Company's environmental protection equipment operating segment designs,
manufactures and markets systems for the control of noxious odors, the
disinfection of waste water streams and the treatment of seawater. These
operations are also located in Iron County, Utah.
At March 31, 2000, the Company's real estate operating segment had
approximately 70 remaining acres of improved land in the Gibson Business
Park near Las Vegas, Nevada, that is held for development and sale. Recent
activity has consisted of sales of land parcels. Although not included in
operating activities, this segment also has an equity investment in a
residential joint venture that is located across the street from the Gibson
Business Park. (See Note 6).
Additional information about the Company's operations, by segment, for
the three months and six months ended March 31, is provided below.
<TABLE>
<CAPTION>
--------------------------------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Specialty chemicals $13,661,000 $16,675,000 $33,015,000 $33,161,000
Environmental protection 2,655,000 149,000 3,127,000 856,000
Real estate 3,000 67,000 1,153,000 1,728,000
--------------------------------------------------------------
Total revenues $16,319,000 $16,891,000 $37,295,000 $35,745,000
--------------------------------------------------------------
Operating income (loss):
Specialty chemicals $ 1,640,000 $ 4,198,000 $ 7,316,000 $ 7,911,000
Environmental protection 730,000 (360,000) 692,000 (367,000)
Real estate (150,000) (94,000) 578,000 1,217,000
--------------------------------------------------------------
Total segment operating income 2,220,000 3,744,000 8,586,000 8,761,000
Unallocated net expenses
(principally net interest) 994,000 1,680,000 2,336,000 3,396,000
--------------------------------------------------------------
Income before income taxes
$ 1,226,000 $ 2,064,000 $ 6,250,000 $ 5,365,000
==============================================================
</TABLE>
8. DEBT REPURCHASE
In June 1999 and September 1998, the Company repurchased and retired $3.0
million and $5.0 million, respectively, in principal amount of its senior
unsecured notes (the "Notes"). The Company incurred extraordinary losses on
debt extinguishment of approximately $0.2 million on each of these
transactions principally as a result of writing off costs associated with
the issuance of the Notes. During the second quarter of fiscal 2000, the
Company repurchased and retired approximately $8.8 million in principal
amount of Notes. The Company incurred extraordinary losses on debt
extinguishment of approximately $0.6 million on these second quarter
transactions. In April and May 2000, the Company repurchased and retired an
additional $14.0 million in principal amount of Notes. Since the original
issuance of the Notes, the Company has repurchased and retired
approximately $30.8 million in principal amount at a weighted average cost
of approximately 102.7% of par.
-10-
<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, a chemical used in fire extinguishing 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.
During 1998, the Company entered into a Purchase Agreement with Kerr-McGee. On
March 12, 1998, the Company sold $75.0 million of 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
69% and 72% of revenues during the six-month periods ended March 31, 2000 and
1999, 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 17% and 20% of revenues during
the six-month periods ended March 31, 2000 and 1999, respectively. The
Company's principal sodium azide customer accounted for in excess of 80% of such
revenues.
Sales of Halotron amounted to approximately 3% and 1% of revenues during the
six-month periods ended March 31, 2000 and 1999, respectively. Halotron is
designed to replace halon-based fire extinguishing 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 3% and 5% of revenues
during the six-month periods ended March 31, 2000 and 1999, 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 8% and 2%
of revenues during the six-month periods ended March 31, 2000 and 1999,
respectively.
In March 2000, the Company received notification from Thiokol Propulsion (a
division of Cordant Technologies, Inc.) ("Thiokol") of a change in the current
purchase order for AP which will result in an estimated reduction in revenues of
approximately $4.0 million in the fiscal year ending September 30, 2000. In
1998, the Company entered into an agreement with Thiokol with respect to the
supply of AP through the year 2008. The agreement establishes a pricing matrix
under which AP unit prices to Thiokol vary inversely with the quantity of AP
sold by the Company to all of its customers. The reduced AP delivery quantities
in the Thiokol change order results in an AP unit price increase for all AP sold
to Thiokol in fiscal 2000 and the Company has recognized in revenues the effects
of the higher AP unit price for quantities sold to Thiokol during the first half
of fiscal 2000.
The financial effects of the change order will be concentrated mostly on the
Company's second half of fiscal 2000. The Company currently expects AP volumes
and revenues to be between 30% and 40% lower in the second half of fiscal 2000
as compared to the first half. However, the change order also allows for a
price adjustment claim which the Company expects to complete and submit in May
2000. Subject to the outcome of
-11-
<PAGE>
the price adjustment claim process, the purchase order modification may have a
material adverse effect on the Company's fiscal year 2000 operating results.
Cost of Sales. The principal elements comprising the Company's cost of sales
- --------------
are depreciation and amortization, 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. 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, 2000 and 1999. 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 valuation allowance is no longer necessary.
Net Income. Although the Company's net income and diluted net income 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) the 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, and environmental protection equipment orders in the future is
uncertain. (See "Forward Looking Statements/Risk Factors" below.)
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Sales and Operating Revenues. Sales decreased $0.6 million, or 4%, during the
- ----------------------------
three months ended March 31, 2000, to $16.3 million from $16.9 million in the
corresponding period of the prior year. This decrease was principally
attributable to decreased sales of specialty chemicals. Perchlorate and sodium
azide chemical sales decreased approximately $3.4 million (see above for a
discussion of the impact of a change order for AP). This decrease was partially
offset by an increase in environmental protection equipment sales of
approximately $2.5 million due primarily to the timing of the shipment of
certain equipment.
Cost of Sales. Cost of sales increased $0.3 million, or 3%, in the three months
- -------------
ended March 31, 2000, to $11.3 million from $11.0 million in the corresponding
period of the prior year. As a percentage of sales, cost of sales was 69%
during the three-month period ended March 31, 2000 compared to 65% during the
same period last year. The increases were principally due to a change in the
mix of sales and the lower variable margins associated with the Company's
environmental protection equipment segment as compared to the specialty
chemicals segment.
Operating Expenses. Operating (selling, general and administrative) expenses
- ------------------
increased $0.3 million, or 12%, in the three months ended March 31, 2000, to
$2.8 million from $2.5 million in the corresponding period of 1999.
-12-
<PAGE>
Net Interest Expense. Net interest and other expense decreased to $1.0 million
- --------------------
in the three months ended March 31, 2000, from $1.4 million in the corresponding
period of the prior year as a result of lower average debt balances.
Six Months Ended March 31, 2000 Compared to Six Months Ended March 31, 1999
Sales and Operating Revenues. Sales increased $1.6 million, or 4%, during the
- ----------------------------
six months ended March 31, 2000, to $37.3 million from $35.7 million in the
corresponding period of the prior year. The increase was principally due to an
increase in environmental protection equipment sales of approximately $2.3
million. Such increase was partially offset by a decrease in real estate sales
of approximately $0.6 million.
Cost of Sales. Cost of sales increased $1.1 million, or 5%, in the six months
- -------------
ended March 31, 2000, to $23.7 million from $22.6 million in the corresponding
period of the prior year. As a percentage of sales, cost of sales was 63%
during the first six months of this fiscal year and last fiscal year.
Operating Expenses. Operating expenses were $5.2 million during the six-month
- ------------------
period ended March 31, 2000 compared to $5.0 million in the corresponding period
of the prior year. Operating expenses during the six-month periods ended March
31, 2000 and 1999 include approximately $0.5 million and $0.4 million,
respectively, in costs associated with the investigation and evaluation of trace
amounts of perchlorate chemicals found in Lake Mead. (See Note 4 to the
Condensed Consolidated Financial Statements).
Net Interest Expense. Net interest and other expense decreased to $2.1 million
- --------------------
in the six months ended March 31, 2000, from $2.9 million in the corresponding
period of the prior year, principally as a result of lower average debt
balances.
Segment Operating Income (Loss). Operating income (loss) of the Company's
- -------------------------------
industry segments during the six-month periods ended March 31, 2000 and 1999 was
as follows:
<TABLE>
<CAPTION>
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Specialty chemicals $7,316,000 $7,911,000
Environmental protection equipment 692,000 (367,000)
Real Estate 578,000 1,217,000
---------- ----------
Total $8,586,000 $8,761,000
========== ==========
</TABLE>
The decrease in operating income in the Company's specialty chemical industry
segment was primarily attributable to lower sales. The increase in operating
performance of the environmental protection equipment segment was principally
due to increased 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,
2000 or 1999. 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. In June 1999 and September
1998, the Company repurchased and retired $3.0 million and $5.0 million,
respectively, in principal amount of Notes.
-13-
<PAGE>
The Company incurred extraordinary losses on debt extinguishment of
approximately $0.2 million on each of these transactions principally as a result
of writing off costs associated with the issuance of the Notes. During the
second quarter of fiscal 2000, the Company repurchases and retired approximately
$8.8 million in principal amount of Notes. The Company incurred extraordinary
losses on debt extinguishment of approximately $0.6 million on these second
quarter transactions. In April and May 2000, the Company repurchased and retired
an additional $14.0 million in principal amount of Notes. Since the original
issuance of the Notes, the Company has repurchased and retired approximately
$30.8 million in principal amount at a weighted average cost of approximately
102.7% of par.
Cash flows provided by operating activities were $10.6 million and $10.7 million
during the six-months ended March 31, 2000 and 1999, respectively. 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 litigation, and the timing, pricing
and magnitude of orders for AP, sodium azide and Halotron, may have an effect on
the use and availability of cash.
Capital expenditures were $1.2 million during the six months ended March 31,
2000, compared to $2.1 million during the same period last year. Capital
expenditures are budgeted to amount to approximately $3.0 million in fiscal 2000
and are expected to relate primarily to specialty chemical segment capital
improvement projects.
During the six-month period ended March 31, 2000, the Company received cash of
approximately $2.7 million relating to the return of capital invested in GRLLC.
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.
During the six-month period ended March 31, 2000, the Company spent
approximately $6.7 million on the repurchase of its Common Stock. The Company
may (but is not obligated to) continue to repurchase its Common Stock but is
limited in its ability to use cash to repurchase stock by certain covenants
contained in the Indenture associated with the Notes.
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, (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 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.
-14-
<PAGE>
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
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.
10. Provisions of the Company's Certificate of Incorporation and By-laws,
and Series D Preferred Stock, the potential dividend of preference
stock purchase rights thereunder and the related Rights Agreement
could have the effect of making it more difficult for potential
acquirors to obtain a control position in the Company.
-15-
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