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, 2002
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: 7,155,000 as of
April 30, 2002.
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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 11 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 12 through 17 of this Report on Form 10-Q.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
Market risk represents the risk of loss arising from adverse changes
in market rates and prices, commodity prices and foreign currency
exchange rates. The Company has certain long-term fixed-rate debt
but does not maintain a revolving or other bank credit facility. The
Company believes that any market risk arising from its fixed-rate
debt is not material. At March 31, 2002, the Company did not have
any derivative-based financial instruments. However, the amount of
outstanding debt may fluctuate and the Company may at some time be
subject to refinancing risk.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The information required by Item 103 of Regulation S-K is provided
on pages 9 and 10 of this Report on Form 10-Q.
ITEM 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Voting results of matters submitted to a vote of Security Holders at
the Registrant's Annual Meeting of Stockholders held on March 12,
2002 were as follows:
Item No. 1 - Election of Class C Directors (through March 2003)
Name For Votes Withheld
---- --- --------------
Fred D. Gibson, Jr. 5,721,090 1,190,202
Victor M. Rosenzweig 5,720,690 1,190,602
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Item No. 2 - Election of Class B Directors (through March 2005)
Name For Votes Withheld
---- --- --------------
Jan H. Loeb 5,731,390 1,179,902
Norval F. Pohl 6,409,290 502,002
C. Keith Rooker 5,721,090 1,190,202
Jane L. Williams 5,723,790 1,187,502
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
a) None.
b) None.
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 8, 2002 /s/ JOHN R. GIBSON
---------------------------------------
John R. Gibson
Chief Executive Officer and President
Date: May 8, 2002 /s/ DAVID N. KEYS
-------------------------------------------
David N. Keys
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer; Principal
Financial and Accounting Officer
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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Income Statements
(unaudited)
===============================================================================================================
For the three months ended For the six months
March 31, ended March 31,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Sales and Operating Revenues $ 20,046,000 $ 14,830,000 $ 33,163,000 $ 26,709,000
Cost of Sales 12,159,000 9,756,000 21,437,000 18,921,000
--------------------------------------------------------------------
Gross Profit 7,887,000 5,074,000 11,726,000 7,788,000
Operating Expenses 3,073,000 2,626,000 6,077,000 4,746,000
--------------------------------------------------------------------
Operating Income 4,814,000 2,448,000 5,649,000 3,042,000
Net Interest and Other Expense 835,000 654,000 1,678,000 1,320,000
--------------------------------------------------------------------
Income Before Income Taxes 3,979,000 1,794,000 3,971,000 1,722,000
Income Taxes 1,308,000 664,000 1,305,000 637,000
--------------------------------------------------------------------
Net Income Before Extraordinary Loss 2,671,000 1,130,000 2,666,000 1,085,000
Extraordinary Loss-Debt Extinguishment 105,000 105,000
--------------------------------------------------------------------
Net Income $ 2,566,000 $ 1,130,000 $ 2,561,000 $ 1,085,000
--------------------------------------------------------------------
Basic Net Income Per Share:
Income Before Extraordinary Loss $ .37 $ .16 $ .37 $ .15
Extraordinary Loss $ (.01) $ $ (.01) $
--------------------------------------------------------------------
Net Income $ .36 $ .16 $ .36 $ .15
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Average Shares Outstanding 7,107,000 7,044,000 7,056,000 7,058,000
--------------------------------------------------------------------
Diluted Net Income Per Share:
Income Before Extraordinary Loss $ .36 $ .16 $ .36 .15
Extraordinary Loss $ (.01) $ $ (.01) $
--------------------------------------------------------------------
Net Income $ 35 $ .16 $ .35 $ .15
--------------------------------------------------------------------
Diluted Shares 7,332,000 7,045,000 7,232,000 7,060,000
--------------------------------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements.
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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
==============================================================================================================
March 31, September 30,
2002 2001
- --------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ 47,066,000 $ 51,471,000
Accounts and Notes Receivable 15,143,000 5,401,000
Related Party Notes and Accrued Interest Receivable 430,000 427,000
Inventories 14,590,000 13,908,000
Prepaid Expenses and Other Assets 1,006,000 770,000
Deferred Income Taxes 500,000 443,000
------------------------------------
Total Current Assets 78,735,000 72,420,000
Property, Plant and Equipment, Net 6,969,000 7,107,000
Intangible Assets, Net 23,219,000 25,411,000
Development Property 3,156,000 4,780,000
Deferred Income Taxes 10,562,000 10,660,000
Other Assets, Net 1,034,000 2,664,000
--------------------------------------
TOTAL ASSETS $ 123,675,000 $ 123,042,000
--------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements.
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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
- -------------------------------------------------------------------------------------------------------
March 31, September 30,
2002 2001
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 6,970,000 $ 6,371,000
------------------------------------
Total Current Liabilities 6,970,000 6,371,000
Long-Term Debt 40,600,000 44,175,000
SERP Obligation 2,060,000 1,972,000
------------------------------------
TOTAL LIABILITIES 49,630,000 52,518,000
------------------------------------
Commitments and Contingencies
Warrants to Purchase Common Stock 3,569,000 3,569,000
Shareholders' Equity:
Common Stock 870,000 852,000
Capital in Excess of Par Value 81,278,000 80,106,000
Retained Earnings (Accumulated Deficit) 739,000 (1,822,000)
Treasury Stock (12,400,000) (12,170,000)
Receivable from the Sale of Stock (11,000) (11,000)
------------------------------------
Total Shareholders' Equity 70,476,000 66,955,000
------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 123,675,000 $ 123,042,000
------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements.
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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
===============================================================================================================
For the three months For the six months
ended March 31, ended March 31,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Cash Flows For Operating Activities $ (4,666,000) $ (2,160,000) $ (2,409,000) $ (3,046,000)
-----------------------------------------------------------------
Cash Flows From Investing Activities:
Capital Expenditures (309,000) (293,000) (694,000) (393,000)
Real Estate Venture Returns 649,000 1,294,000 1,385,000 3,184,000
-----------------------------------------------------------------
Net Cash From Investing Activities 340,000 1,001,000 691,000 2,791,000
-----------------------------------------------------------------
Cash Flows From Financing Activities:
Debt Related Payments (3,647,000) (3,647,000)
Issuance of Common Stock 641,000 1,190,000
Treasury Stock Acquired (101,000) (230,000) (208,000)
-----------------------------------------------------------------
Net Cash For Financing Activities (3,006,000) (101,000) (2,687,000) (208,000)
-----------------------------------------------------------------
Net Change in Cash and Cash Equivalents (7,332,000) (1,260,000) (4,405,000) (463,000)
Cash and Cash Equivalents,
Beginning of Period 54,398,000 30,925,000 51,471,000 30,128,000
-----------------------------------------------------------------
Cash and Cash Equivalents,
End of Period $ 47,066,000 $ 29,665,000 $ 47,066,000 $ 29,665,000
-----------------------------------------------------------------
Supplemental Disclosure of Cash Flow
Information:
Interest Paid $ 2,000,000 $ 2,045,000 $ 2,000,000 $ 2,045,000
Taxes Paid $ 500,000 $ 500,000
-----------------------------------------------------------------
See the accompanying Notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
1. BASIS OF REPORTING AND SIGNIFICANT ACCOUNTING POLICIES
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 March 31, 2002
was derived from the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended September 30,
2001. 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,
2001. In the opinion of management, however, all adjustments 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, 2002
are not necessarily indicative of the results that will be achieved for
the full fiscal year or for future periods.
A summary of the Company's significant accounting policies is included in
the Company's Annual Report on Form 10-K for the year ended September 30,
2001. Management believes that the application of these policies on a
consistent basis enables the Company to provide the users of the
financial statements with useful and reliable information about the
Company's operating results and financial condition.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenue and expenses. Judgments
and assessments of uncertainties are required in applying the Company's
accounting policies in many areas. For example, key assumptions and
estimates are particularly important when determining the Company's
projected liabilities for pension benefits, useful lives for depreciable
and amortizable assets, and the recoverability of deferred tax assets and
long-lived assets, including intangible assets. Other areas in which
significant uncertainties exist include, but are not limited to, costs
that may be incurred in connection with environmental matters and the
resolution of litigation and other contingencies. Actual results will
inevitably differ to some extent from estimates on which the Company's
Condensed Consolidated Financial Statements were prepared.
During the first quarter of fiscal 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". The adoption of SFAS No. 142 did not have a material
effect on the Company's results of operations or financial position.
Under the provisions of SFAS No. 142, the Company's intangible assets
(substantially all related to the Company's perchlorate acquisition in
fiscal 1998) will continue to be amortized under their originally
assigned lives. At March 31, 2002, the Company's intangible assets had a
gross carrying value of approximately $41.5 million and accumulated
amortization of approximately $18.3 million. Amortization expense was
approximately $2.1 million during the six months ended March 31, 2002 and
2001. Amortization expense is estimated to amount to approximately $3.9
million in each of the years during the five-year period ending September
30, 2007.
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 outstanding
stock options and warrants 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, 2002 and
2001, since the average exercise price of such options and warrants was
greater than the average market price of the Company's common stock
during these periods.
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3. INVENTORIES
Inventories consist of the following:
March 31, September 30,
2002 2001
------------- -------------
Work-in-process $ 7,513,000 $ 8,239,000
Raw materials and supplies 7,077,000 5,669,000
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Total $ 14,590,000 $ 13,908,000
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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 LLC's ("Kerr-McGee") former ammonium perchlorate
("AP") operations, and was the location of the Company's AP operations
until May 1988. Lake Mead is a source of drinking water for the City of
Las Vegas, neighboring areas and certain areas of metropolitan Southern
California and Arizona. Since 1998, the Company has spent in excess of
$4.0 million on the investigation and evaluation of the source or sources
of these trace amounts, possible environmental impacts, and potential
remediation methods. The Company's ground water characterization
investigations indicate that the ground water containing perchlorate at
and around its former AP manufacturing site has not reached Lake Mead
and, accordingly, has not been introduced into any source of drinking
water. Based upon flow rates and modeling techniques, such ground water
is not expected to reach a source of drinking water for at least 10
years.
The Environmental Protection Agency ("EPA") is conducting a risk
assessment for the purpose of recommending a maximum standard for
perchlorate levels in drinking water. The EPA has recommended a
preliminary standard of 4 to 18 parts per billion ("ppb"). Certain states
have set levels as low as 1 ppb. Virtually all independent and qualified
experts believe that such preliminary levels have been arbitrarily
established and are not based upon credible science. The Company
understands that the EPA intends to complete its risk assessment and make
a maximum standard recommendation in the fall of 2002. The Company is
cooperating with Federal, 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. Accordingly, no accrual for potential costs
has been made in the accompanying Condensed Consolidated Financial
Statements.
In January 2002, American Azide Corporation ("AAC"), an indirect
wholly-owned subsidiary of the Company, was named as a defendant in a
complaint filed in the Superior Court of the State of California for the
County of Los Angeles - Southwest District. The complaint names in excess
of forty defendants, including AAC's principal sodium azide customer,
Autoliv ASP, Inc. ("Autoliv"). The complaint alleges, among other things,
"toxic injuries" as a result of the deployment of an airbag. The
plaintiffs have submitted a Statement of Damages to the Court for
approximately $10.2 million. In March 2002, AAC filed a motion to quash
service of summons with the Court that has been denied. AAC has not
determined whether its sodium azide was actually a raw material used by
the manufacturer of the airbag inflator device subject to the complaint.
The Company believes the allegations in the complaint are wholly without
merit.
In January 2002, the Company received a demand for payment from Frontier
Insurance Company ("Frontier") of approximately $1.7 million as a result
of the failure of a local developer to complete a project that had been
bonded by Frontier. The local developer was an owner of a company that is
the
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managing member of a Limited Liability Company ("LLC") in which the
Company is also a member. The LLC recently completed development of a
residential project. In 1995, a subsidiary of the Company entered into
indemnity agreements relating to the development of this residential
project. In February 2002, the Company (along with other plaintiffs)
filed a complaint for declaratory relief in District Court, Clark County,
Nevada. The complaint seeks a judgment declaring the indemnity agreements
have been terminated and the Company has no liability to Frontier.
On April 11, 2002, an accident occurred at the Company's sodium azide
plant that resulted in the death of an employee. No other employees were
involved and there was no significant damage to the facility. The Company
is working with Utah OSHA to gather evidence of the exact cause and
origin of the incident. The Company believes that it has statutory
immunity as an employer under the applicable worker's compensation laws
of the State of Utah. However, depending upon the outcome of the Utah
OSHA investigation, the Company may be subject to regulatory fines.
As of March 31, 2002, the Company had approximately $1.6 million in
standby letters of credit. These letters of credit secure performance of
certain environmental protection equipment sold by the Company and
payment of pipeline delivery fees for natural gas used at the Company's
Utah facilities.
5. 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.
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),
clean gas fire extinguishing agents designed to replace halons. 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, 2002, the Company's real estate operating segment had
approximately 40 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.
Additional information about the Company's operations, by segment, for
the three months and six months ended March 31, is provided below.
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======================================================================
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
----------------------------------------------------------------------
Revenues:
Specialty chemicals $ 19,193,000 $ 13,810,000 $ 28,915,000 $ 25,004,000
Environmental protection 135,000 1,016,000 514,000 1,229,000
Real estate 718,000 4,000 3,734,000 476,000
----------------------------------------------------------------------
Total revenues $ 20,046,000 $ 14,830,000 $ 33,163,000 $ 26,709,000
----------------------------------------------------------------------
Operating income (loss):
Specialty chemicals $ 4,564,000 $ 2,529,000 $ 4,330,000 $ 3,009,000
Environmental protection (175,000) 76,000 (402,000) 3,000
Real estate 425,000 (157,000) 1,721,000 30,000
----------------------------------------------------------------------
Total segment operating income 4,814,000 2,448,000 5,649,000 3,042,000
Unallocated net expenses
(principally net interest) (835,000) (654,000) (1,678,000) (1,320,000)
----------------------------------------------------------------------
Income before income taxes and
extraordinary loss $ 3,979,000 $ 1,794,000 $ 3,971,000 $ 1,722,000
======================================================================
6. DEBT REPURCHASE
In December 2001, pursuant to the applicable indenture, the Company made
an offer to purchase approximately $3.6 million of its Senior Unsecured
Notes (the "Notes") at 102% of par. In January 2002, the offer was
accepted and the Company purchased approximately $3.6 million in
principal amount of Notes at a cost of approximately $3.7 million. The
Company incurred an extraordinary loss on debt extinguishment (net of
income taxes) of approximately $0.1 million on this transaction.
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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 extinguishing 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 chemicals 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.
Significant Accounting Policies. A summary of the Company's significant
- -------------------------------
accounting policies is included in Note 1 to the Condensed Consolidated
Financial Statements. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenue and expenses. Judgments and
assessments of uncertainties are required in applying the Company's accounting
policies in many areas. For example, key assumptions and estimates are
particularly important when determining the Company's projected liabilities for
pension benefits, useful lives for depreciable and amortizable assets, and the
recoverability of deferred tax assets and long-lived assets, including
intangible assets. Other areas in which significant uncertainties exist include,
but are not limited to, costs that may be incurred in connection with
environmental matters and the resolution of litigation and other contingencies.
Actual results will inevitably differ to some extent from estimates on which the
Company's Condensed Consolidated Financial Statements were prepared.
Sales and Operating Revenues. Sales of the Company's perchlorate chemical
- ----------------------------
products, consisting mostly of AP sales, accounted for approximately 68% and 69%
of revenues during the six-month periods ended March 31, 2002 and 2001,
respectively. In general, demand for AP is driven by a relatively small number
of Department of Defense ("DOD") and National Aeronautics and Space
Administration ("NASA") contractors; as a result, any one individual AP customer
usually accounts for a significant portion of the Company's revenues.
In connection with the Acquisition, the Company entered into an agreement with
the Thiokol Propulsion Division ("Thiokol") of Alcoa with respect to the supply
of AP through the year 2008. The agreement, as amended, provides that during its
term Thiokol will make all of its AP purchases from the Company. In addition to
the AP purchased from the Company, Thiokol may use AP inventoried by it in prior
years. The 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. AP unit prices in the matrix at all quantity levels escalate each
year through fiscal 2003 and, in fiscal 2004, are adjusted downward by
approximately 20%. After the adjustment, AP unit prices continue to escalate
each year through fiscal 2008. During 2001, Alliant Techsystems, Inc.
("Alliant") acquired Thiokol.
In connection with the Acquisition, the Company entered into an agreement with
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. Alliant and the Company have agreed
that the individual agreements in place prior to Alliant's acquisition of
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Thiokol remain in place. All Thiokol programs existing at the time of the
Alliant acquisition (principally the Space Shuttle and Minuteman) will continue
to be priced under the Thiokol Agreement. All Alliant programs (principally the
Delta, Pegasus and Titan) will be priced under the Alliant Agreement.
Sodium azide sales accounted for approximately 15% and 17% of revenues during
the six-month periods ended March 31, 2002 and 2001, respectively. The Company's
principal sodium azide customer, Autoliv, accounted for in excess of 80% of such
revenues.
In May 1997, the Company entered into a three-year agreement with Autoliv to
supply sodium azide used by Autoliv in the manufacture of automotive airbags.
Deliveries under the agreement commenced in July 1997. The agreement has been
extended through December 31, 2002.
Worldwide sodium azide demand declined significantly during fiscal 2001 and
2000. The Company's sodium azide sales volumes declined approximately 17% in
both fiscal 2001 and 2000, but have increased slightly during the first six
months of fiscal 2002. Worldwide demand for sodium azide is substantially less
than worldwide supply. Based principally upon market information received from
airbag inflator manufacturers, the Company expects sodium azide use to continue
to decline and that inflators using sodium azide will be phased out over some
period of time.
Sales of Halotron(TM) amounted to approximately 4% and 8% of revenues during the
six-month periods ended March 31, 2002 and 2001, respectively. Halotron(TM) is
designed to replace halon-based fire extinguishing systems. Accordingly, demand
for Halotron(TM) depends upon a number of factors including the willingness of
consumers to switch from halon-based systems, the effects of competing products,
as well as existing and potential governmental regulations.
Real estate and related sales amounted to approximately 11% and 2% of revenues
during the six-month periods ended March 31, 2002 and 2001, 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 activity. Real estate
sales are currently estimated to be completed by the end of fiscal 2003.
Environmental protection equipment sales accounted for approximately 2% and 4%
of revenues during the six-month periods ended March 31, 2002 and 2001,
respectively.
Cost of Sales. The principal elements comprising the Company's cost of sales are
- -------------
raw materials, electric power (see below), labor, manufacturing overhead,
depreciation and amortization and the book basis of real estate sold. The major
raw materials used by the Company in its production processes are graphite,
sodium chlorate, ammonia, hydrochloric acid, sodium metal, nitrous oxide and
HCFC 123. 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.
During the first six months of fiscal 2001, the Company received power bills
from Utah Power that were approximately $1.5 million in excess of average
historical quarterly amounts. During this period, the Company purchased greater
quantities of certain raw materials because of these excessive power costs. In
the second half of fiscal 2001, the Company recovered the excessive power costs
through a settlement and curtailment arrangement with Utah Power.
Prices paid by the Company for raw materials have historically been relatively
stable, although the Company has experienced cost increases on certain raw
materials, particularly on HCFC 123, used in the production of Halotron(TM). All
the raw materials used in the Company's manufacturing processes have been
available in commercial quantities, and the Company has had no difficulty
obtaining necessary raw materials. A substantial portion of the total cash costs
of operating the Company's specialty chemical plants, consisting mostly of labor
and overhead, are largely fixed in nature.
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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 to the
Condensed Consolidated Financial Statements, the Company may incur material
costs associated with certain litigation and contingencies; (ii) the timing of
real estate and related sales is not predictable; (iii) 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;
(iv) the results of periodic reviews of impairment issues; (v) the ability to
pass on increases in raw material costs to customers; and (vi) the magnitude,
pricing and timing of AP, sodium azide, Halotron(TM), 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, 2002 Compared to Three Months Ended March 31, 2001
Sales and Operating Revenues. Sales increased $5.2 million, or 35%, during the
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three months ended March 31, 2002, to $20.0 million from $14.8 million in the
corresponding period of the prior year. This increase was principally
attributable to increased specialty chemicals and real estate sales.
Perchlorate chemical sales increased approximately $5.6 million, or 53%, in the
second quarter of fiscal 2002, compared to the second quarter of fiscal 2001.
The Company expects AP sales volumes to increase substantially in fiscal 2002 as
compared to fiscal 2001. The Company currently estimates that AP sales volumes
will be in a range of between 16.0 and 18.0 million pounds during 2002. This
compares to AP shipments of approximately 12.6 million pounds in fiscal 2001.
The expected increase in AP sales volumes in fiscal 2002 as compared to fiscal
2001 results principally from an increase in AP used in the Minuteman program
and AP used in commercial space launch vehicles. However, not all of the
expected AP sales volume in fiscal 2002 is subject to existing purchase orders
and, accordingly, there can be no assurance given with respect to the AP sales
volume estimate for fiscal 2002. The Company has no ability to influence the
demand for AP.
Cost of Sales. Cost of sales increased $2.4 million, or 24%, in the three months
- -------------
ended March 31, 2002, to $12.2 million from $9.8 million in the corresponding
period of the prior year. As a percentage of sales, cost of sales was 61% during
the three-month period ended March 31, 2002, compared to 66% during the same
period last year. This decrease was principally due to an increase in specialty
chemicals sales volumes and to the excessive power costs incurred in fiscal 2001
(see above).
Operating Expenses. Operating (selling, general and administrative) expenses
- ------------------
increased $0.5 million, or 19%, in the three months ended March 31, 2002, to
$3.1 million from $2.6 million in the corresponding period of 2001. The increase
was primarily attributable to costs incurred in connection with certain
corporate and product development activities, and an increase in costs
associated with most areas of insurance coverage. A significant portion of the
increase in costs relate to specific activities that may not continue to be
pursued in the future.
Net Interest Expense. Net interest and other expense increased to $0.8 million
- --------------------
in the three months ended March 31, 2002, from $0.7 million in the corresponding
period of the prior year, primarily as a result of lower interest rates earned
on cash and cash equivalents balances.
Six Months Ended March 31, 2002 Compared to Six Months Ended March 31, 2001
Sales and Operating Revenues. Sales increased $6.5 million, or 24%, during the
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six months ended March 31, 2002, to $33.2 million from $26.7 million in the
corresponding period of the prior year. The increase was principally due to an
increase in specialty chemical sales of approximately $3.9 million and an
increase in real estate sales of approximately $3.3 million. The increase in
specialty chemical sales resulted principally from increased perchlorate and
sodium azide shipments, offset in part by a decrease in shipments of
Halotron(TM).
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Cost of Sales. Cost of sales increased $2.5 million, or 13%, in the six months
- -------------
ended March 31, 2002, to $21.4 million from $18.9 million in the corresponding
period of the prior year. As a percentage of sales, cost of sales was 65% during
the first six months of this fiscal year as compared to 70% during the same
period last year. The decrease in the percentage of cost of sales to sales was
principally attributable to increased specialty chemical sales volumes, an
increase in higher margin real estate sales and the significant increase in
power costs in the first half of fiscal 2001 described above.
Operating Expenses. Operating expenses were $6.1 million during the six-month
- ------------------
period ended March 31, 2002 compared to $4.7 million in the corresponding period
of the prior year. The increase was primarily attributable to costs incurred in
connection with facility security reviews, certain corporate and product
development activities, and an increase in costs associated with most areas of
insurance coverage. A significant portion of the increase in costs relates to
specific activities that may not continue to be pursued in the future.
Net Interest Expense. Net interest and other expense increased to $1.7 million
- --------------------
in the six months ended March 31, 2002, from $1.3 million in the corresponding
period of the prior year, principally as a result of lower interest rates earned
on cash and cash equivalents balances.
Segment Operating Income. Operating income (loss) of the Company's industry
- ------------------------
segments during the six-month periods ended March 31, 2002 and 2001 was as
follows:
======================================
2002 2001
--------------- -----------------
Specialty chemicals $ 4,330,000 $ 3,009,000
Environmental protection equipment (402,000) 3,000
Real Estate 1,721,000 30,000
-------------- -----------------
Total $ 5,649,000 $ 3,042,000
============== =================
The increase in operating income in the Company's specialty chemicals industry
segment was primarily attributable to increased sales and lower power costs (see
above). The decrease in operating performance of the environmental protection
equipment segment was principally due to decreased sales. The increase in
operating income in the Company's real estate segment was primarily a result of
increased sales.
INFLATION
General inflation did not have a significant effect on the Company's sales and
operating revenues or costs during the six-month periods ended March 31, 2002 or
2001. General 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 may somewhat insulate the Company from increases in costs associated with
inflation. As discussed above, the Company has experienced significant increases
in certain raw material costs and power costs, although the Company believes
that such increases are not specifically related to the effects of general
inflation.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities were $(2.4) million and $(3.0) million
during the six months ended March 31, 2002 and 2001, respectively. Cash flows
from operating activities decreased principally as a result of an increase in
receivable balances related to significant specialty chemicals shipments that
were delivered late in the second quarter of fiscal 2002. Approximately $5.2
million of receivable balances as of March 31, 2002 had been collected by May 3,
2002. 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, including debt repayments. However, the resolution of contingencies
and litigation, and the timing, pricing and magnitude of orders for AP, sodium
azide and Halotron(TM), may have an effect on the use and availability of cash.
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Capital expenditures were $0.7 million during the six months ended March 31,
2002, compared to $0.4 million during the same period last year. Capital
expenditures relate primarily to specialty chemicals segment capital improvement
projects.
In December 2001, pursuant to the applicable indenture, the Company made an
offer to purchase approximately $3.6 million of its Notes at 102% of par. In
January 2002, the offer was accepted and the Company purchased approximately
$3.6 million in principal amount of Notes at a cost of approximately $3.7
million. The Company incurred an extraordinary loss on debt extinguishment (net
of income taxes) of approximately $0.1 million on this transaction.
During the six-month period ended March 31, 2002, the Company spent
approximately $0.2 million on the repurchase of its Common Stock. The Company
may (but is not obligated to) continue to repurchase its Common Stock, but has
not determined how many additional shares will be purchased or the time period
during which purchases, if any, will be made. The Company is limited in its
ability to use cash to repurchase stock by certain covenants in an Indenture
governing the Notes.
Contractual Obligations and Commitments. The following tables summarize the
- ---------------------------------------
Company's fiscal year (2002 is for the remaining six-month period ending
September 30, 2002) contractual obligations and commitments as of March 31,
2002.
Payments Due by Period
---------------------------------------------------------------
2005 and
Total 2002 2003 2004 Thereafter
------------ ----------- ----------- ---------- -----------
Contractual Obligations
Long-term debt $ 40,600,000 $ $ $ $40,600,000
Operating leases 2,200,000 275,000 550,000 550,000 825,000
SERP obligation 2,060,000 60,000 120,000 120,000 1,760,000
------------ ----------- ----------- ---------- -----------
Total contractual obligations $ 44,860,000 $ 335,000 $ 670,000 $ 670,000 $43,185,000
============ =========== =========== ========== ===========
Amount of Commitment Expiration by Period
---------------------------------------------------------------
Total Amounts 2005 and
Committed 2002 2003 2004 Thereafter
------------- ----------- ----------- --------- ----------
Other Commitments
Letters of credit $ 1,600,000 $ 1,100,000 $ 200,000 $ 100,000 $ 200,000
------------- ----------- ----------- ---------- ----------
Total other commitments $ 1,600,000 $ 1,100,000 $ 200,000 $ 100,000 $ 200,000
============ =========== =========== ========== ==========
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 (including excess customer inventories) 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
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the Company's products based upon perceived quality,
environmental effects and pricing, (f) future power costs
including the ultimate impact of the settlement of the Company's
disputes concerning its power agreement, and (g) 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
recently, in the perchlorate market, potential patent coverage
issues, and the development or penetration of competing new
products, particularly in the propulsion, airbag inflation and
fire extinguishing 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 real estate markets, changes in general or
local economic conditions, interest rate fluctuations affecting
the availability and cost of financing 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. The results of the Company's periodic review of impairment issues
under the provisions of SFAS No. 121.
8. The dependence upon a single facility for the production of most
of the Company's products.
9. Provisions of the Company's Certificate of Incorporation and
By-laws and Series D Preferred Stock, and the dividend of
preference stock purchase rights and related Rights Agreement,
could have the effect of making it more difficult for potential
acquirors to obtain a control position in the Company.
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