Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2000
Commission File Number 1-8137
AMERICAN PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 59-6490478
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
3770 Howard Hughes Parkway, Suite 300,
Las Vegas, Nevada 89109
(Address of principal executive office) (Zip Code)
(702) 735-2200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.10
par value)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 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 ______
------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 1, 2000, was approximately $32.9 million. Solely for
the purposes of this calculation, shares held by directors and officers of the
Registrant have been excluded. Such exclusion should not be deemed a
determination by the Registrant that such individuals are, in fact, affiliates
of the Registrant.
The number of shares of Common Stock, $.10 par value, outstanding as of December
1, 2000 was 7,080,955.
1
DOCUMENTS INCORPORATED BY REFERENCE
Part III Hereof
Definitive Proxy Statement for 2000 Annual Meeting of Stockholders to be
filed not later than January 28, 2001.
Part IV Hereof
S-14 Registration Statement (2-70830); Annual Reports on Forms 10-K for the
years ended September 30, 1999, 1997, 1995, 1994 and 1993; S-2 Registration
Statement (33-36664); Quarterly Reports on Form 10-Q for the fiscal quarters
ended June 30, 1999, December 31, 1998 and March 31, 1998; Form 8-A dated August
6, 1999; S-3 Registration Statement (33-52196); S-8 Registration Statement (333-
53449); S-4 Registration Statement (333-49883) and Current Reports on Forms 8-K
dated February 28, 1992, February 19, 1998 and November 9, 1999.
2
PART I
Item 1. Business
- -----------------
Overview
American Pacific Corporation (the "Company") is principally engaged in the
production of a specialty chemical, ammonium perchlorate ("AP"), which is used
as an oxidizing agent in composite solid propellants for rockets, booster motors
and missiles. AP is employed in the Space Shuttle, the Minuteman missile, the
Titan space launch vehicle, the Delta and Atlas families of commercial space
launch vehicles, and most other solid fuel rocket motors. AP customers include
contractors of the National Aeronautics and Space Administration ("NASA"), the
Department of Defense ("DOD") and certain commercial space launch vehicle
programs used to launch satellites for communication, navigation, intelligence
gathering, space exploration, weather forecasting and environmental monitoring.
The Company also produces a variety of other specialty chemicals and
environmental protection equipment for niche applications, including: (i) other
perchlorate chemicals used principally in explosives and the inflation of
automotive airbags, (ii) sodium azide, used in the inflation of automotive
airbags and certain pharmaceutical applications; (iii) Halotron(TM) products,
used to extinguish fires; and (iv) water treatment equipment, used to disinfect
effluents from sewage treatment and industrial facilities and for the treatment
of seawater. In addition, the Company has interests in two real estate assets
in the Las Vegas, Nevada area, consisting of approximately 65 remaining acres of
undeveloped land in an industrial park and a 50% interest in a master-planned
residential community on approximately 320 acres.
On March 12, 1998, the Company sold $75.0 million principal amount of
unsecured senior notes (the "Notes"), consummated an acquisition (the
"Acquisition") of certain assets from Kerr-McGee Chemical Corporation ("Kerr-
McGee") described below and repurchased the remaining $25.0 million principal
amount outstanding of subordinated secured notes (the "Azide Notes").
The Company is a party to agreements with Dynamit Nobel A.G., of Germany
("Dynamit Nobel") relating to the production and sale of sodium azide, the
principal component of a gas generant used in certain automotive airbag
inflation systems. Dynamit Nobel licensed to the Company, on an exclusive basis
for the North American market, its technology and know-how in the production of
sodium azide, and provided technical support for the design, construction and
start-up of the Company's sodium azide facility. The Company commenced
commercial sales of sodium azide in fiscal 1994. In January 1996, the Company
filed an antidumping petition with the United States International Trade
Commission ("ITC") and the United States Department of Commerce ("Commerce") in
response to the unlawful pricing practices of Japanese producers of sodium
azide. In the fiscal years 2000 and 1997, the Company recognized impairment
charges of $9.1 million and $52.6 million, respectively, relating to the fixed
assets used in the production of sodium azide. See Note 12 to the Consolidated
Financial Statements of the Company.
In February 1992, the Company acquired (by exercise of an option previously
granted to it) the worldwide rights to Halotron(TM), a fire extinguishing system
that includes chemical compounds and application technology to replace halons,
which have been found to be ozone layer-depleting chemicals. Halotron(TM) has
applications as a fire extinguishing agent for military, commercial and
industrial uses.
During the past three fiscal years, the Company has been pursuing a number of
strategic and financial opportunities. As discussed above, in March 1998, the
Company consummated the Acquisition and effectively became the sole North
American producer of AP. The Company's financial performance has improved
significantly since fiscal 1997. Net income before income taxes and
extraordinary losses was $0.2 million
3
during the year ended September 30, 2000, as compared to a net loss before
income taxes and extraordinary losses of $58.8 million during the year ended
September 30, 1997. Operating income before impairment charges was $12.9 million
in fiscal 2000, as compared to an operating loss before impairment charges of
$5.5 million in fiscal 1997. Cash flows from operating activities were $19.0
million in fiscal 2000, as compared to $9.6 million in fiscal 1997. During the
same period, net debt (total debt less cash) increased only $1.8 million, from
$12.2 million at September 30, 1997, to $14.0 million at September 30, 2000. In
addition, the Company has repurchased approximately 13% of its outstanding
Common Stock since September 30, 1997.
In fiscal 1999, subsequent to the consummation and successful integration of
the Acquisition, the Company began exploring a number of merger, acquisition and
sale possibilities. None of these options led to a transaction that the Company
believed would be in the best interests of its shareholders. In January 2000,
the Company engaged an investment banking firm to pursue a transaction to
realize shareholder value. Toward the end of fiscal 2000, the Board of
Directors determined to pursue an all-cash sale of the Company with a financial
buyer contacted through this effort. The principal executive officers were to
join in such a purchase. Accordingly, an independent financial adviser was
engaged to assist a Special Committee of the Company's non-management Directors,
which entered into negotiations with the prospective buyer. The prospective
buyer terminated negotiations with the Special Committee in October 2000, which
termination management believes to have been largely the result of tightening
credit markets and lower forecasted customer demand levels for the Company's
principal product, AP (See "Specialty Chemicals-Perchlorate Chemicals", below).
The Company will remain open to and pursue such strategic and financial
alternatives that appear to create value for the shareholders of the Company.
See Note 11 to the Consolidated Financial Statements of the Company for
financial information concerning the Company's operating segments. The
Company's perchlorate chemicals accounted for approximately 69%, 67% and 67% of
revenues during the years ended September 30, 2000, 1999 and 1998, respectively.
The term "Company" used herein includes, where the context requires, one or more
of the direct and indirect subsidiaries or divisions of American Pacific
Corporation.
Specialty Chemicals
Perchlorate Chemicals
Strategy
The Company's strategy is to continue its efforts to consolidate the world-
wide market for AP and other perchlorate chemicals and derivatives. Upon
consummation of the Acquisition, the Company effectively became the only North
American producer of AP.
Market
AP is the sole oxidizing agent for solid fuel rockets, booster motors and
missiles used in space exploration, commercial satellite transportation and
national defense programs. A significant number of existing and planned launch
vehicles providing access to space use solid fuel and thus depend, in part, upon
AP. Many of the rockets and missiles used in national defense programs are also
powered by solid fuel.
The Company has supplied AP for use in space programs for over 30 years,
beginning with the Titan program in the early 1960's. Today, its principal
space customers are Thiokol Propulsion ("Thiokol") for the Space Shuttle
Program, and Alliant Techsystems, Inc. ("Alliant") for both the Delta family of
commercial rockets and the Titan program. The Company's AP is used in solid
fuel rockets on various space launch vehicles that launch satellites for
communications, navigation, intelligence gathering, space exploration, weather
forecasting and environmental monitoring. The Company is also a qualified
supplier of AP to a number of defense
4
programs, including the Minuteman, Navy Standard Missile, Patriot, and Multiple
Launch Rocket System programs.
Demand for AP declined throughout the 1990's. In 1998, supply capacity was
substantially in excess of demand levels and, in an attempt to rationalize the
AP industry, the Company consummated the Acquisition with Kerr-McGee. See
"Perchlorate Chemicals - Kerr-McGee Acquisition." Sales volume levels for AP
declined from approximately 20.2 million pounds in fiscal 1999 to approximately
16.4 million pounds in fiscal 2000. The Company expects sales volumes for AP in
fiscal 2001 to decrease further to between 13.0 million and 15.0 million pounds.
The recent weakness in sales volumes is primarily attributable to lower
requirements for applications in certain commercial space launch vehicles used
primarily in satellite launches, particularly telecommunication satellites. In
addition, purchases of AP for use in the solid rocket motors for the Space
Shuttle have declined as a result of existing excess inventory levels. The
Company believes that such excess should be reduced over the next few years
considering the number of shuttle flights planned for the construction and
servicing of the International Space Station. The Company also understands that
existing plans call for significant AP requirements over the next several years
for use in the Minuteman program. Accordingly, the Company believes that the
estimated future AP requirements for these two programs should bring North
American demand for AP back to an annual level of between 16.0 million and 20.0
million pounds over the next few years, although there can be no assurance given
with respect to these estimates. The Company has no ability to influence North
American demand for AP.
The Company produces other perchlorate chemicals including sodium perchlorate,
which is used principally in cast explosives, and potassium perchlorate, which
is primarily used in the inflation of certain types of automotive airbags. The
dollar amount of sales of these chemicals has historically been relatively small
compared to AP sales.
Customers
Prospective purchasers of AP consist principally of contractors in programs of
NASA and the DOD. As a practical matter, the specialized nature of the
activities of these contractors restricts competitive entry by others.
Therefore, there are relatively few potential customers for AP, and individual
AP customers account for a significant portion of the Company's revenues.
Prospective customers also include companies providing commercial satellite
launch services and agencies of foreign governments and their contractors,
although historically sales to foreign agencies and their contractors have not
accounted for significant percentages of AP sales. See "Competition."
Thiokol accounted for 38%, 35% and 39% of the Company's revenues during the
fiscal years 2000, 1999 and 1998, respectively. Alliant accounted for
approximately 13%, 14% and 16% of the Company's revenues during the fiscal years
2000, 1999 and 1998, respectively.
Thiokol Agreement
In connection with the Acquisition, the Company entered into an agreement with
Thiokol with respect to the supply of AP through the year 2008. The agreement,
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. After the adjustment, AP unit prices
continue to escalate each year through fiscal 2008.
Alliant Agreement
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
5
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.
Backlog
As of November 30, 2000, the Company had a backlog of approximately $26.0
million for delivery of perchlorate chemicals in fiscal 2001.
Manufacturing Capacity and Process
Production of AP at the Company's current manufacturing facility in Iron
County, Utah commenced in July 1989. This facility, as currently configured, is
capable of producing 30.0 million pounds of AP annually and is readily
expandable to 40.0 million pounds annually. The Company also produces
commercial quantities of other perchlorate chemicals at this facility. AP
produced at the facility and propellants incorporating such AP have qualified
for use in all programs for which testing has been conducted, including the
Space Shuttle, Titan, Minuteman, Multiple Launch Rocket System, and the Delta
and Atlas programs.
The Company's AP facility is designed to site particular components of the
manufacturing process in discrete areas of the facility. It incorporates modern
equipment and materials-handling systems designed, constructed and operated in
accordance with the operating and safety requirements of the Company's AP
customers, insurance carriers and governmental authorities.
AP is manufactured by electrochemical processes using the Company's
proprietary technology. The principal raw materials used in the manufacture of
AP (other than electrical energy) are salt, sodium chlorate, graphite, ammonia
and hydrochloric acid. All of the raw materials used in the AP manufacturing
process have been available in commercial quantities, and the Company has had no
difficulty in obtaining necessary raw materials. Prices paid by the Company for
raw materials have historically been relatively stable, although the Company has
recently experienced cost increases on certain raw materials, particularly those
requiring substantial energy costs to manufacture.
The Company's AP production requires substantial amounts of electric power.
The Company is a party to an agreement with Utah Power & Light Company ("UPL")
for its electrical requirements at its AP facility. The Company's agreement
with UPL provided for the supply of power for a minimum 10-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. The agreement had 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.
Competition
Upon consummation of the Acquisition, the Company effectively became the sole
North American producer of AP. The Company is aware of production capacity for
AP in France, Japan and possibly China. Although the Company has limited
information with respect to these facilities, the Company believes that these
foreign AP producers operate lower volume, higher cost production facilities and
are not approved as AP suppliers for NASA or DOD programs, which represent the
majority of domestic AP demand. In addition, the Company believes that the
rigorous and sometimes costly NASA and DOD program qualification process, the
strategic nature of such programs, the high cost of constructing an AP facility,
and the Company's established relationships with key customers constitute
significant hurdles to entry for prospective competitors.
6
Kerr-McGee Acquisition
On March 12, 1998 (the "Closing Date"), the Company acquired, pursuant to a
purchase agreement (the "Purchase Agreement") with Kerr-McGee, certain
intangible assets related to Kerr-McGee's production of AP (the "Rights") for a
purchase price of $39.0 million. The Acquisition did not include Kerr-McGee's
production facilities (the "Production Facilities") and certain water and power
supply agreements used by Kerr-McGee in the production of AP. Under the
Purchase Agreement, Kerr-McGee ceased the production and sale of AP, although
the Production Facilities may continue to be used by Kerr-McGee for production
of AP under certain limited circumstances described below. Under the Purchase
Agreement, Kerr-McGee reserved a perpetual, royalty-free, nonexclusive license
to use any of the technology forming part of the Rights as may be necessary or
useful to use, repair or sell the Production Facilities (the "Reserved
License").
Under the Purchase Agreement, Kerr-McGee reserved the right to process and
sell certain reclaimed AP that is not suitable for use in solid fuel rocket
motors (the "Reclaimed Product"), and to produce and sell AP (i) to fulfill
orders scheduled for delivery after the closing, subject to making payments to
the Company with respect to such orders, as provided in the Purchase Agreement
and (ii) in the event of the Company's inability to meet customer demand or
requirements, breach of the Purchase Agreement or termination of the Company's
AP business.
The Purchase Agreement provides that, together with the Reserved License,
Kerr-McGee is permitted in its discretion to (i) lease, sell, dismantle,
demolish and/or scrap all or any portion of the Production Facilities, (ii)
retain the Production Facilities for manufacture of Reclaimed Product and (iii)
maintain the Production Facilities in a "standby" or "mothballed" condition so
they will be capable of being used to produce AP under the limited circumstances
referred to above.
Under the Purchase Agreement, Kerr-McGee has agreed to indemnify the Company
against loss or liability from claims associated with the ownership and use of
the Rights prior to consummation of the Acquisition or resulting from any breach
of its warranties, representations and covenants. The Company has agreed to
indemnify Kerr-McGee against loss and liability from claims associated with the
ownership and use of the Rights after consummation of the Acquisition or
resulting from any breach of its warranties, representations and covenants. In
addition, Kerr-McGee has agreed that it will, at the Company's request,
introduce the Company to AP customers that were not customers of the Company and
consult with the Company regarding the production and marketing of AP. The
Company has agreed that, at Kerr-McGee's request, it will use reasonable efforts
to market Reclaimed Product on Kerr-McGee's behalf for up to three years
following consummation of the Acquisition.
The Company has determined that a business was not acquired in the Acquisition
and that the Rights acquired have no independent value to the Company apart from
the overall benefit of the transaction and that, as a result thereof, Kerr-McGee
has ceased production of AP (except in the limited circumstances referred to
above), thereby leaving the Company as the sole North American supplier of AP.
Since they have no independent value to the Company, the Company has assigned no
value to the Rights and assigned the entire purchase price to an unidentified
intangible asset. The Company is amortizing the purchase price for the
unidentified intangible over ten years, the duration of the pricing agreements
with its two principal AP customers referred to above.
Financing
On March 12, 1998, the Company sold $75.0 million in Notes. A portion of the
net proceeds ($39.0 million) was used to effect the Acquisition. The Notes
mature on March 1, 2005. Interest on the Notes is paid in cash at a rate of 9-
1/4% per annum on each March 1 and September 1, which commenced September 1,
1998. The indebtedness evidenced by the Notes represents a senior unsecured
obligation of the Company, ranks pari passu in right of payment with all
existing and future senior indebtedness of the Company and is
7
senior in right of payment to all future subordinated indebtedness of the
Company. The Indenture under which the Notes were issued contains various
limitations and restrictions including (i) change in control provisions, (ii)
limitations on indebtedness and (iii) limitations on restricted payments such as
dividends, stock repurchases and investments. Management believes the Company
has complied with these limitations and restrictions. In April 1998, the Company
filed a Form S-4 registration statement with the Securities and Exchange
Commission for the purpose of effecting the exchange of the Notes for identical
Notes registered for resale under the federal securities laws. The exchange
offer was consummated on August 28, 1998. Since the issuance of the Notes, the
Company has repurchased and retired approximately $30.8 million in principal
amount of Notes.
A portion of the net proceeds from sale of the Notes was applied to repurchase
the Azide Notes (described below) for approximately $28.2 million (approximately
113% of the outstanding principal amount thereof). In connection with the
repurchase, the Company recognized an extraordinary loss on debt extinguishment
of approximately $5.0 million. The extraordinary loss consisted of the cash
premium paid of $3.2 million upon repurchase and a charge of $1.8 million to
write off the unamortized balance of debt issue and discount costs.
Sodium Azide
Sodium Azide Facility
In July 1990, the Company entered into agreements (the "Azide Agreements")
pursuant to which Dynamit Nobel has licensed to the Company on an exclusive
basis for the North American market its most advanced technology and know-how
for the production of sodium azide, the principal component of the gas generant
used in certain automotive airbag safety systems. In addition, Dynamit Nobel
provided technical support for the design, construction and startup of the
facility. The facility was constructed on land owned by the Company in Iron
County, Utah for its owner and operator, American Azide Corporation ("AAC"), a
wholly-owned indirect subsidiary of the Company, and has an annual design
capacity of 6.0 million pounds.
Financing
On February 21, 1992, the Company concluded a $40.0 million financing for the
design, construction and startup of the sodium azide facility through the sale
of the Azide Notes (11% noncallable subordinated secured term notes). As
described above, on March 12, 1998, the Company repurchased the then remaining
$25.0 million principal amount outstanding of the Azide Notes with funds
obtained through the issuance of the Notes. In connection with the issuance of
the Azide Notes, the Company issued Warrants ("the Warrants") to the purchasers
of the Azide Notes, which are exercisable for a 10-year period on or after
December 31, 1993, to purchase shares of the Company's Common Stock. The
exercise price of the Warrants is $14.00 per share. At a $14.00 per share
exercise price, 2,857,000 shares could be purchased under the Warrants. The
Warrants contain additional provisions for a reduction in exercise price in the
event that the Company issues or is deemed to issue stock, rights to purchase
stock or convertible debt at a price less than the exercise price in effect, or
in the event of certain stock dividends or in the event of certain stock splits,
mergers or similar transactions. The Warrants are exercisable, at the option of
their holders, to purchase up to 20% of the Common Stock of AAC, rather than the
Company's Common Stock. In the event of such an election, the exercise price of
the Warrants will be based upon a pro rata share of AAC's capital, adjusted for
earnings and losses, plus interest from the date of contribution.
On or after December 31, 1999, the Company may call up to 50% of the Warrants
at prices that would provide a 30% internal rate of return to the holders
thereof through the date of call (inclusive of the Azide Notes' yield). The
holders of the Warrants were also granted the right to require that the Common
Stock underlying the Warrants be registered under the Securities Act of 1933, as
amended, on one occasion, as well as certain incidental registration rights.
8
Market
A number of firms have devoted extensive efforts for at least 25 years to the
development of automotive airbag safety systems. These efforts have resulted in
the acceptance by the automobile industry and the consuming public of an
inflator for automotive airbags that initially was based principally upon sodium
azide, combined in tablet or granule form with limited amounts of other
materials. Other inflator technologies have since been commercially developed
and have rapidly gained market share.
The Company expects demand for airbag systems in North America and worldwide
to increase, although the level of demand for sodium azide will depend upon the
penetration of competing inflator technologies that are not based upon the use
of sodium azide. Based principally upon market information received from
inflator manufacturers, the Company expects sodium azide use to decline
significantly and that inflators using sodium azide will be phased out over some
period of time.
The Company initially believed that demand for sodium azide in North America
and the world would substantially exceed existing manufacturing capacity and
announced expansions or new facilities (including the AAC plant) by the 1994
model year (which for sodium azide sales purposes was the period June 1993
through May 1994). Currently, demand for sodium azide is substantially less
than supply on a worldwide basis. The Company believes this is the result of
previous capacity expansions by producers coupled with declining demand,
although the Company's information with respect to competitors' existing or
planned capacity is limited. By reason of this highly competitive market
environment, and other factors discussed below, sodium azide prices decreased
significantly in the mid 1990's.
The Company believes that the price erosion of sodium azide has been due, in
part, to unlawful pricing procedures of Japanese sodium azide producers. In
response to such practices, in January 1996, the Company filed an antidumping
petition with the International Trade Commission ("ITC") and the Department of
Commerce ("Commerce"). In August 1996, Commerce issued a preliminary
determination that Japanese imports of sodium azide have been sold in the United
States at prices that are significantly below fair value. Commerce's
preliminary dumping determination applied to all Japanese imports of sodium
azide, regardless of end-use. Commerce's preliminary determination followed a
March 1996 preliminary determination by the ITC that dumped Japanese imports
have caused material injury to the U.S. sodium azide industry.
On January 7, 1997, the anti-dumping investigation initiated by Commerce,
based upon the Company's petition, against the three Japanese producers of
sodium azide was suspended by agreement. It is the Company's understanding
that, by reason of the Suspension Agreement, two of the three Japanese sodium
azide producers have ceased their exports of sodium azide to the United States
for an indeterminate period. As to the third and largest Japanese sodium azide
producer, which has not admitted any prior unlawful conduct, the Suspension
Agreement requires that it make all necessary price revisions to eliminate all
United States sales at below "Normal Value," and that it conform to the
requirements of sections 732 and 733 of the Tariff Act of 1930, as amended, in
connection with its future sales of sodium azide in the United States.
The Suspension Agreement contemplates a cost-based determination of "Normal
Value" and establishes reporting and verification procedures to assure
compliance. Accordingly, the minimum pricing for sodium azide sold in the
United States by the remaining Japanese producer will be based primarily on its
actual costs, and may be affected by changes in the relevant exchange rates.
Finally, the Suspension Agreement provides that it may be terminated by any
party on 60 days' notice, in which event the anti-dumping proceeding would be
re-instituted at the stage to which it had advanced at the time the Suspension
Agreement became effective.
9
Customers
In May 1997 the Company entered into a three-year agreement with Autoliv ASP,
Inc. ("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, 2001. Autoliv accounted for
approximately 14%, 17% and 19% of the Company's revenues during the fiscal years
2000, 1999 and 1998, respectively. The Company is also qualified to supply
sodium azide to TRW, Inc. ("TRW"), the other major supplier of airbag inflators
in the United States, but TRW's requirements have been supplied by competitors
of the Company.
Competition
The Company believes that current competing production capacity includes one
producer in Japan and at least three producers in India. In addition, idle
capacity is available and it is possible that domestic or foreign entities will
seek to develop additional sodium azide production facilities in North America.
However, the Company believes that the reduced level of demand and the
underutilization of existing production facilities makes this unlikely.
In the fiscal years 2000 and 1997, the Company recognized impairment charges
of $9.1 million and $52.6 million, respectively, relating to the fixed assets
used in the production of sodium azide. See Note 12 to the Consolidated
Financial Statements of the Company.
Azide Agreements
Under the Azide Agreements, Dynamit Nobel was to receive, for the use of its
technology and know-how relating to its batch production process of
manufacturing sodium azide, quarterly royalty payments of 5% of the quarterly
net sales of sodium azide by AAC for a period of 15 years from the date the
Company begins to produce sodium azide in commercial quantities. The Company
and Dynamit Nobel agreed to suspend the royalty payment effective as of July 1,
1995.
Halotron(TM)
Halotron(TM) is a fire extinguishing system designed to replace halons, which
are brominated CFC chemicals that have been widely used as fire extinguishing
agents in military, industrial, and commercial applications. The impetus for
the invention and improvement of Halotron(TM) was the discovery during the
1980's that halons are highly destructive to the stratospheric ozone layer,
which acts as a shield against harmful solar ultraviolet radiation.
Use of Halons
Halons have been used throughout the world in modalities that range from hand-
held fire extinguishers to extensively engineered fixed systems, but which are
generally of two types, streaming and total flooding systems. Streaming systems
rely upon the focused projection of a slowly gasifying liquid over distances of
up to 50 feet from the point of projection. Total flooding systems release a
quickly gasifying liquid into a confined space, rendering inert a combustible
atmosphere and extinguishing any ongoing combustion. Halon 1211, principally a
streaming agent, was used on aircraft and aircraft flightlines, on small boats
and ships, in chemically clean rooms and laboratories, telecommunication
facilities, hotels, textile manufacturing facilities and other commercial and
industrial facilities, including those in the petroleum industries. Its
worldwide production peaked in 1988 at 20,000 metric tons. Halon 1301,
principally a flooding agent, protects such installations as computer,
electronic and equipment rooms, ship and other engine room spaces, petroleum
handling stations and repositories of literature and cultural heritage. Its
worldwide production peaked in 1988 at 12,500 metric tons.
10
Customers and Market
The end-user market for halons and consequently, Halotron(TM), is divided into
several segments. The government segment consists of the armed services and
other agencies, including the Department of Energy, NASA and governmental
offices, laboratories and data processing centers. Historically, military
applications have predominated in this segment. It will be critical to the
Company's efforts to market Halotron(TM) to the military that military
specifications for the procurement of halon replacements include Halotron(TM).
The Company is not aware of any military specifications for halon replacements
that have been issued to date.
Commercial market segments include fire critical industries such as utilities,
telecommunications, oil and gas exploration and production, textile
manufacturing, railroad, retail, wholesale, ocean transport and commercial
aviation. Other market segments include schools, hotels, other business
organizations and small users that typically follow selections made by the
industry users described above.
The Company's efforts to produce, market and sell Halotron(TM) are dependent
upon the political climate and environmental regulations that exist and may vary
from country to country. The magnitude of future orders received will be
dependent to a large degree upon political issues and environmental regulations
that are not within the Company's control, as well as additional testing and
qualification in certain jurisdictions, governmental budgetary constraints and
the ultimate market acceptance of these new products.
Halotron(TM) I, the first phase of Halotron(TM), has been extensively and
successfully tested. In 1993, Halotron(TM) I was approved by the United States
Environmental Protection Agency (the "EPA") as a replacement agent for Halon
1211 (the principal halon currently in use). During 1995, the Federal Aviation
Administration ("FAA") approved Halotron(TM) I as an acceptable airport ramp
firefighting agent, concluding that Halotron(TM) I will extinguish flightline
fires in a manner similar to halon 1211.
The Company, together with distributors Amerex Corporation ("Amerex"), Badger
Fire Protection, ("Badger"), Kidde Fyrnetics ("Kidde") and Buckeye Fire
Equipment Company ("Buckeye"), have successfully completed Underwriters
Laboratories' ("UL") fire tests for a number of sizes of portable and wheeled
fire extinguishers using Halotron(TM) I. Domestic distribution of the Buckeye
Halotron(TM) extinguisher line began in early 1996. In May 1998, Amerex began
distribution of a line of UL listed portable fire extinguishers using
Halotron(TM) I. In June 1998, Badger began distribution of a line of UL listed
portable fire extinguishers using Halotron(TM) I. In 1999, Kidde also began
distributing UL listed Halotron(TM) I portables. The Company now has four major
domestic fire extinguisher companies manufacturing and distributing UL listed
portable fire extinguishers using Halotron(TM) I. The Company is also marketing
Halotron(TM) I to other domestic and international fire extinguisher
manufacturers.
In August 1997, the Company completed a study, which concluded that the market
for halon substitutes anticipated by the Company when it entered into the
Halotron(TM) business in 1992 had not materialized and that the market for "in-
kind" substitutes for Halon 1211 would remain substantially smaller than the
peak use in 1988. Although the study also concluded that the Company's
Halotron(TM) I product could command a significant percentage of this smaller
than anticipated market, there can be no assurance in that regard. In order for
the Company to achieve and maintain market share for Halotron(TM) I and a long
term presence in the industry, it may be necessary for the Company to expend
considerable additional funds and effort in research and development. Although
Halotron(TM) I has an Ozone Depletion Potential ("ODP") that is significantly
lower than that of halons and that meets current environmental standards,
potential users of halon replacements may eventually require a product with zero
ODP. Accordingly, the product life of Halotron(TM) I may be limited, and the
Company may be required to produce succeeding Halotron(TM) phases that can meet
increasingly stringent standards. There can be no assurance that such phases
will be capable of production or that a competitor or competitors will not
develop fire extinguishing agents with comparable or superior qualities.
11
Competition
Potential halon alternatives (not in-kind) and substitutes (halocarbons)
compete as to performance characteristics, environmental effects and cost.
Performance characteristics include throwability, visibility after application,
after-fire damage, equipment portability and versatility, low and high
temperature performance, corrosion probability, shelf life and efficiency. The
environmental effects include ODP, global warming potential and toxicity.
Potential halon alternatives include water, carbon dioxide and a variety of
chemicals in liquid, foam and powder form. It is likely that competitors
producing alternatives and substitutes will be larger, will have experience in
the production of fire extinguishing chemicals and systems and will have greater
financial resources than those available to the Company. In 1996, Dupont
introduced a new substitute fire extinguishing agent called FE-36(TM), which is
intended to replace Halon 1211. There are also certain existing patents held by
others that may cover the use as a fire extinguishing agent of one of the key
raw materials the Company uses in the production of Halotron(TM) I. The Company
has recently experienced increases in the cost of this raw material. In
addition, there are currently no domestic use restrictions on halon, so that
potential customers for halon substitutes may continue to use existing halon-
based systems in their possession until the supply is exhausted, which is
believed to be a substantial period of time for some users.
Halotron(TM) Agreement
In 1991 and thereafter, the Company entered into a number of agreements
(collectively the "Halotron(TM) Agreement") with the inventors of Halotron(TM)
(the "Inventors"), granting the Company the option (which was exercised in
February, 1992) to acquire the exclusive worldwide rights to manufacture and
sell Halotron(TM). The Halotron(TM) Agreement provides for disclosure to the
Company of all confidential and proprietary information concerning Halotron(TM)
I. On February 26, 1992, the Company acquired the rights provided for in the
Halotron(TM) Agreement, gave notice to that effect to the Inventors, and
exercised its option. In addition to the exclusive license to manufacture and
sell Halotron(TM) I, the rights acquired by the Company include rights under all
present and future patents relating to Halotron(TM) I throughout the world,
rights to related and follow-on products and technologies and product and
technology improvements. Upon exercise of the option, the Company paid the sum
of $0.7 million (the exercise price of $1.0 million, less advance payments
previously made) and subsequently paid the further total sum of $1.5 million in
monthly installments, commencing in March 1992. A license agreement between the
Company and the Inventors of Halotron(TM) I provided for a royalty to the
Inventors of 5% of the Company's net sales of Halotron(TM) I over a period of 15
years (however, see below for a discussion of certain litigation associated with
the Inventors' rights to royalties). In addition, the Company entered into
employment and consulting agreements with the Inventors which have since been
terminated.
See Item 3. Legal Proceedings and Note 13 to the Consolidated Financial
Statements of the Company for a discussion of litigation associated with the
Halotron(TM) Agreement.
Halotron(TM) Facility
The Company has designed and constructed a Halotron(TM) facility that has an
annual capacity of at least 6.0 million pounds, located on land owned by the
Company in Iron County, Utah.
Real Estate Assets
The Company has interests in two real estate assets under development in Clark
County, Nevada: the Gibson Business Park and the Ventana Canyon joint venture
residential project. The Company also owns 4,700 acres of land at the site of
its facility in Iron County, Utah that are dedicated to the Company's growth and
diversification.
At September 30, 2000, the Company owned approximately 65 acres of improved
undeveloped land at the Gibson Business Park near Las Vegas, Nevada. The
Company's land is held for sale.
12
Ventana Canyon is a 320 acre master-planned community under development near
Las Vegas, Nevada. The community is primarily residential in character,
contemplating single family detached homes, townhomes and apartment buildings.
The project is owned by Gibson Ranch Limited Liability Company ("GRLLC"), to
which the Company has contributed approximately 240 acres and an unrelated local
real estate development group (the "Developer") has contributed the remaining 80
acres. The Developer is the managing member of GRLLC and manages the business
conducted by GRLLC. Certain major decisions, such as increasing debt and
changes in the development plan or budget may be made only by a management
committee on which the Company is represented. The property contributed by the
Company had a carrying value of approximately $12.3 million at the date of
contribution in 1993.
The Company provides financing to the project under two revolving credit
facilities: (i) a $2.4 million facility with GRLLC (the "GRLLC Facility") and
(ii) a $1.7 million facility with the Developer (under which the Developer is
required to advance funds to GRLLC) (the "Developer Facility"). As of September
30, 2000 and 1999, all of the funds previously advanced under these facilities
had been repaid. The credit facilities remain in effect until the property is
fully developed. The profits and losses of GRLLC will be split equally between
the Company and the Developer after the return of the advances and agreed upon
values for initial contributions of property. The Company believes that
development and sale of the property will be completed by the end of calendar
2001, although no assurance can be given in this regard. If the development and
sale of the property continues beyond calendar 2001, there may be an adverse
impact on the earnings and cash flows of GRLLC.
Environmental Protection Equipment
The Company designs, manufactures and markets systems for the control of
noxious odors, the disinfection of waste water streams and the treatment of
seawater. Its OdorMaster(TM) systems eliminate odors from gases at sewage
treatment plants, composting sites and pumping stations and at chemical, food
processing and other industrial plants. These systems, which use
electrochemical technology developed in the Company's specialty chemical
operations, chemically deodorize malodorous compounds in contaminated air.
Advanced OdorMaster(TM) systems place two or three scrubber towers in series to
treat complex odors, such as those produced at sewage composting sites or in
sewage sludge conditioning systems. ChlorMaster(TM) Brine and Sea water systems
utilize a similar process to disinfect effluent at inland sewage treatment and
industrial plants and to control marine growths in condenser cooling and service
water at power and desalination plants and at oil drilling production facilities
on seacoasts and offshore.
The Company's customers for its OdorMaster(TM) System are municipalities and
special authorities (and the contractors who build the sewage systems for such
municipalities and authorities) and plant owners. Municipalities and special
authorities, and oil and other industrial companies are customers of its
ChlorMaster(TM) systems. Its systems are marketed domestically by sales
representatives and overseas by sales representatives and licensees. The
Company competes both with companies that utilize other decontamination
processes and those that utilize technology similar to the Company's. All are
substantially larger than the Company. The Company's success to date is derived
from the ability of its products both to generate sodium hypochlorite on site
and to decontaminate effectively. Its future success will depend upon the
competitiveness of its technology and the success of its sales representatives
and licensees.
At October 31, 2000, the backlog for environmental protection equipment was
$2.1 million.
Research and Development
The Company's existing laboratory facilities are located on the premises of
the Company's perchlorate production activities and are used to support those
activities and its sodium azide and Halotron(TM) production
13
activities. The Company conducts research and development programs directed
toward enhancement of product quality and performance and the development of
complementary or related products at these facilities.
Insurance
The Company's insurance currently includes property insurance on all of its
facilities and business interruption insurance. The Company also maintains
certain liability insurance. Management believes that the nature and extent of
the Company's current insurance coverages are adequate. The Company has not
experienced difficulty obtaining these types of insurance.
Government Regulation
As a supplier to United States government projects, the Company has been and
may be subject to audit and/or review by the government of the negotiation and
performance of, and of the accounting and general practice relating to,
government contracts. Most of the Company's contracts for the sale of AP are in
whole or in part subject to the commercial sections of the Federal Acquisition
Regulations. The Company's AP pricing practices have been and may be reviewed
by its customers and by certain government agencies.
Environmental Regulation
The Company's operations are subject to extensive federal, state and local
regulations governing, among other things, emissions to air, discharges to water
and waste management. Management believes that the Company is currently in
compliance in all material respects with all applicable environmental, safety
and health requirements and, subject to the matters discussed below, does not
anticipate any material adverse effects from existing or known future
requirements. To meet changing licensing and regulatory standards, the Company
may be required to make additional significant site or operational
modifications, potentially involving substantial expenditures or the reduction
or suspension of certain operations. In addition, the operation of the
Company's manufacturing plants entails risk of adverse environmental and health
effects and there can be no assurance that material costs or liabilities will
not be incurred to rectify any future occurrences related to environmental or
health matters.
In 1997, the Southern Nevada Water Authority detected trace amounts of
perchlorate chemicals in Lake Mead and the Las Vegas Wash, bodies of water near
the Company's real estate development property in Henderson, Nevada. Lake Mead
is a source of drinking water for the City of Las Vegas, neighboring areas and
certain areas of metropolitan Southern California. Perchlorate chemicals
(including AP) are a potential health concern because they can interfere with
the production of a growth hormone by the thyroid gland, although they are not
currently included in the list of hazardous substances compiled by the EPA.
However, perchlorates have been added to the EPA's Contaminant Candidate List
and will likely eventually be regulated. The Company manufactured AP at a
facility on the Henderson site until the facility was destroyed in the May 1988
incident, described below, after which the Company relocated its AP production
to its current facilities in Iron County, Utah. For many years, Kerr-McGee
operated an AP production facility at a site near the Company's Henderson
property.
The Water Authority's testing has shown perchlorate concentrations of 8 to 14
parts per billion (ppb) in drinking water. In response to this discovery, the
Company has engaged environmental consultants to drill monitor wells in order to
characterize ground water at and in the vicinity of the Henderson site. The
results of the Company's tests have shown perchlorate concentrations in the
ground water at the Henderson property ranging from 0 to approximately 750,000
ppb at certain monitoring wells. The results have also indicated that the
ground water containing perchlorate concentration from the Henderson site has
not reached the Las Vegas
14
Wash or Lake Mead and, accordingly, has not been introduced into any source of
drinking water. It has been reported that levels as high as 3.7 million ppb have
been detected at a monitoring well at the Kerr-McGee site. The State of
California has adopted a preliminary maximum standard of 18 ppb for perchlorate
levels in drinking water, but there are currently no federal or State of Nevada
standards for acceptable levels of perchlorate in ground water or drinking
water. The Company is cooperating with State and local agencies, and with Kerr-
McGee and other interested firms, in the investigation and evaluation of
perchlorate found at its site and of the source or sources of perchlorates in
Lake Mead 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 contributions or assistance.
Safety Considerations
AP, in the particle sizes and chemical purities produced by the Company, is
categorized for transportation purposes by the United States Department of
Transportation ("DOT") as a Class IV oxidizer. Such classification indicates
that the DOT considers AP to be non-explosive, non-flammable and non-toxic. The
Company's AP manufacturing plant was constructed in a manner intended to
minimize, to the extent of known technologies and safety measures, the
combination of AP with other materials in a manner that could result in
explosions or combustion. However, no assurance can be given that the Company's
safety precautions will be effective in preventing explosions, fires and other
such events from occurring. On July 30, 1997, an explosion and fire occurred at
the Company's AP production facility in Iron County, Utah. Although damage to
the Company's property was confined to a relatively small area, the incident
left one employee dead and three others injured, one seriously. As a result of
this incident, the Utah Occupational Safety and Health Division of the Utah
Labor Commission cited the Company for violation of certain applicable Utah
safety regulations in connection with the handling of AP and assessed fines
totaling $5,250. Although the Company has taken steps to improve safety
measures and training in response to this incident, there can be no assurance
that such measures will be effective in preventing other such events in the
future.
The Company has one major operating facility located in Iron County, Utah.
The loss or shutdown of operations over an extended period of time at such
facility would have a material adverse effect on the Company. The Company's
operations are subject to the usual hazards associated with chemical
manufacturing and the related storage and transportation of products and wastes,
including explosions, fires, inclement weather and natural disasters, mechanical
failure, unscheduled downtime, transportation interruptions, chemical spills,
discharges or releases of toxic or hazardous substances or gases and other
environmental risks, such as required remediation of contamination. These
hazards can cause personal injury and loss of life, severe damage to or
destruction of property and equipment and environmental damage, and may result
in suspension of operations and the imposition of civil or criminal penalties.
The Company maintains property, business interruption and liability insurance at
levels which it believes are in accordance with customary industry practice, but
there can be no assurance that the Company will not incur losses beyond the
limits or outside the coverage of its insurance.
On May 4, 1988, the former manufacturing and office facilities of the Company
in Henderson, Nevada were destroyed by a series of massive explosions and
associated fires. Extensive property damage occurred both at the Company's
facilities and in immediately adjacent areas, the principal damage occurring
within a three-mile radius. Production of AP, the Company's principal business,
ceased for a 15-month period. Significant interruptions were also experienced
in the Company's other businesses, which occupied the same or adjacent sites.
Although the Company's current facility is designed to site particular
components of the manufacturing process in discrete areas of the facility and
incorporates modern equipment and materials handling systems designed,
constructed and operated in accordance with the operating and safety
requirements of the Company's customers, insurance carriers and governmental
authorities, there can be no assurance that
15
another incident could not interrupt some or all of the activities carried on at
the Company's current manufacturing site.
Sodium azide is a strong reducing agent and is classified by the DOT as a
poison. Its manufacture entails certain hazards with which Dynamit Nobel and
the Company have become familiar over the course of time. The Company's method
of production is intended to limit the quantity of sodium azide in process at
any one time and to utilize known safety measures in an effort to lessen
attendant risks. In late 1992, a fire occurred in a sodium azide reactor vessel
at the Company's facility during start-up and testing of the reactor vessel. In
addition, fires are reported to have affected production at a competitor's
facility in the past. There can be no assurance that a fire or other incident
will not occur at the Company's sodium azide production facility in the future.
The Company believes that exposure to sodium azide after an airbag is installed
in an automobile is highly unlikely due to the way in which sodium azide is used
and to the housing in which it is encased. However, the Company understands
that claims have been asserted by automobile drivers and passengers that they
have suffered hand burns from heated gas and facial abrasions from airbag fabric
after its deployment, although no such claims have been asserted against the
Company.
Employees
At September 30, 2000, the Company employed approximately 211 persons in
executive, administrative, sales and manufacturing capacities. Although efforts
have been made by union representatives to seek certification to represent
certain Company employees, no such certification has been granted and the
Company does not have collective bargaining agreements with any of its
employees. The Company considers relationships with its employees to be
satisfactory.
Item 2. Properties
- -------------------
The following table sets forth certain information regarding the Company's
properties at September 30, 2000.
Approximate
Area or Approximate
Location Principal Use Floor Space Status Annual Rent
-------- ------------- ----------- ------ -----------
Iron County, UT Perchlorate Manufacturing Facility/(a)/ 217 acres Owned ___
Iron County, UT Sodium Azide Manufacturing Facility/(b)/ 41 acres Owned ___
Iron County, UT Halotron(TM) Manufacturing Facility/(c)/ 6,720 sq. ft. Owned ___
Las Vegas, NV Executive Offices 22,262 sq. ft. Leased/(d)/ $ 590,000
(a) This facility is used for the production of perchlorate products
and consists of approximately 112,000 sq. ft. of enclosed
manufacturing space, a 12,000 sq. ft. administration building and
a 3,200 sq. ft. laboratory building. Capacity utilization rates
for this production facility were approximately 69%, 80% and 62%
during the fiscal years ended September 30, 2000, 1999 and 1998,
respectively.
(b) This facility is used for the production of sodium azide and
consists of approximately 34,600 sq. ft. of enclosed
manufacturing and laboratory space. Capacity utilization rates
for this production facility were approximately 40%, 47% and 39%
during the fiscal years ended September 30, 2000, 1999 and 1998,
respectively.
16
/(c)/ Capacity utilization rates for the Halotron(TM) production
facility were approximately 7% during the fiscal year ended
September 30, 2000 and 4% in each of the fiscal years ended
September 30, 1999 and 1998.
/(d)/ These facilities are leased from 3770 Howard Hughes Parkway
Associates-Limited Partnership for an initial term of 10 years,
which began on March 1, 1991. See Note 4 to the Consolidated
Financial Statements of the Company.
The Company's facilities are considered by it to be adequate for its present
needs and suitable for their current use. See Item 1. Business-"Real Estate
Assets" for a description of the Company's development properties in Iron
County, Utah and Clark County, Nevada.
Item 3. Legal Proceedings
- --------------------------
In February 1992, following successful technical evaluations and field tests,
the Company exercised its option to acquire the rights provided for in the
Halotron(TM) Agreement.
In 1992, the Company sued the Inventors, claiming they had breached the
agreements and contracts in which they had sold the rights to Halotron(TM).
This initial litigation was settled when the Inventors promised to perform
faithfully their duties and to honor the terms of the contracts that, among
other things, gave the Company exclusive rights to the Halotron(TM) chemicals
and delivery systems. Following the settlement of the initial litigation,
however, the Inventors failed to perform the acts they had promised in order to
secure dismissal of that litigation. As a result, the Company brought an action
in the Utah state courts in March 1994, for the purpose of establishing the
Company's exclusive rights to the Halotron(TM) chemicals and delivery systems.
On August 15, 1994, the court entered a default judgment against the Inventors
granting the injunctive relief requested by the Company and awarding damages in
the amount of $42.2 million. The trial court further ordered the Inventors to
execute documents required for patent registration of Halotron(TM) in various
countries. When the Inventors ignored this court order, the Court directed the
Clerk of the Court to execute these documents on behalf of the Inventors.
Finally, the Court ordered that the Inventors' rights to any future royalties
from sales of Halotron(TM) were terminated.
In 1996, the Company initiated arbitration proceedings by filing a notice of
arbitration with the American Arbitration Association ("AAA") against the
Inventors to enforce, among other things, the Company's rights under the
Halotron(TM) Agreement. In June 2000, an AAA Panel (the "Tribunal") issued
their final award in this proceeding. The Tribunal awarded the Company monetary
relief consisting of $2.0 million in compensatory damages, $0.2 million in
arbitration costs, and $0.3 million in partial legal related costs, plus
interest at an annual non-compounded rate of 9%. The Tribunal also awarded the
Company injunctive relief essentially consisting of requirements that the
Inventors stop using the Halotron(TM) name, the invention, the know-how, and the
proprietary information, produce missing work product, disclose and transfer
relevant patent and trademark rights, and provide information on sales of
"Halotron(TM)" products. The award also specifies that the Inventors pay $1000
for each day, beyond twenty days of award delivery, that they fail to satisfy
the directives within the injunctive relief. Any opportunity for royalties to
the Inventors would only occur after the payment of damages and compliance with
the directives within the award. The Company is pursuing local enforcement
proceedings in Sweden against the Inventors through the Svea Hovratt Court.
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 the fire and explosion on July 30, 1997 at the
Company's AP production facility (see Item 1. Business-"Safety Considerations").
The Company believes 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 accident. These
lawsuits are currently in a discovery phase.
17
Trace amounts of perchlorate chemicals have been found in Lake Mead. Clark
County, Nevada, where Lake Mead is situated, was the location of Kerr-McGee's AP
operations, and was also 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
impacts, if any, of such cooperation, contributions or assistance. See Item I.
Business-"Environmental Regulation."
The information set forth in Notes 9 and 13 to the Consolidated Financial
Statements of the Company regarding litigation and contingencies is incorporated
herein by reference. Reference is also made to Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not Applicable.
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
- -------------------------------------------------------------------------
Matters
- -------
The Company's Common Stock trades on The Nasdaq Stock Market(R) under the
symbol "APFC." The table below sets forth the high and low sales prices of the
Common Stock for the periods indicated.
High Low
------- -------
Fiscal Year 2000
----------------
1st Quarter $ 8.875 $ 6.813
2nd Quarter 10.688 7.000
3rd Quarter 7.313 5.250
4th Quarter 6.625 5.188
Fiscal Year 1999
----------------
1st Quarter $ 8.000 $ 6.500
2nd Quarter 9.063 7.375
3rd Quarter 8.500 7.625
4th Quarter 9.438 7.625
At December 1, 2000, there were approximately 1,224 shareholders of record of
the Company's Common Stock. The Company has not paid a dividend on the Common
Stock since the Company's incorporation and does not anticipate paying cash
dividends in the foreseeable future. In addition, covenants contained in the
Indenture associated with the Notes restrict the Company's ability to pay
dividends. (See Note 5 to the Consolidated Financial Statements of the Company.)
18
Item 6. Selected Financial Data
- --------------------------------
FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA FOR THE YEARS ENDED
- -----------------------------------------------------------------------------
SEPTEMBER 30,
- -------------
2000 1999 1998 1997 1996
------------------------------------------------------
.......(in thousands except per share amounts)........
STATEMENT OF OPERATIONS DATA:
Sales and operating revenues $ 67,369 $ 72,834 $ 52,339 $ 44,050 $ 42,381
Cost of sales 44,279 45,834 35,792 36,420 32,579
Gross profit 23,090 27,000 16,547 7,630 9,802
Operating expenses 10,236 10,024 9,246 9,509 9,367
Impairment charges 9,084 52,605
Employee separation and management reorganization
costs 3,616
Operating income (loss) 3,770 16,976 7,301 (58,100) 435
Equity in real estate venture 300 200 700
Interest and other income 1,987 1,588 1,294 1,115 1,381
Interest and other expense 5,568 6,951 5,734 2,001 2,836
Income (loss) before income taxes 189 11,613 3,161 (58,786) (320)
Income taxes (15,136) (10,101) (109)
Net income (loss) before extraordinary losses 15,325 11,613 3,161 (48,685) (211)
Extraordinary loss-debt extinguishments 1,594 174 5,172
Net income (loss) 13,731 11,439 (2,011) (48,685) (211)
Basic net income (loss) per share 1.88 1.41 (.24) (6.01) (.03)
Diluted net income (loss) per share $ 1.86 $ 1.39 $ (.24) $ (6.01) $ (.03)
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments $ 30,128 $ 40,434 $ 20,389 $ 18,881 $ 20,501
Restricted cash 1,195 1,176 3,580 4,969
Inventories and accounts and notes receivable 20,813 18,883 23,193 17,304 16,199
Property, plant and equipment - net 7,064 17,254 19,529 19,314 77,217
Intangible assets-net 29,805 34,210 38,252 1,540 1,760
Deferred Income Taxes 15,406
Development property 5,482 6,440 7,036 7,362 8,631
Real estate equity investments 6,838 11,237 17,112 20,248 18,698
Total assets 117,590 132,882 130,759 90,081 150,019
Working capital 43,758 53,088 34,786 23,479 24,905
Notes payable and current portion of long-term debt 1,195 1,176 6,166 7,334
Long-term debt 44,175 67,000 70,000 24,900 29,452
Shareholders' equity $ 59,609 $ 52,204 $ 44,029 $ 45,551 $ 94,156
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Overview
The Company is principally engaged in the production of AP for the aerospace
and national defense industries. In addition, the Company produces and sells
sodium azide, the primary component of a gas generant used in automotive airbag
safety systems, and Halotron(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 operating
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 water and seawater treatment systems.
In 1998, the Company entered into the Purchase Agreement with Kerr-McGee.
Upon consummation of the Acquisition, the Company effectively became the sole
North American producer of AP.
Sales and Operating Revenues. Sales of the Company's perchlorate chemical
products, consisting almost entirely of AP sales, accounted for approximately
69%, 67% and 67% of revenues during the fiscal years ended September 30, 2000,
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
revenues of the Company. For example, Thiokol accounted for approximately 38%,
35% and 39% of the Company's revenues during the fiscal years ended September
30, 2000, 1999 and 1998, respectively. In addition, Alliant accounted for
approximately 13%, 14% and 16% of the Company's revenues during fiscal 2000,
1999 and 1998, respectively.
Sodium azide sales accounted for approximately 18%, 19% and 21% of sales
during fiscal years ended September 30, 2000, 1999 and 1998, respectively.
Autoliv, the Company's principal sodium azide customer, accounted for
approximately 14%,17% and 19% of the Company's revenues during fiscal 2000, 1999
and 1998, respectively.
Sales of Halotron(TM) amounted to approximately 4%, 2% and 3% of revenues
during the fiscal years ended September 30, 2000, 1999 and 1998, 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, as well as
existing and potential governmental regulations.
Real estate and related sales amounted to approximately 4%, 9% and 5% of
revenues during the fiscal years ended September 30, 2000, 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
recognition of the equity in earnings of real estate ventures.
Environmental protection equipment sales accounted for approximately 5%, 3%
and 4% of revenues during the fiscal years ended September 30, 2000, 1999 and
1998, respectively.
Cost of Sales. The principal elements comprising the Company's cost of sales
are raw materials, electric power, labor, manufacturing overhead 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. Prices paid by the Company for raw
materials have historically been relatively stable, although the Company has
recently experienced cost increases on certain raw materials, particularly on
HCFC 123 and those requiring substantial
20
energy costs to produce. 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 costs of operating the Company's specialty chemical plants,
consisting mostly of labor and overhead, are largely fixed in nature. The
Company is in the process of negotiating for its expected power requirements
beyond April 2002 (see Note 9 to the Consolidated Financial Statements of the
Company).
Operating Expenses. Operating (selling, general and administrative) expenses
were $10.2 million, $10.0 million and $9.2 million during the fiscal years ended
September 30, 2000, 1999 and 1998, respectively. Operating expenses in each of
the fiscal years 2000, 1999 and 1998 include approximately $1.0 million in
costs related to the investigation and evaluation of the trace amounts of
perchlorate chemicals found in Lake Mead (see Note 9 to the Consolidated
Financial Statements of the Company). The Company is unable to determine the
extent to which similar costs will be incurred in the future.
Income Taxes. The Company's effective income tax rates were approximately 0%
during the fiscal years ended September 30, 1999 and 1998, as a result of the
establishment of a deferred tax valuation allowance. In accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes", in fiscal 2000 the Company released its deferred
tax valuation allowance and recognized the benefits of its net deferred tax
assets (see Note 7 to the Consolidated Financial Statements of the Company).
Net Income (Loss). Although the Company's net income (loss) and diluted net
income (loss) per common share have not been subject to seasonal fluctuations,
they have been and are expected to continue to be subject to variations from
quarter to quarter and year to year due to the following factors, among others:
(i) as discussed in Note 9 to the Consolidated Financial Statements of the
Company, the Company may incur material legal and other costs associated with
certain litigation and contingencies; (ii) the timing of real estate and related
sales and equity in the earnings of real estate ventures is not predictable;
(iii) the recognition of revenues from environmental protection equipment orders
not accounted for as long-term contracts depends upon orders generated and the
timing of shipment of the equipment; (iv) weighted average common and common
equivalent shares for purposes of calculating diluted net income (loss) per
common share are subject to significant fluctuations based upon changes in the
market price of the Company's Common Stock due to outstanding warrants and
options; (v) the results of periodic reviews of impairment issues; and (vi) 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
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended September 30,
1999
Sales and Operating Revenues. Sales decreased $5.4 million, or 7%, to $67.4
million in fiscal 2000, from $72.8 million in fiscal 1999. This decrease was
attributable to decreased specialty chemical and real estate sales. The decrease
was partially offset by an increase in environmental protection equipment sales.
Specialty chemical sales decreased $3.1 million, or 5%, to $61.4 million in
fiscal 2000, from $64.5 million in fiscal 1999. This decrease was principally
attributable to a decrease in perchlorate sales of $1.8 million and a decrease
in sodium azide sales of $2.5 million. These decreases were offset in part by
an increase in Halotron(TM) sales. Halotron sales increased $1.2 million, or
80%, to $2.7 million in fiscal 2000 compared to $1.5 million in fiscal 1999.
The increase in Halotron(TM) sales results principally from the Company's
increased penetration into the clean-gas fire extinguishing agent market,
particularly the domestic market.
21
In March 2000, the Company received notification from Thiokol of a change in
the fiscal 2000 purchase order for AP that resulted in a decrease of
approximately 3.23 million pounds of AP (from 10.48 million pounds of AP). The
Company submitted a price adjustment claim under the change order and, in
September 2000, negotiated and settled the claim which resulted in a $3.0
million payment from Thiokol. The payment has been recognized in revenues of
the Company's specialty chemical segment which mitigated the impact of the lower
AP volumes resulting from the change order. However, sales volume levels for AP
declined from approximately 20.2 million pounds in fiscal 1999 to approximately
16.4 million pounds in fiscal 2000. The Company expects sales volumes for AP in
fiscal 2001 to decrease further to between 13.0 million and 15.0 million pounds.
The recent weakness in sales volumes is primarily attributable to lower
requirements for applications in certain commercial space launch vehicles used
primarily in satellite launches, particularly telecommunication satellites. In
addition, purchases of AP for use in the solid rocket motors for the Space
Shuttle, as evidenced by the change order referred to above, have declined as a
result of existing excess inventory levels. The Company believes that such
excess should be reduced over the next few years considering the number of
shuttle flights planned for the construction and servicing of the International
Space Station. The Company also understands that existing plans call for
significant AP requirements over the next several years for use in the Minuteman
program. Accordingly, the Company believes that the estimated future AP
requirements for these two programs should bring North American demand for AP
back to an annual level of between 16.0 million and 20.0 million pounds over the
next few years, although there can be no assurance given with respect to these
estimates. The Company has no ability to influence North American demand for
AP.
The Company experienced a 17% decrease in sodium azide sales volumes in fiscal
2000 as compared to fiscal 1999. Although the Company expects the worldwide
demand for airbag systems to increase, the level of demand for sodium azide will
depend upon the penetration of competing inflator technologies that are not
based upon the use of sodium azide. Based principally upon market information
received from 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. As a result of these market conditions, in fiscal
2000 the Company recognized an impairment charge of approximately $9.1 million
relating to fixed assets used in the production of sodium azide. See Note 12 to
the Consolidated Financial Statements of the Company.
Real estate sales decreased $3.7 million, or 60%, to $2.5 million in fiscal
2000, from $6.2 million in fiscal 1999 due to a decrease in land sales in fiscal
2000 compared to fiscal 1999.
Environmental protection equipment sales increased $1.4 million, or 67%, to
$3.5 million in fiscal 2000, from $2.1 million in fiscal 1999. As of October
31, 2000, the Company has a backlog of approximately $2.1 million for deliveries
of environmental protection equipment in fiscal 2001.
Cost of Sales. Cost of sales decreased $1.5 million, or 3%, in fiscal 2000 to
$44.3 million from $45.8 million in fiscal 1999. Cost of sales as a percentage
of sales increased to 66% in fiscal 2000 as compared to 63% in fiscal 1999. The
increase in cost of sales as a percentage of sales was primarily attributable to
lower specialty chemical sales volumes (perchlorates and sodium azide).
Operating Expenses. Operating (selling, general and administrative) expenses
increased $0.1 million, or 1%, in fiscal 2000 to $10.2 million from $10.0
million in fiscal 1999.
Segment Operating Income (Loss). Operating income (loss) of the Company's
operating segments during the fiscal years ended September 30, 2000 and 1999 was
as follows:
22
--------------------------------
2000 1999
--------------------------------
Specialty chemicals $2,936,000 $14,847,000
Environmental protection equipment 453,000 (888,000)
Real estate 871,000 3,485,000
--------------------------------
Total $4,260,000 $17,444,000
================================
The decrease in operating income of the specialty chemicals segment was
attributable to the decrease in perchlorate and sodium azide sales and the
impairment charge of $9.1 million discussed above. The increase in operating
income of the environmental protection equipment segment was primarily due to an
increase in sales and an unusual charge recognized in fiscal 1999 in the amount
of approximately $0.7 million associated with certain warranty items. The
decrease in operating income of the real estate segment was attributable to a
decrease in revenues from $6.2 million in fiscal 1999 to $2.5 million in fiscal
2000.
Interest and Other Income. Interest and other income increased to $2.0
million in fiscal 2000 from $1.6 million in 1999. The increase was principally
due to higher average interest rates earned on cash and cash equivalent
balances.
Interest and Other Expense. Interest and other expense decreased to $5.6
million in fiscal 2000 from $7.0 million in fiscal 1999. The decrease was
primarily due to the Company's repurchase of approximately $22.8 million in
principal amount of Notes during fiscal 2000.
Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended September 30,
1998
Sales and Operating Revenues. Sales increased $20.5 million, or 39%, to $72.8
million in fiscal 1999, from $52.3 million in fiscal 1998. This increase was
attributable to increased specialty chemical and real estate sales.
Specialty chemical sales increased $16.8 million, or 35%, to $64.5 million in
fiscal 1999, from $47.7 million in fiscal 1998. This increase was principally
attributable to an increase in perchlorate sales of $13.6 million. The increase
in perchlorate sales was attributable to a full year of additional AP sales
volume resulting from the Acquisition. In addition, sodium azide sales
increased $3.4 million, or 31%, to $14.3 million in fiscal 1999, from $10.9
million in fiscal 1998.
Real estate sales increased $3.7 million, or 148%, to $6.2 million in fiscal
1999, from $2.5 million in fiscal 1998 due to an increase in land sales in
fiscal 1999 compared to fiscal 1998.
Environmental protection equipment sales were $2.1 million in both fiscal 1999
and 1998.
Cost of Sales. Cost of sales increased $10.0 million, or 28%, in fiscal 1999
to $45.8 million from $35.8 million in fiscal 1998. Cost of sales as a
percentage of sales decreased to 63% in fiscal 1999 as compared to 68% in fiscal
1998. The decrease in cost of sales as a percentage of sales was primarily
attributable to operating efficiencies resulting from an increase in specialty
chemical sales volumes (perchlorates and sodium azide).
Operating Expenses. Operating (selling, general and administrative) expenses
increased $0.8 million, or 9%, in fiscal 1999 to $10.0 million from $9.2 million
in fiscal 1998. The increase in operating expenses was primarily due to an
increase in net periodic pension cost of approximately $0.5 million (see Note 8
to the Consolidated Financial Statements of the Company) and approximately $0.2
million in fiscal 1999 costs incurred related to the arbitration of the
Halotron(TM) Agreement (see Note 13 to the Consolidated Financial Statements of
the Company).
23
Segment Operating Income (Loss). Operating income (loss) of the Company's
operating segments during the fiscal years ended September 30, 1999 and 1998 was
as follows:
--------------------------------
1999 1998
--------------------------------
Specialty chemicals $14,847,000 $6,422,000
Environmental protection equipment (888,000) (2,000)
Real estate 3,485,000 1,082,000
--------------------------------
Total $17,444,000 $7,502,000
================================
The increase in operating income of the specialty chemicals segment was
attributable to the increase in perchlorate sales and operating performance as a
result of the Acquisition. The increase in operating loss of the environmental
protection equipment segment was primarily due to an unusual charge in the
amount of approximately $0.7 million associated with certain warranty items.
The increase in operating income of the real estate segment was attributable to
an increase in revenues from $2.5 million in fiscal 1998 to $6.2 million in
fiscal 1999.
Interest and Other Income. Interest and other income increased to $1.6
million in fiscal 1999 from $1.3 million in 1998. The increase was principally
due to higher average cash and cash equivalent balances.
Interest and Other Expense. Interest and other expense increased to $7.0
million in fiscal 1999 from $5.7 million in fiscal 1998. The increase was
primarily due to the issuance of the Notes.
Inflation
Inflation did not have a significant effect on the Company's sales and
operating revenues or costs during the three-year period ended September 30,
2000. As discussed above, the Company has recently experienced cost increases
on certain of its raw materials and inflation may have an effect on gross profit
in the future as a result of potential further increases, and the fact that
certain of the Company's agreements with AP and sodium azide customers require
fixed prices. However, certain of such agreements contain escalation features
that should somewhat mitigate the risks associated with inflation.
Liquidity and Capital Resources
As discussed in Notes 5 and 6 to the Consolidated Financial Statements of the
Company, 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. The Company incurred
approximately $3.6 million in costs associated with the issuance of the Notes.
In connection with the Azide Notes repurchase, the Company recognized an
extraordinary loss on debt extinguishment of approximately $5.0 million. Since
the original issuance of the Notes, the Company has repurchased and retired
approximately $30.8 million in principal amount of Notes and incurred
extraordinary losses on these debt extinguishments of approximately $1.8
million.
Cash flows provided by operating activities were $19.0 million, $22.6 million
and $7.7 million during the fiscal years ended September 30, 2000, 1999 and
1998, respectively. The significant increase in cash flows from operating
activities in fiscal 1999 resulted from increased sales and margins in the
Company's specialty chemical and real estate 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, including
debt related payments. However, the resolution of litigation and contingencies,
and the timing, pricing and
24
magnitude of orders for AP, sodium azide and Halotron(TM), may have an effect on
the use and availability of cash.
Capital expenditures were $2.5 million, $2.1 million and $2.8 million during
the fiscal years ended September 30, 2000, 1999 and 1998, respectively. Capital
expenditures relate principally to specialty chemicals segment capital
improvement projects. Capital expenditures are expected to be funded from
existing cash balances and operating cash flow.
During the three-year period ended September 30, 2000, the Company made debt
related payments of approximately $67.4 million, repurchased $10.7 million in
common stock and issued $1.6 million in common stock as a result of the exercise
of outstanding stock options.
During the three-year period ended September 30, 2000, the Company received
net cash of approximately $13.4 million from its 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 near the end of calendar 2001.
As a result of the litigation and contingencies discussed in Note 9 to the
Consolidated Financial Statements of the Company, the Company has incurred legal
and other costs, and it may incur material legal and other costs associated with
the resolution of litigation and 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 or the period of time
over which such costs will be incurred.
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 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 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.
25
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 described in Note 9 to the
Consolidated Financial Statements of the Company 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, 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.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company has certain fixed-rate debt (the Notes) 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.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Financial statements called for hereunder are included herein on the
following pages:
Page(s)
-------
Independent Auditors' Report 35
Consolidated Balance Sheets 36
Consolidated Statements of Operations 37
Consolidated Statements of Cash Flows 38
Consolidated Statements of Changes in Shareholders' Equity 39
Notes to Consolidated Financial Statements 40-55
26
SUMMARIZED QUARTERLY FINANCIAL DATA
(unaudited)
(amounts in thousands except per share amounts)
------------------------------------------------------
Quarters For Fiscal Year 2000
1st 2nd 3rd 4th Total
- ------------------------------------------------------------------------------------
/(1)/
/(1)/ /(1)/ /(2)/ /(2)/
Sales and Operating Revenues $20,976 $16,319 $17,021 $13,053 $67,369
Gross Profit 8,573 5,025 6,155 3,337 23,090
Net Income Before
Extraordinary Loss 5,024 1,226 2,827 6,248 15,325
Net Income 5,024 612 1,847 6,248 13,731
Diluted Net Income Before
Extraordinary Loss Per Share $ .64 $ .16 $ .40 $ .88 $ 2.08
Diluted Net Income Per Share $ .64 $ .08 $ .26 $ .88 $ 1.86
/(1)/ Net income includes extraordinary losses on debt extinguishments of
approximately $0.6 million in the second quarter and $1.0 million in the
third quarter.
/(2)/ Net income in the fourth quarter includes an impairment charge of
approximately $9.1 million and the recognition of the benefit of net
deferred tax assets of approximately $15.1 million.
------------------------------------------------------
Quarters For Fiscal Year 2000
1st 2nd 3rd 4th Total
- ------------------------------------------------------------------------------------
/(1)/ /(1)/
Sales and Operating Revenues $18,854 $16,891 $18,659 $18,430 $72,834
Gross Profit 7,266 5,921 6,230 7,583 27,000
Net Income Before
Extraordinary Loss 3,301 2,064 2,356 3,892 11,613
Net Income 3,301 2,064 2,182 3,892 11,439
Diluted Net Income Before
Extraordinary Loss Per Share $ .40 $ .25 $ .28 $ .48 $ 1.41
Diluted Net Income Per Share $ .40 $ .25 $ .26 $ .48 $ 1.39
/(1)/ Net income includes an extraordinary loss on debt extinguishment of
approximately $0.2 million in the third quarter.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not Applicable.
27
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The required information regarding directors and executive officers is
incorporated herein by reference from the Company's definitive proxy statement
for its 2001 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission not later than January 28, 2001.
Item 11. Executive Compensation
- --------------------------------
The required information regarding executive compensation is incorporated
herein by reference from the Company's definitive proxy statement for its 2001
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission not later than January 28, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The required information regarding security ownership of certain beneficial
owners and management is incorporated herein by reference from the Company's
definitive proxy statement for its 2001 Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission not later than January 28,
2001.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The required information regarding certain relationships and related
transactions is incorporated by reference from the Company's definitive proxy
statement for its 2001 Annual Meeting of Stockholders, to be filed with the
Securities and Exchange Commission not later than January 28, 2001.
28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) (1) Financial Statements
--------------------
See Part II, Item 8 for an index to the Registrant's financial
statements and supplementary data.
(2) Financial Statement Schedules
-----------------------------
None applicable.
(3) Exhibits
--------
(a) The following Exhibits are filed as part of this Report
(references are to Regulation S-K Exhibit Numbers):
2.1 Asset Purchase Agreement dated as of October 10, 1997, between
AMPAC, Inc. and Kerr-McGee Chemical Corporation, incorporated
herein by reference to Exhibit 99.1 to the Registrant's Current
Report on Form 8-K dated February 19, 1998.
3.1 Registrant's Restated Certificate of Incorporation, incorporated
by reference to Exhibit 3A to Registrant's Registration Statement
on Form S-14 (File No. 2-70830), (the "S-14").
3.2 Registrant's By-Laws, incorporated by reference to Exhibit 3B to
the S-14.
3.3 Amendments to Registrant's By-Laws, incorporated by Reference to
the Registrant's Current Report on Form 8-K dated November 9,
1999.
3.4 Articles of Amendment to the Restated Certificate of
Incorporation, as filed with the Secretary of State, State of
Delaware, on October 7, 1991, incorporated by reference to Exhibit
4.3 to Registrant's Registration Statement on Form S-3 (File No.
33-52196) (the "S-3").
3.5 Articles of Amendment to the Restated Certificate of Incorporation
as filed with the Secretary of State, State of Delaware, on April
21, 1992, incorporated by reference to Exhibit 4.4 to the S-3.
* 3.6 Form of Indemnification Agreement between the Registrant and all
Directors of the Registrant.
4.1 American Pacific Corporation 1991 Nonqualified Stock Option Plan,
incorporated by reference to Exhibit 10.26 to the Registrant's
Registration Statement on Form S-2 (File No. 33-36664) (the "1990
S-2").
29
4.2 American Pacific Corporation 1994 Directors' Stock Option Plan,
incorporated by reference to Exhibit 10.34 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30,
1995 (the "1995 10-K").
4.3 Stock Option Agreement between Registrant and General Technical
Services, Inc. dated July 11, 1995, incorporated by reference to
Exhibit 10.35 to the 1995 10-K.
4.4 Stock Option Agreement between Registrant and John R. Gibson dated
July 8, 1997, incorporated by reference to Exhibit 10.18 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 (the "1997 10-K").
4.5 Stock Option Agreement between Registrant and David N. Keys dated
July 8, 1997, incorporated by reference to Exhibit 10.19 to the
1997 10-K.
4.6 Form of Stock Option Agreement between Registrant and certain
Directors dated May 21, 1997, incorporated by reference to Exhibit
10.21 to the 1997 10-K.
4.7 American Pacific Corporation 1997 Stock Option Plan (the "1997
Plan"), incorporated by reference to Exhibit 4.1 to Registrant's
Form S-8 (File No. 333-53449) (the "1998 S-8").
4.8 Form of Option Agreement under the 1997 Plan, incorporated by
reference to Exhibit 4.2 to the 1998 S-8.
4.9 Form of Note and Warrants Purchase Agreement dated February 21,
1992, relating to the Registrant's previously outstanding
Subordinated Secured Term Notes, incorporated by reference to
Exhibit 10.3 to the Registrant's Current Report on Form 8-K dated
February 28, 1992 (the "1992 8-K").
4.10 Form of Warrant to purchase Common Stock of the Registrant dated
February 21, 1992, incorporated by reference to Exhibit 10.4 to
the 1992 8-K.
4.11 Form of Warrant to purchase Common Stock of American Azide
Corporation dated February 21, 1992, incorporated by reference to
Exhibit 10.5 to the 1992 8-K.
4.12 Indenture dated as of March 1, 1998, by and between the Registrant
and United States Trust Company of New York, incorporated by
reference to Exhibit 4.1 to Form S-4 (File No. 333-49883) (the
"1998 S-4").
4.13 Registration Rights Agreement dated March 12, 1998, by and between
the Company and Credit Suisse First Boston Corporation,
incorporated by reference to Exhibit 99.1 to the 1998 S-4.
4.14 Form of Letter of Transmittal for Tender of outstanding 9 1/4%
Senior Notes Due 2005 in exchange for 9 1/4% Senior Notes Due 2005
of the Registrant, incorporated by reference to Exhibit 99.2 to
the 1998 S-4.
4.15 Form of Tender for outstanding 9 1/4% Senior Notes Due 2005 in
exchange for 9 1/4% Senior Notes due 2005 of the Registrant,
incorporated by reference to Exhibit 99.3 to the 1998 S-4.
30
4.16 Form of Instruction to Registered Holder from Beneficial Owner of
9 1/4% Senior Unsecured Notes due 2005 of the Registrant,
incorporated by reference to Exhibit 99.4 to the 1998 S-4.
4.17 Form of Notice of Guaranteed Delivery for outstanding 9 1/4%
Senior Notes Due 2005 in exchange for 9 1/4% Senior Notes Due 2005
of the Registrant, incorporated by reference to Exhibit 99.5 to
the 1998 S-4.
4.18 Form of Rights Agreement, dated as of August 3, 1999, between
Registrant and American Stock Transfer & Trust Company,
incorporated by reference to the Registrant's Registration
Statement on Form 8-A dated August 6, 1999 (the "Form 8-A").
4.19 Form of Letter to Stockholders with copies of Summary of Rights to
Purchase Preference Shares, incorporated by reference to the Form
8-A.
10.1 Employment agreement dated November 7, 1994, between the
Registrant and David N. Keys, incorporated by reference to Exhibit
10.22 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994.
10.2 Employment agreement dated May 11, 1999, between the Registrant
and John R. Gibson, incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1999.
10.3 Consulting Agreement between the Registrant and Fred D. Gibson,
Jr. dated October 1, 1999, incorporated by reference to Exhibit
10.3 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1999 (the "1999 Form 10-K").
10.4 Amended and Restated American Pacific Corporation Defined Benefit
Pension Plan, incorporated by reference to Exhibit 10.4 to the
1999 10-K.
10.5 Amended and Restated American Pacific Corporation Supplemental
Executive Retirement Plan effective January 1, 1999, incorporated
by reference to Exhibit 10.5 to the 1999 10-K.
10.6 Trust Agreement for the Amended and Restated American Pacific
Corporation Supplemental Executive Retirement Plan, incorporated
by reference to Exhibit 10.6 to the 1999 10-K.
10.7 Lease Agreement between 3770 Hughes Parkway Associates Limited
Partnership and the Registrant, dated July 31, 1990, incorporated
by reference to Exhibit 10.22 to the 1990 S-2.
10.8 Limited Partnership Agreement of 3770 Hughes Parkway Associates,
Limited Partnership, incorporated by reference to Exhibit 10.23 to
the 1990 S-2.
10.9 Cooperation and Stock Option Agreement dated as of July 4, 1990,
by and between Dynamit Nobel AG and the Registrant, including
exhibits thereto, incorporated by reference to Exhibit 10.24 to
the 1990 S-2.
10.10 Articles of organization of Gibson Ranch Limited - Liability
Company dated August 25, 1993, incorporated by reference to
Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 1993 (the "1993 10-K").
31
10.11 Operating agreement of Gibson Ranch Limited - Liability Company, a
Nevada Limited - Liability Company, incorporated by reference to
Exhibit 10.34 to the 1993 10-K.
10.12 Settlement Agreement between Registrant and C. Keith Rooker dated
July 17, 1997, incorporated by reference to Exhibit 10.20 to the
1997 10-K.
10.13 Long-Term Pricing Agreement dated as of December 12, 1997, between
Thiokol Corporation-Propulsion and the Registrant, incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1998 (the "1998
March 10-Q").
*10.14 Modification No. 1 dated September 13, 2000, to Long-Term Pricing
Agreement between Thiokol Propulsion and the Registrant.
10.15 Partnershipping Agreement between Alliant Techsystems Incorporated
("Alliant") and Western Electrochemical Company and letter dated
November 24, 1997, from the Registrant to Alliant and revised
Exhibit B with respect thereto, incorporated by reference to
Exhibit 10.2 to the 1998 March 10-Q.
*21 Subsidiaries of the Registrant.
*23 Consent of Deloitte & Touche LLP.
*24 Power of Attorney, included on Page 33.
*27 Financial Data Schedule.
* Filed herewith.
(b) Reports on Form 8-K
-------------------
Date of Report Event Reported
-------------- --------------
November 9, 1999 Amendment to Company By-laws.
March 14, 2000 American Pacific Corporation Announces
Ammonium Perchlorate Change Order;
Results of Voting at the 2000 Annual
Stockholders Meeting.
32
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: December 12, 2000 AMERICAN PACIFIC CORPORATION
(Registrant)
By: /s/ JOHN R. GIBSON
-----------------------------------
John R. Gibson
President & Chief Executive Officer
By: /s/ DAVID N. KEYS
-----------------------------------
David N. Keys
Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer, Principal Financial and
Accounting Officer
POWER OF ATTORNEY
-----------------
American Pacific Corporation and each of the undersigned do hereby appoint
John R. Gibson and David N. Keys and each of them severally, its or his true and
lawful attorneys, with full power of substitution and resubstitution, to execute
on behalf of American Pacific Corporation and the undersigned any and all
amendments to this Report and to file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission. Each of such attorneys shall have the power to act hereunder with or
without the others.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on behalf of the Registrant by the following
persons in the capacities and on the dates indicated.
/s/ John R. Gibson Date: December 12, 2000
- -----------------------------------
John R. Gibson
Chief Executive Officer, President,
and Director
/s/ David N. Keys Date: December 12, 2000
- -----------------------------------
David N. Keys
Executive Vice President, Chief
Financial Officer, Secretary and Treasurer;
Principal Financial and Accounting Officer
and Director
33
/s/ Fred D. Gibson, Jr. Date: December 12, 2000
- -----------------------------------
Fred D. Gibson, Jr.
Director
/s/ C. Keith Rooker Date: December 12, 2000
- -----------------------------------
C. Keith Rooker
Director
/s/ Norval F. Pohl Date: December 12, 2000
- -----------------------------------
Norval F. Pohl, Ph.D.
Director
/s/ Thomas A. Turner Date: December 12, 2000
- -----------------------------------
Thomas A. Turner
Director
/s/ Berlyn D. Miller Date: December 12, 2000
- -----------------------------------
Berlyn D. Miller
Director
/s/ Jane L. Williams Date: December 12, 2000
- -----------------------------------
Jane L. Williams
Director
/s/ Victor M. Rosenzweig Date: December 12, 2000
- -----------------------------------
Victor M. Rosenzweig
Director
/s/ Dean M. Willard Date: December 12, 2000
- -----------------------------------
Dean M. Willard
Director
/s/ Eugene A. Cafiero Date: December 12, 2000
- -----------------------------------
Eugene A. Cafiero
Director
/s/ Jan H. Loeb Date: December 12, 2000
- -----------------------------------
Jan H. Loeb
Director
34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
American Pacific Corporation:
We have audited the accompanying consolidated balance sheets of American Pacific
Corporation and its Subsidiaries (the "Company") as of September 30, 2000 and
1999, and the related consolidated statements of operations, cash flows and
changes in shareholders' equity for each of the three years in the period ended
September 30, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
November 22, 2000
35
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
================================================================================
-------------------------------
2000 1999
-------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,128,000 $ 40,434,000
Accounts and notes receivable 9,461,000 8,800,000
Related party notes and accrued interest receivable 477,000 506,000
Inventories 10,875,000 9,577,000
Prepaid expenses and other assets 661,000 680,000
Deferred income taxes 650,000
Restricted cash 1,195,000
-----------------------------
Total Current Assets 52,252,000 61,192,000
PROPERTY, PLANT AND EQUIPMENT, NET 7,064,000 17,254,000
INTANGIBLE ASSETS, NET 29,805,000 34,210,000
REAL ESTATE EQUITY INVESTMENTS 6,838,000 11,237,000
DEVELOPMENT PROPERTY 5,482,000 6,440,000
DEFERRED INCOME TAXES 14,756,000
DEBT ISSUE COSTS, NET 1,393,000 2,547,000
OTHER ASSETS 2,000
-----------------------------
TOTAL ASSETS $117,590,000 $132,882,000
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 8,494,000 $ 6,909,000
Notes payable and current portion of
long-term debt 1,195,000
-----------------------------
Total Current Liabilities 8,494,000 8,104,000
SERP OBLIGATION AND OTHER NON-CURRENT LIABILITIES 1,743,000 2,005,000
LONG-TERM DEBT 44,175,000 67,000,000
-----------------------------
TOTAL LIABILITIES 54,412,000 77,109,000
-----------------------------
COMMITMENTS AND CONTINGENCIES
WARRANTS TO PURCHASE COMMON STOCK 3,569,000 3,569,000
SHAREHOLDERS' EQUITY:
Common stock - $.10 par value, 20,000,000 authorized,
issued - 8,513,291 in 2000 and 8,467,791 in 1999 852,000 847,000
Capital in excess of par value 80,094,000 79,757,000
Accumulated deficit (9,548,000) (23,279,000)
Treasury stock (1,434,654 shares in 2000 and 635,354
shares in 1999) (11,722,000) (5,034,000)
Note receivable from the sale of stock (67,000) (87,000)
-----------------------------
Total Shareholders' Equity 59,609,000 52,204,000
-----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $117,590,000 $132,882,000
=============================
See Notes to Consolidated Financial Statements.
36
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
================================================================================
==========================================
2000 1999 1998
------------------------------------------
SALES AND OPERATING REVENUES $ 67,369,000 $72,834,000 $52,339,000
COST OF SALES 44,279,000 45,834,000 35,792,000
------------------------------------------
GROSS PROFIT 23,090,000 27,000,000 16,547,000
OPERATING EXPENSES 10,236,000 10,024,000 9,246,000
IMPAIRMENT CHARGE 9,084,000
------------------------------------------
OPERATING INCOME 3,770,000 16,976,000 7,301,000
EQUITY IN EARNINGS OF REAL ESTATE VENTURE 300,000
INTEREST AND OTHER INCOME 1,987,000 1,588,000 1,294,000
INTEREST AND OTHER EXPENSE 5,568,000 6,951,000 5,734,000
------------------------------------------
INCOME BEFORE INCOME TAXES 189,000 11,613,000 3,161,000
INCOME TAXES (15,136,000)
------------------------------------------
NET INCOME BEFORE EXTRAORDINARY LOSSES 15,325,000 11,613,000 3,161,000
EXTRAORDINARY LOSS-DEBT EXTINGUISHMENTS 1,594,000 174,000 5,172,000
------------------------------------------
NET INCOME (LOSS) $ 13,731,000 $11,439,000 $(2,011,000)
==========================================
BASIC NET INCOME (LOSS) PER SHARE:
INCOME BEFORE EXTRAORDINARY LOSS $ 2.09 $ 1.43 $ .39
EXTRAORDINARY LOSS (.22) (.02) (.63)
------------------------------------------
NET INCOME (LOSS) $ 1.88 $ 1.41 $ (.24)
==========================================
AVERAGE SHARES OUTSTANDING 7,319,000 8,111,000 8,198,000
------------------------------------------
DILUTED NET INCOME (LOSS) PER SHARE:
INCOME BEFORE EXTRAORDINARY LOSS $ 2.08 $ 1.41 $ .38
EXTRAORDINARY LOSS (.21) (.02) (.62)
------------------------------------------
NET INCOME (LOSS) $ 1.86 $ 1.39 $ (.24)
==========================================
DILUTED SHARES 7,385,000 8,236,000 8,321,000
------------------------------------------
See Notes to Consolidated Financial Statements.
37
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
================================================================================
------------------------------------------
2000 1999 1998
------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 13,731,000 $11,439,000 $ (2,011,000)
------------------------------------------
Adjustments to reconcile net income (loss ) to net cash from
operating activities:
Depreciation and amortization 8,931,000 7,684,000 5,322,000
Basis in development property sold 1,018,000 1,913,000 822,000
Impairment Charge 9,084,000
Development property additions (60,000) (96,000) (496,000)
Equity in real estate venture (300,000)
Cash received on equity in real estate venture 300,000
Extraordinary debt charges 1,594,000 174,000 5,172,000
Changes in assets and liabilities:
Accounts and notes receivable (612,000) 167,000 (3,275,000)
Inventories (1,831,000) 4,153,000 (2,614,000)
Restricted cash 1,195,000 2,404,000
Prepaid expenses and other 21,000 234,000 188,000
Deferred income taxes (15,406,000)
Accounts payable and accrued liabilities 1,323,000 (3,071,000) 2,148,000
------------------------------------------
Total adjustments 5,257,000 11,158,000 9,671,000
------------------------------------------
Net cash from operating activities 18,988,000 22,597,000 7,660,000
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,458,000) (2,100,000) (2,766,000)
Payment for acquisition intangible (39,000,000)
Return of capital on real estate equity investments 4,399,000 5,875,000 3,135,000
------------------------------------------
Net cash from investing activities 1,941,000 3,775,000 (38,631,000)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt related payments (24,889,000) (3,053,000) (39,416,000)
Issuance of common stock 342,000 274,000 940,000
Treasury stock acquired (6,688,000) (3,548,000) (451,000)
Issuance of notes 75,000,000
Debt issue costs (3,594,000)
------------------------------------------
Net cash from financing activities (31,235,000) (6,327,000) 32,479,000
------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (10,306,000) 20,045,000 1,508,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 40,434,000 20,389,000 18,881,000
------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 30,128,000 $40,434,000 $ 20,389,000
==========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for interest $ 5,023,000 $ 6,463,000 $ 5,118,000
==========================================
See Notes to Consolidated Financial Statements.
38
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
================================================================================
----------------------------------------------------------------------------------------
Note
Net Outstanding Par Value Capital in Receivable
Number of Common of Shares excess of Accumulated Treasury from the
Shares Issued Par Value Deficit Stock Sale of Stock
----------------------------------------------------------------------------------------
BALANCES,
OCTOBER 1, 1997 8,137,537 $829,000 $78,561,000 $(32,707,000) $ (1,035,000) $(97,000)
Net loss (2,011,000)
Issuance of common stock 134,000 13,000 927,000
Treasury stock acquired (54,400) (451,000)
----------------------------------------------------------------------------------------
BALANCES,
SEPTEMBER 30, 1998 8,217,137 842,000 79,488,000 (34,718,000) (1,486,000) (97,000)
Net income 11,439,000
Issuance of common stock 44,000 5,000 269,000
Treasury stock acquired (428,700) (3,548,000)
Note payments 10,000
----------------------------------------------------------------------------------------
BALANCES,
SEPTEMBER 30, 1999 7,832,437 847,000 79,757,000 (23,279,000) (5,034,000) (87,000)
Net income 13,731,000
Issuance of common stock 45,500 5,000 337,000
Treasury stock acquired (799,300) (6,688,000)
Note payments 20,000
----------------------------------------------------------------------------------------
BALANCES,
SEPTEMBER 30, 2000 7,078,637 $852,000 $80,094,000 $ (9,548,000) $(11,722,000) $(67,000)
========================================================================================
See Notes to Consolidated Financial Statements.
39
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
================================================================================
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include
---------------------------
the accounts of American Pacific Corporation and Subsidiaries (the
"Company"). All significant intercompany accounts and transactions have
been eliminated.
Cash and Cash Equivalents - All highly liquid investment securities with a
-------------------------
maturity of three months or less when acquired are considered to be cash
equivalents.
The Company's investment securities, along with certain cash and cash
equivalents that are not deemed securities under Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," are carried on the consolidated balance
sheets in the cash and cash equivalents category. SFAS No. 115 requires all
securities to be classified as either held-to-maturity, trading or
available-for-sale. Management determines the appropriate classification of
its investment securities at the time of purchase and re-evaluates such
determination at each balance sheet date. Pursuant to the criteria that are
prescribed by SFAS No. 115, the Company has classified its investment
securities as available-for-sale. Available-for-sale securities are
required to be carried at fair value, with material unrealized gains and
losses, net of tax, reported in a separate component of shareholders'
equity. Realized gains and losses are taken into income in the period of
realization. The estimated fair value of the Company's portfolio of
investment securities at September 30, 2000 and 1999 closely approximated
amortized cost. There were no material unrealized gains or losses on
investment securities and no recorded adjustments to amortized cost at
September 30, 2000 or 1999.
Related Party Notes and Accrued Interest Receivable - Related party notes
---------------------------------------------------
and accrued interest receivable represent demand notes bearing interest at a
bank's prime rate from the former Chairman and a current officer of the
Company.
Inventories - Inventories are stated at the lower of cost or market. Cost
-----------
of the specialty chemicals segment inventories is determined principally on
a moving average basis and cost of the environmental protection equipment
segment inventories is determined principally on the specific identification
basis.
Property, Plant and Equipment - Property, plant and equipment are carried at
-----------------------------
cost less accumulated depreciation. The Company periodically assesses the
recoverability of property, plant and equipment and evaluates such assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In accordance with the
requirements of SFAS No. 121, asset impairment (including intangible assets)
is determined to exist if estimated future cash flows, undiscounted and
without interest charges, are less than the carrying amount. An impairment
charge of $9.1 million relating to certain specialty chemical assets was
recognized in fiscal 2000. (See Note 12.) Depreciation is computed on the
straight line method over the estimated productive lives of the assets (3 to
12 years for machinery and equipment and 15 to 31 years for buildings and
improvements).
Development Property - Development property consists of commercial and
--------------------
industrial land (principally improved land). During fiscal 1993,
approximately 240 acres of development property was contributed to a real
estate limited-liability company. (See Note 4.) Development property is
carried at cost not in excess of estimated net realizable value. Estimated
net realizable value is based upon the net sales proceeds anticipated in the
normal course of business, less estimated costs to complete or improve the
property to the condition used in determining the estimated selling price,
including future interest and property taxes through the point of
substantial completion. Cost includes the cost of land, initial planning,
development costs and carrying costs. Carrying costs include interest and
property taxes until
40
projects are substantially complete. No interest was capitalized on
development property during the three-year period ended September 30, 2000.
Debt Issue Costs - Debt issue costs are amortized on the effective interest
----------------
method over the terms of the related indebtedness.
Fair Value Disclosure as of September 30, 2000:
-----------------------------------------------
Cash and cash equivalents, accounts and notes receivable, and accounts
payable and accrued liabilities - The carrying value of these items is a
reasonable estimate of their fair value.
Long-term debt and warrants - Market quotations are not available for the
Company's Warrants. However, the $14 strike price of the Warrants (see Note
5) is substantially in excess of the recent trading prices of the Company's
common stock. Although the Company's unsecured senior notes are thinly
traded, the Company believes that par or 100% of the principal amount
represents a reasonable estimate of the fair value of the notes.
Sales and Revenue Recognition - Sales of the specialty chemicals segment are
-----------------------------
recognized as the product is shipped and billed pursuant to outstanding
purchase orders. Sales of the environmental protection equipment segment
are recognized on the percentage of completion method for long-term
contracts and, for other contracts, when the product is shipped. Profit
from sales of development property and the Company's equity in real estate
equity investments is recognized when and to the extent permitted by SFAS
No. 66, "Accounting for Sales of Real Estate".
Research and Development - Research and development costs are charged to
------------------------
operations as incurred. These costs are for proprietary research and
development activities that are expected to contribute to the future
profitability of the Company.
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 net income (loss) per share amounts are computed by dividing net
income (loss) by average shares outstanding plus the dilutive effect of
common share equivalents. The effect of stock options and warrants
outstanding to purchase approximately 3.3 million shares during fiscal 2000
and 2.9 million shares during the 1999 and 1998 fiscal years were not
included in diluted per share calculations as the average exercise price of
such options and warrants was greater than the average price of the
Company's common stock.
Income Taxes - The Company accounts for income taxes under the provisions of
------------
SFAS No. 109, "Accounting for Income Taxes". (See Note 7.)
Estimates and Assumptions - The preparation of financial statements in
-------------------------
conformity with accounting principles generally accepted in the U.S.A.
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 made by the Company include estimated useful lives for
depreciable and amortizable assets, the estimated valuation allowance for
deferred tax assets, and estimated cash flows in assessing the
recoverability of long-lived assets. Actual results may differ from
estimates.
Recently Adopted Accounting Standards - During 2000, the Company adopted
-------------------------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The statement establishes accounting and reporting standards
for derivative instruments, including certain derivatives instruments
embedded in other contracts, and for hedging activities. Adoption of this
statement had no material effect on the Company.
41
Recently Issued Accounting Standards - In December 1999, the Securities and
------------------------------------
Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." In June 2000, the SEC
staff amended SAB 101 to provide registrants with additional time to
implement SAB 101. The Company will be required to adopt SAB 101 by the
third quarter of fiscal 2001. The Company has not completed its
determination of the impact of the adoption of SAB 101 on its consolidated
financial position or results of operations.
Reclassifications - Certain reclassifications have been made in the 1999 and
-----------------
1998 consolidated financial statements in order to conform to the
presentation used in 2000.
2. INVENTORIES
Inventories at September 30, 2000 and 1999 consist of the following:
--------------------------------------------------------
2000 1999
--------------------------------------------------------
Work-in-process $ 8,429,000 $5,938,000
Raw material and supplies 2,446,000 3,639,000
--------------------------------------------------------
Total $10,875,000 $9,577,000
========================================================
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 2000 and 1999 are
summarized as follows:
------------------------------------------------------------------
2000 1999
------------------------------------------------------------------
Land $ 117,000 $ 117,000
Buildings, machinery and equipment 13,077,000 25,158,000
Construction in progress 1,264,000 1,065,000
------------------------------------------------------------------
Total 14,458,000 26,340,000
Less: accumulated depreciation 7,394,000 9,086,000
------------------------------------------------------------------
Property, plant and equipment, net $ 7,064,000 $17,254,000
==================================================================
A fixed asset impairment charge of $9.1 million was recognized in fiscal
2000. See Note 12.
4. REAL ESTATE EQUITY INVESTMENTS
During fiscal 1993, the Company contributed approximately 240 acres of
development property to Gibson Ranch Limited Liability Company ("GRLLC").
A local real estate development group ("Developer") contributed an
adjacent 80-acre parcel to GRLLC. GRLLC is developing the 320-acre parcel
principally as a residential real estate development.
Each of the Company and Developer is obligated to loan to GRLLC, under a
revolving line of credit, up to $2.4 million at an annual interest rate of
10 percent. However, Developer will not be required to advance funds under
its revolving line of credit until the Company's line is exhausted. In
November, 1995, the Company committed to advance an additional $1.7
million to Developer. Developer is required to advance any funds received
to GRLLC. Funds advanced under this additional commitment bear annual
interest of 12 percent. There were no advances outstanding under these
lines at September 30, 2000.
Developer is the managing member of GRLLC and is managing the business
conducted by GRLLC. Certain major decisions, such as incurring debt and
changes in the development plan or budget may be made only by a management
committee on which the Company is equally represented. The profits and
losses of GRLLC will be split equally between the Company and Developer
after the return of advances and agreed upon values for initial
contributions.
42
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 nine months ended September 30, 2000
and as of and for the years ended December 31, 1999 and 1998 was as follows:
-----------------------------------------------------------------
September 30, December 31, December 31,
2000 1999 1998
-----------------------------------------------------------------
Income Statement:
Revenues $31,922,000 $38,139,000 $36,975,000
Gross Profit 3,241,000 6,467,000 2,766,000
Operating expenses 1,011,000 1,507,000 1,542,000
Net Income $ 2,271,000 $ 5,067,000 $ 1,224,000
Balance Sheet:
Assets $20,283,000 $22,341,000 $25,007,000
Liabilities 12,138,000 11,685,000 13,628,000
Equity $ 8,145,000 $10,656,000 $11,379,000
- -----------------------------------------------------------------------------------------------------------
The Company has applied the provisions of SFAS No. 58 "Capitalization of
Interest Cost of Financial Statements that Include Investments Accounted for
by the Equity Method" to its investment in GRLLC. As of September 30, 2000,
the Company has capitalized approximately $6.2 million of interest since the
joint venture began undergoing activities to start its planned principal
operations of real estate development and sale of such real estate.
Capitalization of interest on the joint venture ceased in September 1997.
At September 30, 2000, the Company's recorded investment in GRLLC
approximates the amount of cash flow that is estimated to be generated from
the project.
The Company amortizes the difference resulting from the application of SFAS
No. 58 on a current quarterly basis based upon the ratio of acres sold to
total saleable acres in the joint venture. Such difference will be
completely amortized upon the build-out and sale of the joint venture's real
estate project which is estimated to occur in calendar 2001. As of
September 30, 2000, approximately $4.2 million in capitalized interest
resulting from the application of SFAS No. 58 had been amortized against the
equity in earnings of GRLLC.
GRLLC's balance sheet is not classified. Assets consist principally of
inventories and liabilities consist principally of notes and accounts
payable. Inventories were $17.3 million at September 30, 2000, $19.8
million at December 31, 1999 and $21.4 million at December 31, 1998.
In July 1990, the Company contributed $0.7 million to Gibson Business Park
Associates 1986-I, a real estate development limited partnership (the
"Partnership"), in return for a 70% interest as a general and limited
partner, and other limited partners contributed $0.3 million in return for a
30% interest as limited partners. Such other limited partners include
certain members of the Company's Board of Directors. The Partnership, in
turn, contributed $1.0 million to 3770 Hughes Parkway Associates Limited
Partnership, a Nevada limited partnership ("Hughes Parkway"), in return for
a 33% interest as a limited partner in Hughes Parkway. The Company entered
into an agreement with Hughes Parkway pursuant to which the Company leases
office space in a building in Las Vegas, Nevada. (See Note 9.)
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt at September 30, 2000 and 1999 are
summarized as follows:
------------------------------------------------
2000 1999
------------------------------------------------
9 1/4% Senior unsecured notes $44,175,000 $67,000,000
Other 1,195,000
------------------------------------------------
Total 44,175,000 68,195,000
Less current portion 1,195,000
------------------------------------------------
Total $44,175,000 $67,000,000
================================================
43
On March 12, 1998, the Company sold $75.0 million principal amount of
unsecured senior notes (the "Notes"), consummated an acquisition (the
"Acquisition") of certain assets from Kerr-McGee Chemical Corporation
("Kerr-McGee") described in Note 6 and repurchased the remaining $25.0
million principal amount outstanding of subordinated secured notes (the
"Azide Notes").
The Notes mature on March 1, 2005. Interest on the Notes is payable in cash
at a rate of 9-1/4% per annum on each March 1 and September 1, commencing
September 1, 1998. The indebtedness evidenced by the Notes represents a
senior unsecured obligation of the Company, ranks pari passu in right of
payment with all existing and future senior indebtedness of the Company and
is senior in right of payment to all future subordinated indebtedness of the
Company. The Indenture under which the Notes were issued contains various
limitations and restrictions including (i) change in control provisions,
(ii) limitations on indebtedness and (iii) limitations on restricted
payments such as dividends, stock repurchases and investments. Management
believes the Company has complied with these limitations and restrictions.
In April 1998, the Company filed a Form S-4 registration statement with the
Securities and Exchange Commission for the purpose of effecting the exchange
of the Notes for identical Notes registered for resale under the federal
securities laws. The exchange was consummated on August 28, 1998.
Since the original issuance of the Notes, the Company has repurchased and
retired approximately $30.8 million in principal amount of Notes at a
weighted average cost of approximately 102.7% of par value. The Company
incurred total extraordinary losses on debt extinguishment on these
transactions of approximately $1.8 million.
Within ninety days following the end of each fiscal year, the Indenture
requires the Company to make an offer to all holders of the Notes to
purchase Notes at an offer price equal to 102% of the principal amount of
the Notes to be purchased, in an amount equal to 50% of the excess cash flow
(a defined term in the Indenture) for the applicable fiscal year. Due to
the repurchases referred to above, the Company will not be required to make
such an offer relating to the fiscal year 2000.
The Azide Notes were 11% noncallable subordinated secured term notes, which
were issued and sold in February 1992 to finance the design, construction
and start-up of the Company's sodium azide facility. A portion of the net
proceeds from sale of the Notes was applied to repurchase the Azide Notes
for approximately $28.2 million (approximately 113% of the outstanding
principal amount thereof). In connection with the repurchase, the Company
recognized an extraordinary loss on debt extinguishment of approximately
$5.0 million in fiscal 1998. The extraordinary loss consisted of the cash
premium paid of $3.2 million upon repurchase and a charge of $1.8 million to
write off the unamortized balance of debt issue and discount costs.
The Company issued to the purchasers of the Azide Notes warrants (the
"Warrants"), exercisable for a ten-year period commencing on December 31,
1993, to purchase shares of Common Stock at an exercise price of $14.00 per
share. The maximum number of shares purchasable upon exercise of the
Warrants is 2,857,000 shares. The Warrants are exercisable, at the option
of their holders, to purchase up to 20 percent of the common stock of
American Azide Corporation ("AAC"), a wholly-owned subsidiary of the
Company, rather than the Company's Common Stock. In the event of such an
election, the exercise price of the Warrants will be based upon a pro rata
share of AAC's capital, adjusted for earnings and losses, plus interest from
the date of contribution. The Warrants contain certain provisions for a
reduction in exercise price in the event the Company issues or is deemed to
issue stock, rights to purchase stock or convertible debt at a price less
than the exercise price in effect, or in the event of certain stock
dividends, stock splits, mergers or similar transactions.
On or after December 31, 1999, the Company may call up to 50% of the
Warrants at prices that would provide a 30% internal rate of return to the
holders thereof through the date of call (inclusive of the 11% Azide Notes'
yield). The holders of the Warrants were also granted the right to require
that the Common
44
Stock underlying the Warrants be registered on one occasion, as well as
certain incidental registration rights.
The Company has accounted for the proceeds of the financing applicable to
the Warrants as temporary capital. Any adjustment of the value assigned at
the date of issuance will be reported as an adjustment to retained earnings.
The value assigned to the Warrants was determined in accordance with
Accounting Principle Board Opinion No. 14 "Accounting for Convertible Debt
and Debt Issued with Stock Purchase Warrants" and was based upon the
relative fair value of the Warrants and indebtedness at the time of
issuance.
Notes payable and long-term debt maturities are as follows:
-------------------------------
For the Years Ending
September 30,
-------------------------------
2005 $44,175,000
--------------
Total $44,175,000
==============
6. ACQUISITION
On March 12, 1998 (the "Closing Date"), the Company acquired, pursuant to a
purchase agreement (the "Purchase Agreement") with Kerr-McGee, certain
intangible assets related to Kerr-McGee's production of AP (the "Rights")
for a purchase price of $39.0 million. The Acquisition did not include
Kerr-McGee's production facilities (the "Production Facilities") and certain
water and power supply agreements used by Kerr-McGee in the production of
AP. Under the Purchase Agreement, Kerr-McGee ceased the production and sale
of AP although the Production Facilities may continue to be used by Kerr-
McGee for production of AP under certain limited circumstances described
below. Under the Purchase Agreement, Kerr-McGee reserved a perpetual,
royalty-free, nonexclusive license to use any of the technology forming part
of the Rights as may be necessary or useful to use, repair or sell the
Production Facilities (the "Reserved License").
Under the Purchase Agreement, Kerr-McGee reserved the right to process and
sell certain reclaimed AP that is not suitable for use in solid fuel rocket
motors (the "Reclaimed Product"), and to produce and sell AP (i) to fulfill
orders scheduled for delivery after the closing, subject to making payments
to the Company with respect to such orders, as provided in the Purchase
Agreement and (ii) in the event of the Company's inability to meet customer
demand or requirements, breach of the Purchase Agreement or termination of
the Company's AP business.
The Purchase Agreement provides that, together with the Reserved License,
Kerr-McGee is permitted in its discretion to (i) lease, sell, dismantle,
demolish and/or scrap all or any portion of the Production Facilities, (ii)
retain the Production Facilities for manufacture of Reclaimed Product and
(iii) maintain the Production Facilities in a "standby" or "mothballed"
condition so they will be capable of being used to produce AP under the
limited circumstances referred to above.
Under the Purchase Agreement, Kerr-McGee has agreed to indemnify the Company
against loss or liability from claims associated with the ownership and use
of the Rights prior to consummation of the Acquisition or resulting from any
breach of its warranties, representations and covenants. The Company has
agreed to indemnify Kerr-McGee against loss and liability from claims
associated with the ownership and use of the Rights after consummation of
the Acquisition or resulting from any breach of its warranties,
representations and covenants. In addition, Kerr-McGee has agreed that it
will, at the Company's request, introduce the Company to AP customers that
were not customers of the Company, and consult with the Company regarding
the production and marketing of AP. The Company has agreed that, at Kerr-
McGee's request, it will use reasonable efforts to market Reclaimed Product
on Kerr-McGee's behalf for up to three years following consummation of the
Acquisition.
45
The Company has determined that a business was not acquired in the
Acquisition and that the Rights acquired have no independent value to the
Company apart from the overall benefit of the transaction and that, as a
result thereof, Kerr-McGee has ceased production of AP (except in the
limited circumstances referred to above), thereby leaving the Company as the
sole North American supplier of AP. The Company is amortizing the purchase
price of $39.0 million for the unidentified intangible over ten years, the
duration of pricing contracts with two principal AP customers referred to
below.
In connection with the Acquisition, the Company entered into an agreement
with Thiokol Propulsion ("Thiokol") 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. After the adjustment, AP unit prices continue to escalate each
year through fiscal 2008.
In connection with the Acquisition, the Company also entered into an
agreement with Alliant Techsystems Incorporated ("Alliant") to extend an
existing agreement through the year 2008. The agreement establishes prices
for any AP purchased by Alliant from the Company during the term of the
agreement as extended. Under this agreement, Alliant agrees to use its
efforts to cause the Company's AP to be qualified on all new and current
programs served by Alliant's Bacchus Works.
7. INCOME TAXES
The Company accounts for income taxes using the asset and liability approach
required by SFAS No. 109. The asset and liability approach requires the
recognition of deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between the carrying amounts and
the tax bases of the Company's assets and liabilities. Future tax benefits
attributable to temporary differences are recognized to the extent that
realization of such benefits are more likely than not. These future tax
benefits are measured by applying currently enacted tax rates.
The following table provides an analysis of the Company's income taxes for
the years ended September 30:
-------------------------------------
2000 1999 1998
-------------------------------------
Current $ 270,000 $ $
Deferred (federal and state) (15,406,000)
-------------------------------------
Income taxes $(15,136,000) $ $
=====================================
A valuation allowance for net deferred tax assets was established in 1997.
In accordance with the provisions of SFAS No. 109, in fiscal 2000 the
Company released its deferred tax valuation allowance and recognized the
benefits of its net deferred tax assets. Deferred tax assets are composed,
for the most part, of alternative minimum tax credits and net operating
losses. The alternative minimum tax credit carryforward, valued at
approximately $1.5 million, may be carried forward indefinitely as a credit
against regular tax. The net operating loss carryforwards, valued at
approximately $7.5 million, will begin to expire for tax purposes in 2010 as
follows:
-----------------------------------------
NOL Deduction Tax Rate NOL Asset
------------------------------------------
Expiration of net operating losses
2010 $ 8,418,000 34.0% $2,862,000
2011 and thereafter 13,597,000 34.0% 4,673,000
------------------------------------------
TOTAL $22,015,000 $7,485,000
==========================================
46
Income taxes for the years ended September 30, 2000, 1999, and 1998 differ
from the amount computed at the federal and state income tax statutory rates
as a result of the following:
-----------------------------------------------------------------------
2000 % 1999 % 1998 %
-----------------------------------------------------------------------
Expected provision (credit) for
Income taxes $ (435,000) (34)% $ 3,890,000 34.0% $(518,000) (34.0)%
Adjustment:
Nondeductible expenses 30,000 2.4% 29,000 0.3% 16,000 1.1%
Tax benefit (provision) limitation due to the
valuation allowance (14,731,000) (1150.9)% (3,919,000) (34.3)% 502,000 32.9%
-----------------------------------------------------------------------
Credit for income taxes $(15,136,000) (1182.5)% $ $
=======================================================================
The components of net deferred taxes at September 30, 2000, 1999 and 1998
consisted of the following:
-----------------------------------------------------
2000 1999 1998
-----------------------------------------------------
Deferred tax assets:
Amortization $ 1,228,000 $ 920,000 $ 526,000
Property 5,428,000 3,049,000 4,136,000
Net operating losses 7,485,000 12,067,000 18,512,000
Alternative minimum tax credits 1,460,000 1,191,000 976,000
Employee separation and management reorganization costs 129,000 534,000 837,000
Inventory capitalization 375,000 375,000 500,000
Accruals 1,313,000 447,000 490,000
Other 677,000 444,000 396,000
----------------------------------------------------
Total deferred tax assets $18,095,000 $ 19,027,000 $ 26,373,000
----------------------------------------------------
Deferred tax liabilities:
Accrued income and expenses $ (89,000) $ (332,000) $ (661,000)
State taxes (600,000) (600,000) (600,000)
Other taxes payable (1,460,000)
Other (2,000,000) (3,364,000) (4,263,000)
----------------------------------------------------
Total deferred tax liabilities (2,689,000) (4,296,000) (6,984,000)
----------------------------------------------------
Preliminary net deferred tax assets 15,406,000 14,731,000 19,389,000
Valuation allowance for deferred tax assets (14,731,000) (19,389,000)
----------------------------------------------------
Net deferred tax assets $15,406,000 $ $
====================================================
8. EMPLOYEE BENEFIT PLANS
The Company maintains a group health and life benefit plan, an employee
stock ownership plan ("ESOP") that includes a Section 401(k) feature, and a
defined benefit pension plan (the "Plan"). The ESOP permits employees to
make contributions. The Company does not presently match any portion of
employee ESOP contributions.
All full-time employees age 21 and over with one year of service are
eligible to participate in the Plan. Benefits are paid based on an average
of earnings, retirement age, and length of service, among other factors.
The tables below provide relevant financial information about the Plan as of
and for the fiscal years ended September 30:
47
---------------------------------------------------
2000 1999
---------------------------------------------------
Change in Benefit Obligation:
Benefit obligation, beginning of year $13,922,000 $13,495,000
Service cost 702,000 994,000
Interest cost 1,098,000 992,000
Actuarial (gains)/losses 554,000 (862,000)
Benefits paid (583000) (697,000)
---------------------------------------------------
Benefit obligation, end of year $15,693,000 $13,922,000
---------------------------------------------------
Change in Plan Assets:
Fair value of plan assets, beginning of year $11,453,000 $10,177,000
Actual return on plan assets 2,010,000 1,223,000
Employer contribution 688,000 750,000
Benefits paid (583,000) (697,000)
---------------------------------------------------
Fair value of plan assets, end of year $13,568,000 $11,453,000
---------------------------------------------------
Reconciliation of Funded Status:
Funded status $(2,125,000) $(2,469,000)
Unrecognized net actuarial (gains)/losses (649,000) (118,000)
Unrecognized transition obligation 305,000 458,000
Unrecognized prior service costs 351,000 387,000
---------------------------------------------------
Accrued benefit liability recognized $ 2,118,000 $(1,742,000)
===================================================
----------------------------------------------------
2000 1999 1998
----------------------------------------------------
Net Periodic Pension Cost:
Service cost $ 702,000 $ 994,000 $ 687,000
Interest cost 1,098,000 992,000 863,000
Expected return on assets (925,000) (819,000) (783,000)
Net total of other components 189,000 277,000 189,000
----------------------------------------------------
Net periodic pension cost $1,064,000 $1,444,000 $ 956,000
----------------------------------------------------
Actuarial Assumptions:
Discount rate 7.75% 7.75% 6.75%
Rate of compensation increase 5.00% 5.00% 5.00%
Expected return on plan assets 8.00% 8.00% 8.00%
====================================================
The Company also maintains a Supplemental Executive Retirement Plan
("SERP") for the benefit of the Company's Chief Executive Officer, Chief
Financial Officer and the former Chief Executive Officer. Benefits paid
under the plan were approximately $0.1 million in each of the fiscal years
2000, 1999 and 1998. Net periodic pension cost was approximately $0.3
million, $0.3 million and $0.1 million during the years ended September 30,
2000, 1999 and 1998, respectively. At September 30, 2000, the accrued
pension liability recognized was approximately $1.7 million. During fiscal
2001, the Company expects to establish and fund a trust for the SERP.
9. 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's 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. The Company
expended approximately $1.0 million in each of the fiscal years 2000, 1999
and 1998 on the investigation and evaluation of this matter. 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,
48
the Company may be called upon to contribute to or assist with future
remediation efforts, or the financial impacts, if any, of such contributions
or assistance. Accordingly, no accrual for potential losses has been made in
the accompanying Consolidated Financial Statements of the Company.
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. These 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 provided 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 had 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.
See Note 13 for a discussion of certain litigation involving Halotron(TM).
The Company and its subsidiaries have been and are also involved in other
lawsuits. The Company believes that these other lawsuits, individually or in
the aggregate, will not have a material adverse effect on the Company or any
of its subsidiaries.
As discussed in Note 4, the Company entered into an agreement with Hughes
Parkway pursuant to which the Company leases office space. The lease is for
an initial term of 10 years expiring in March 2001, and is subject to
escalation every three years based on changes in the consumer price index,
and provides for the Company to occupy 22,262 square feet of office space.
Rental payments were approximately $0.6 million during the fiscal years
ended September 30, 2000, 1999 and 1998. Future minimum rental payments
under this lease for the years ending September 30, are as follows:
2001 285,000
-------------------
Total $ 285,000
===================
10. SHAREHOLDERS' EQUITY
Preferred Stock and Purchase Rights
-----------------------------------
The Company has authorized the issuance of 3,000,000 shares of preferred
stock, of which 125,000 shares have been designated as Series A, 125,000
shares have been designated as Series B and 15,340 shares have been
designated as Series C redeemable convertible preferred stock. No Series A
or Series B preferred stock is issued or outstanding. The Series C
redeemable convertible preferred stock was redeemed in December 1989, and is
no longer authorized for issuance.
On August 3, 1999, the Board of Directors of the Company adopted a
Shareholder Rights Plan and declared a dividend of one preference share
purchase right (a "Right") for each outstanding share of Common Stock, par
value $.10 per share (the "Common Shares"), of the Company. The dividend was
paid to stockholders of record on August 16, 1999. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share
of Series D Participating Preference Stock, par value $1.00 per share of the
Company at a price of $24.00 per one one-hundredth of a Preference Share
subject to adjustment under certain circumstances. The description and terms
of the Rights are set forth
49
in a Rights Agreement dated as of August 3, 1999, between the Company and
American Stock Transfer & Trust Company, as Rights Agent. The Rights may
also, under certain conditions, entitle the holders (other than any
Acquiring Person, as defined), to receive Common Stock of the Company,
Common Stock of an entity acquiring the Company, or other consideration,
each having a market value of two times the exercise price of each Right.
Three hundred and fifty-thousand Preference Shares have been designated as
Series D Preference Shares and are reserved for issuance under the Plan. The
Rights are redeemable by the Company at a price of $.001 per Right under the
conditions provided in the Plan. If not exercised or redeemed (or exchanged
by the Company), the Rights expire on August 2, 2009.
Stock Options and Warrants
--------------------------
The Company has granted options and warrants to purchase shares of the
Company's Common Stock at prices at or in excess of market value at the date
of grant. The options and warrants were granted under various plans or by
specific grants approved by the Company's Board of Directors.
Option and warrant transactions are summarized as follows:
--------------------------------------------------
Shares Under Options
and Warrants Option Price
--------------------------------------------------
October 1, 1997 3,807,000 $ 3.88 - $ 21.50
Granted 116,000 7.00 - 7.19
Exercised, expired or canceled (169,000) 3.88 - 21.50
--------------------------------------------------
September 30, 1998 3,754,000 4.88 - 21.50
Granted 209,000 7.90 - 8.00
Exercised, expired or canceled (75,000) 5.63 - 21.50
--------------------------------------------------
September 30, 1999 3,888,000 4.88 - 14.00
Granted
Exercised, expired or canceled (91,000) 4.88 - 7.50
--------------------------------------------------
September 30, 2000 3,797,000 $ 4.88 - $ 14.00
--------------------------------------------------
In February 1992, the Company issued $40,000,000 in Azide Notes with
Warrants. See Note 5 for a description of the Warrants. Shares under options
and warrants at September 30, 2000 include approximately 2,857,000 Warrants
at a price of $14 per Warrant.
The following table summarizes information about stock options and warrants
outstanding at September 30, 2000:
- -----------------------------------------------------------------------------------------------------------------------------------
Options and Warrants Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------------------
Average Remaining
Range of Number Contractual Life Weighted Average Number Weighted Average
Exercise Price Outstanding (Years) Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
$ 4.88 30,000 1.50 $ 4.88 30,000 $ 4.88
6.38 - 8.00 910,000 2.52 7.09 910,000 7.09
14.00 2,857,000 3.25 14.00 2,857,000 14.00
---------------------------------------------------------------------------------------------------------------
3,797,000 3.07 $13.02 3,797,000 $13.02
===============================================================================================================
The Company has adopted the disclosures-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company applies Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations in
accounting for its stock options. Under APB No. 25, no compensation cost has
been recognized in the financial statements for stock options granted. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. Had compensation cost for the stock
option grants been determined based on the fair value at the date of grant
for awards consistent with the provision of SFAS No. 123, the Company's
diluted net income (loss) per common
50
share would have changed to the pro forma amounts indicated below for the
years ended September 30:
---------------------------------------
2000 1999 1998
---------------------------------------
Net income (loss) - as reported $13,731,000 $11,439,000 $(2,011,000)
Net income (loss) - pro forma $13,429,000 $10,941,000 $(2,680,000)
Diluted net income (loss) per share - as reported $ 1.86 $ 1.39 $ (.24)
Diluted net income (loss) per share - pro forma $ 1.82 $ 1.33 $ (.32)
---------------------------------------
There were no stock options granted in fiscal 2000. The fair value of each
option granted in the fiscal years 1999 and 1998 was estimated using the
following assumptions for the Black-Scholes options pricing model: (i) no
dividends; (ii) expected volatility ranging from 50% to 55%, (iii) risk
free interest rates averaging 5.8% in 1999 and 5.5% in 1998, and (iv) the
expected average life of 3.3 years. The weighted average fair values of the
options granted were $3.26 and $2.71 in the fiscal years 1999 and 1998,
respectively. Because the SFAS No. 123 method of accounting has not been
applied to options granted prior to October 1, 1996, the resulting pro
forma net income may not be representative of that to be expected in future
years.
11. 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 manufacturers 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 suppression agent designed to replace Halon 1211. The specialty
chemicals segment production facilities are located in Iron County, Utah.
Perchlorate chemical sales comprised approximately 76%, 75% and 70% of
specialty chemical segment sales during the fiscal years ended September
30, 2000, 1999 and 1998, respectively. The Company had three customers that
accounted for 10% or more of both the Company's and the specialty chemical
segment's sales during the last three fiscal years. Sales to these
customers during the fiscal years ended September 30 were as follows:
------------------------------------------
Customer Chemical 2000 1999 1998
--------------------------------------------------------------------------
A Perchlorates $25,331,000 $25,814,000 $20,421,000
B Perchlorates 8,527,000 10,197,000 8,633,000
C Sodium Azide 9,556,000 12,406,000 9,884,000
--------------------------------------------------------------------------
In fiscal 1998, the Company acquired certain intangible assets related to
the production and sale of AP from Kerr-McGee and entered into long-term
agreements with respect to the supply of AP to the two major domestic AP
users. (See Note 6). In fiscal 2000, the Company recognized a fixed asset
impairment charge of $9.1 million relating to certain fixed assets in its
specialty chemicals segment. (See Note 12.)
The specialty chemicals operating segment is subject to various federal,
state and local environmental and safety regulations. The Company has
designed and implemented policies and procedures to minimize the risk of
potential violations of these regulations, although such risks will likely
always be present in the production and sale of the Company's specialty
chemicals. (See Note 9).
51
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 September 30, 2000, the Company's real estate operating segment had
approximately 65 remaining acres of improved land in the Gibson Business
Park near Las Vegas, Nevada, that is held for development and sale.
Activity during the last three fiscal years 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 4).
Additional information about the Company's operations in different segments
for each of the last three fiscal years ended September 30, is provided
below.
--------------------------------------------
2000 1999 1998
--------------------------------------------
Revenues:
Specialty chemicals $ 61,423,000 $ 64,497,000 $ 47,718,000
Environmental protection 3,464,000 2,121,000 2,153,000
Real estate 2,482,000 6,216,000 2,468,000
--------------------------------------------
Total revenues $ 67,369,000 $ 72,834,000 $ 52,339,000
============================================
Gross profit:
Specialty chemicals $ 20,621,000 $ 23,526,000 $ 14,273,000
Environmental protection 999,000 (247,000) 733,000
Real estate 1,470,000 4,096,000 1,559,000
--------------------------------------------
Total segment gross profit $ 23,090,000 $ 27,375,000 $ 16,565,000
============================================
Operating income:
Specialty chemicals $ 2,936,000 $ 14,847,000 $ 6,422,000
Environmental protection 453,000 (888,000) (2,000)
Real estate 871,000 3,485,000 1,082,000
--------------------------------------------
Total segment operating income 4,260,000 17,444,000 7,502,000
General corporate (490,000) (468,000) (201,000)
Equity in earnings of real estate venture 300,000
Net interest (3,581,000) (5,363,000) (4,440,000)
--------------------------------------------
Income before income taxes
and extraordinary losses $ 189,000 $ 11,613,000 $ 3,161,000
============================================
Depreciation and amortization:
Specialty chemicals $ 8,155,000 $ 6,905,000 $ 4,718,000
All other segments and corporate 348,000 291,000 604,000
--------------------------------------------
Total depreciation and amortization $ 8,503,000 $ 7,196,000 $ 5,322,000
============================================
Capital Expenditures:
Specialty chemicals $ 2,332,000 $ 1,820,000 $ 2,284,000
All other segments and corporate 126,000 280,000 482,000
--------------------------------------------
Total capital expenditures $ 2,458,000 $ 2,100,000 $ 2,766,000
============================================
Assets:
Specialty chemicals $ 55,739,000 $ 67,750,000 $ 76,265,000
Environmental protection 1,126,000 1,954,000 1,345,000
Real estate 12,698,000 18,347,000 23,881,000
Corporate 48,027,000 44,831,000 29,268,000
--------------------------------------------
Total assets $117,590,000 $132,882,000 $130,759,000
============================================
The Company's operations are located in the United States. Export sales,
consisting mostly of AP sales to Europe and environmental protection
equipment sales to the Far and Middle East, have represented less than 5%
of the Company's revenues during each of the last three fiscal years.
52
12. SODIUM AZIDE
In July 1990, the Company entered into agreements (the "Azide Agreements")
pursuant to which Dynamit Nobel licensed to the Company on an exclusive
basis for the North American market its most advanced technology and know-
how for the production of sodium azide, the principal component of the gas
generant used in certain automotive airbag inflation systems. In addition,
Dynamit Nobel provided technical support for the design, construction and
start-up of the facility.
Under the Azide Agreements, Dynamit Nobel was to receive, for the use of
its technology and know-how relating to its batch production process of
manufacturing sodium azide, quarterly royalty payments of 5% of the
quarterly net sales of sodium azide by AAC for a period of 15 years from
the date the Company begins to produce sodium azide in commercial
quantities. In July 1996, the Company and Dynamit Nobel agreed to suspend
the royalty payment effective as of July 1, 1995.
In May 1997, the Company entered into a three-year agreement with Autoliv
ASP, Inc. ("Autoliv") (formerly Morton International Automotive Safety
Products). The agreement provides for the Company to supply sodium azide
used by Autoliv in the manufacture of automotive airbag inflators.
Deliveries under the agreement commenced in July 1997. The agreement has
been extended through December 31, 2001.
The Company initially believed that demand for sodium azide in North
America and the world would substantially exceed existing manufacturing
capacity and announced expansions or new facilities (including the
Company's plant) by the 1994 model year (which for sodium azide sales
purposes is the period June 1993 through May 1994). Currently, demand for
sodium azide is substantially less than supply on a worldwide basis. By
reason of this industry capacity underutilization, and other factors
discussed below, there exists considerable pressure on the price of sodium
azide.
The Company believes that the price erosion of sodium azide over the past
few years has been due, in part, to unlawful pricing procedures of Japanese
sodium azide producers. In response to such practices, in January 1996, the
Company filed an antidumping petition with the International Trade
Commission ("ITC") and the Department of Commerce ("Commerce"). In August
1996, Commerce issued a preliminary determination that Japanese imports of
sodium azide have been sold in the United States at prices that are
significantly below fair value. Commerce's preliminary dumping
determination applied to all Japanese imports of sodium azide, regardless
of end-use. Commerce's preliminary determination followed a March 1996
preliminary determination by the ITC that dumped Japanese imports have
caused material injury to the U.S. sodium azide industry.
On January 7, 1997, the anti-dumping investigation initiated by Commerce,
based upon the Company's petition, against the three Japanese producers of
sodium azide was suspended by agreement. It is the Company's understanding
that, by reason of the Suspension Agreement, two of the three Japanese
sodium azide producers have ceased their exports of sodium azide to the
United States for the time being. As to the third and largest Japanese
sodium azide producer, which has not admitted any prior unlawful conduct,
the Suspension Agreement requires that it make all necessary price
revisions to eliminate all United States sales at below "Normal Value," and
that it conform to the requirements of sections 732 and 733 of the Tariff
Act of 1930, as amended, in connection with its future sales of sodium
azide in the United States.
The Suspension Agreement contemplates a cost-based determination of "Normal
Value" and establishes reporting and verification procedures to assure
compliance. Accordingly, the minimum pricing for sodium azide sold in the
United States by the remaining Japanese producer will be based primarily on
its actual costs, and may be affected by changes in the relevant exchange
rates.
53
Finally, the Suspension Agreement provides that it may be terminated by any
party on 60 days' notice, in which event the anti-dumping proceeding would
be re-instituted at the stage to which it had advanced at the time the
Suspension Agreement became effective.
Worldwide sodium azide demand declined significantly during fiscal 2000.
The Company's sodium azide sales volumes in fiscal 2000 were approximately
17% below those in fiscal 1999. As noted above, 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 significantly and that
inflators using sodium azide will be phased out over some period of time.
As a result of these market conditions and in accordance with the
requirements of SFAS No. 121, the Company recognized an impairment charge
of $9.1 million in fiscal 2000 relating to the fixed assets (property,
plant and equipment) used in the production of sodium azide. The present
value of estimated future cash flows was used to determine the amount of
impaired fixed assets. The impairment charge was recorded as a reduction of
building and equipment and accumulated depreciation of $14.7 million and
$5.6 million, respectively.
13. HALOTRON(TM)
In 1991 and thereafter, the Company entered into a number of agreements
(collectively the "Halotron(TM) Agreement") granting the Company the option
to acquire the exclusive worldwide rights to manufacture and sell
Halotron(TM) (a replacement for certain halons). Halotron(TM) products are
fire extinguishing systems, including a series of chemical compounds and
application technologies, designed to replace halons, chemicals that were
in wide use as a fire extinguishing agent in military, industrial,
commercial and residential applications. The Halotron(TM) Agreement
provides for disclosure to the Company of all confidential and proprietary
information concerning Halotron(TM) I.
In February 1992, the Company determined to acquire the rights provided for
in the Halotron(TM) Agreement, gave notice to that effect to the inventors
(the "Inventors"), and exercised its option. In addition to the exclusive
license to manufacture and sell Halotron(TM) I, the rights acquired by the
Company include rights under all present and future patents relating to
Halotron(TM) I throughout the world, rights to related and follow-on
products and technologies and product and technology improvements. Upon
exercise of the option, the Company paid the sum of $0.7 million (the
exercise price of $1.0 million, less advance payments previously made) and
subsequently paid the further total sum of $1.5 million in monthly
installments commencing in March 1992. A license agreement entered into
between the Company and the Inventors provided for a royalty to the
Inventors of 5% of the Company's net sales of Halotron(TM) I over a period
of 15 years.
In 1992, the Company sued the Inventors, claiming they had breached the
agreements and contracts in which they had sold the rights to Halotron(TM).
This initial litigation was settled when the Inventors promised to perform
faithfully their duties and to honor the terms of the contracts that, among
other things, gave the Company exclusive rights to the Halotron(TM)
chemicals and delivery systems. Following the settlement of the initial
litigation, however, the Inventors failed to perform the acts they had
promised in order to secure dismissal of that litigation. As a result, the
Company brought an action in the Utah state courts in March 1994, for the
purpose of establishing the Company's exclusive rights to the Halotron(TM)
chemicals and delivery systems. On August 15, 1994, the court entered a
default judgment against the Inventors granting the injunctive relief
requested by the Company and awarding damages in the amount of $42.2
million. The trial court further ordered the Inventors to execute documents
required for patent registration of Halotron(TM) in various countries. When
the Inventors ignored this court order, the Court directed the Clerk of the
Court to execute these documents on behalf of the Inventors. Finally, the
Court ordered that the Inventors' rights to any future royalties from sales
of Halotron(TM) I were terminated.
In 1996, the Company initiated arbitration proceedings by filing a notice
of Arbitration with the American Arbitration Association ("AAA") against
the Inventors to enforce, among other things, the
54
Company's rights under the Halotron(TM) Agreement. In June 2000, an AAA
Panel (the "Tribunal") issued their final award in this proceeding. The
Tribunal awarded the Company monetary relief consisting of $2.0 million in
compensatory damages, $0.2 million in arbitration costs, and $0.3 million
in partial legal related costs, plus interest at an annual non-compounded
rate of 9%. The Tribunal also awarded the Company injunctive relief
essentially consisting of requirements that the Inventors stop using the
Halotron(TM) name, the invention, the know-how, and the proprietary
information, produce missing work product, disclose and transfer relevant
patent and trademark rights, and provide information on sales of
"Halotron(TM)" products. The award also specifies that the Inventors pay
$1000 for each day, beyond twenty days of award delivery, that they fail to
satisfy the directives within the injunctive relief. Any opportunity for
royalties to the Inventors would only occur after the payment of damages
and compliance with the directives within the award. The Company is
pursuing local enforcement proceedings in Sweden against the Inventors
through the Svea Hovratt Court.
55