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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, 1999
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) (ZipCode)
(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 ar 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, 1999, was approximately $52.2 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, 1999 was 7,808,137.
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, 2000.
Part IV Hereof
S-14 Registration Statement (2-70830); Annual Reports on Forms 10-K for the
years ended September 30, 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.
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PART I
Item 1. Business
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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 U.S. military's Titan
missile, the Delta family of commercial rockets 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 rocket 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) sodium
azide, used in the inflation of automotive airbags; (ii) Halotron(TM) products,
used to extinguish fires; and (iii) 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 80 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 automotive airbag 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 fourth quarter
of fiscal 1997, the Company recognized an impairment charge of $52.6 million
relating to the fixed assets used in the production of sodium azide. See
"Sodium Azide - Market" and "Sodium Azide - Competition."
In February 1992, the Company acquired (by exercise of an option previously
granted to it) the worldwide rights to Halotron(TM), a fire suppression system
that includes chemical compounds and application technology intended to replace
halons, which have been found to be ozone layer-depleting chemicals.
Halotron(TM) has applications as a fire suppression agent for military,
commercial and industrial uses.
See Note 12 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 67%, 67% and 52% of
revenues during the years ended September 30, 1999, 1998 and 1997, 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.
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Specialty Chemicals
Ammonium Perchlorate
Strategy
The Company's strategy is to become the leading world-wide producer of 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 1960s. Today, its principal space
customers are Thiokol Propulsion, a division of Cordant Technologies Inc.
("Thiokol") for the Space Shuttle Program, and Alliant Techsystems, Inc.
("Alliant") for the Delta family of commercial rockets and the Titan program.
The Company's AP is also used in rockets that launch satellites for
communications, navigation, intelligence gathering, space exploration, weather
forecasting and environmental monitoring. The Company is a qualified supplier
of AP to a number of defense programs, including the Navy Standard Missile,
Patriot, and Multiple Launch Rocket System programs.
Demand for AP has declined steadily over the past five years but appears to
have leveled off recently on a worldwide basis at approximately 20.0 to 25.0
million pounds annually. Supply capacity was substantially in excess of these
demand levels. In an attempt to rationalize the AP industry, the Company
consummated the Acquisition with Kerr-McGee. See "Ammonium Perchlorate - Kerr-
McGee Acquisition."
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 35%, 39% and 35% of the Company's revenues during fiscal
1999, 1998 and 1997, respectively. Alliant accounted for approximately 14%, 16%
and 10% of the Company's revenues during fiscal 1999, 1998 and 1997,
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,
which was contingent upon consummation of the Acquisition, provides that during
its term Thiokol will make all of its AP purchases from the Company. The
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.
In addition to the AP purchased from the Company, Thiokol may use AP inventoried
by it in prior years and AP recycled by it from certain existing solid rocket
motors.
4
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 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 October 31, 1999, the Company had a backlog of approximately $35.2
million for delivery of perchlorate chemicals in fiscal 2000.
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 various forms of other perchlorate chemicals at this
facility. AP produced at the facility and propellants incorporating such AP
have qualified for use in all NASA and DOD programs for which testing has been
conducted, including the Space Shuttle, Titan, Minuteman and Delta 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, ammonia and hydrochloric acid. All
of the raw materials used in the AP manufacturing process are 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 been
relatively stable, with no discernible long-term price fluctuations.
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 provides 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 has a three year notice of termination
provision and, on April 7, 1999, UPL provided written notice of termination
effective April 7, 2002. The Company is in the process of negotiating for its
expected power requirements beyond April 7, 2002.
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 at a plant in France and a plant in Japan. Although the Company has limited
information with respect to these plants, the Company believes that these
foreign AP producers operate low volume, high 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.
5
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 are not currently customers of the
Company and consult with the Company regarding the production and marketing of
AP. The Company has agreed that, at Kerr-McGee's request, it will use reasonable
efforts to market Reclaimed Product on Kerr-McGee's behalf for up to three years
following consummation of the Acquisition.
The Company has determined that a business was not acquired in the Acquisition
and that the Rights acquired have no independent value to the Company apart from
the overall benefit of the transaction that, as a result thereof, Kerr-McGee has
ceased production of AP (except in the limited circumstances referred to above),
thereby leaving the Company as the sole North American supplier of AP. Since
they have no independent value to the Company, the Company has assigned no value
to 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 length of the terms 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,
6
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 offer was consummated on August 28, 1998.
The Company repurchased and retired $3.0 million and $5.0 million in principal
amount of Notes in fiscal 1999 and 1998, respectively.
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 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 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.
The holders of the Warrants had certain put rights that required the holders
to deliver to the Secretary of the Company a written request (a "Put Notice") at
least ninety days prior to a Put Purchase Date (a defined term in the Warrants).
Since the last available Put Purchase Date under the Warrants is December 31,
1999, and the Company has received no Put Notices, the put rights under the
Warrants have effectively expired. 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).
7
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.
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. Recently, however, other inflator technologies have been
commercially developed that 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, in part,
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 ultimately be phased
out.
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 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.
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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.
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 an additional six months through December 31, 2000.
Autoliv accounted for approximately 17%, 19% and 28% of the Company's revenues
during fiscal 1999, 1998 and 1997, 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 are supplied by
competitors of the Company.
Competition
According to public announcements, a Canadian facility ceased the production
of commercial quantities of sodium azide in the summer of 1998. 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.
The Company incurred significant operating losses in its sodium azide
operation in the 1997 fiscal year and prior fiscal years. Sodium azide
performance improved in the fourth quarter of fiscal 1997, principally as a
result of additional sodium azide deliveries under the Autoliv agreement
referred to above. However, even though performance improved, management's view
of the economics of the sodium azide market changed during the fourth quarter of
fiscal 1997. One major inflator manufacturer announced the acquisition of non-
azide based inflator technology and that it intended to be in the market with
this new technology by model year 1999. In addition, although the Company had
achieved significant gains in market share that appeared to relate to the
Company's anti-dumping petition and the Suspension Agreement, management
believed that the effects of the anti-dumping petition were likely fully
incorporated into the sodium azide market by the end of fiscal 1997.
Recognizing that the uncertainties respecting the market and discussed above
continued to exist, during the fourth quarter of fiscal 1997, management
concluded that the cash flows associated with sodium azide operations would not
be sufficient to recover the Company's investment in sodium azide related fixed
assets. As quoted market prices were not available, the present value of
estimated future cash flows was used to estimate the fair value of sodium azide
fixed assets. Under the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 121, and as a result of this valuation technique, an
impairment charge of $52.6 million was recognized in the fourth quarter of
fiscal 1997. (See Note 13 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.
9
Halotron(TM)
Halotron(TM) is a fire suppression system designed to replace halons, which
are chemicals that were widely used as fire suppression agents in military,
industrial, and commercial applications. The impetus for the invention of
Halotron(TM) was the discovery during the 1980s that halons are highly
destructive to the stratospheric ozone layer, which acts as a shield against
harmful solar ultraviolet radiation.
Use of Halons
Halons are used throughout the world in modalities that range from hand-held
fire extinguishers to extensively engineered aircraft installations, but which
are generally of two types, streaming and 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. 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, is used on aircraft and aircraft flightlines, on small boats and ships
and in chemically clean rooms and laboratories, other commercial and industrial
facilities, including those in the lumber and petroleum industries, offices and
residences. Its worldwide production peaked in 1988 at 19,000 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.
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, and it is the military that has
taken the lead in research for halon replacements, both in streaming and in
flooding applications. 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 firms, the oil and gas exploration and production industry,
lumbering, ocean transport and commercial aviation. Other market segments
include 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, if any, 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
firefighting agent, concluding that Halotron(TM) I will suppress or extinguish
fire in the same manner as halon.
The Company, together with Amerex Corporation ("Amerex"), Badger Fire
Protection, Inc. ("Badger") and Buckeye Fire Equipment Company ("Buckeye"), have
successfully completed Underwriters Laboratories' ("UL") fire tests for a number
of sizes of portable fire extinguishers using Halotron(TM) I. Domestic
distribution of the
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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 also began distribution of a line of UL
listed portable fire extinguishers using Halotron(TM) I. The Company now has
three 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
"clean gas" 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. Environmental standards may also be expected to mandate this result.
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 suppression agents with comparable or superior qualities.
Competition
Potential halon alternatives and substitutes will compete as to performance
characteristics, environmental effects and cost. Performance characteristics
include throwability, visibility after application, after-fire damage, equipment
portability and versatility, low temperature performance, corrosion probability,
shelf life and efficiency. The environmental effects include ODP, global
warming potential and toxicity. Potential halon substitutes 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 suppressing chemicals and
systems and will have greater financial resources than those available to the
Company. In 1996, Dupont introduced a new alternative fire extinguishing agent
called FE-36(TM), which is intended to replace Halon 1211. Dupont claims that
FE-36(TM) meets application, performance, toxicity and environmental standards
as a Halon 1211 replacement. 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
On August 30, 1991, the Company entered into an agreement (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, rights to reclaim, store and distribute halon and
rights to utilize the productive capacity of the Inventors' Swedish
manufacturing facility. 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 provides for a royalty to the
11
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 14 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, 1999, the Company owned approximately 80 acres of improved
undeveloped land at the Gibson Business Park near Las Vegas, Nevada. The
Company's land is held for sale.
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, 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, and that most of the
cash flow that may be generated by the project will be received at or near the
end of the development and sale process.
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
12
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. 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, 1999, the backlog for environmental protection equipment was
$2.6 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 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 at estimated
replacement value 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 and
amounts 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 costs have been and may be audited by its
customers and by government audit agencies such as the United States Defense
Contract Audit Agency. To date, such audits have not had a material effect on
the Company's results of operations or financial position.
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 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
13
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.
The Southern Nevada Water Authority has 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. Kerr-McGee for many years
operated an AP production facility at a site near the Company's Henderson
property. The Water Authority's testing showed perchlorate concentrations of 8
to 11 parts per billion (ppb) in drinking water. In response to this discovery,
the Company has engaged environmental consultants to drill test wells in order
to evaluate 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 wells. The results have also indicated that the ground water
containing perchlorate concentration from the Henderson site has not reached the
Las Vegas 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 well at the Kerr-McGee site. The State of
California has adopted a preliminary 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
14
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
casualty 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 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 has
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, 1999, the Company employed approximately 222 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.
15
Item 2. Properties
- ------------------
The following table sets forth certain information regarding the Company's
properties at September 30, 1999.
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) $550,000
(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 80%, 62% and 34% during the fiscal years ended September 30,
1999, 1998 and 1997, 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 47%, 39% and 45% during the fiscal years ended September
30, 1999, 1998 and 1997 , respectively.
(c) Capacity utilization rates for the Halotron production facility were
approximately 4% during the fiscal years ended September 30, 1999, 1998
and 1997.
(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 5 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
- -------------------------
On August 30, 1991, the Company entered into the Halotron(TM) Agreement. 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.
16
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 against the Inventors to
enforce, among other things, the Company's rights under the Halotron(TM)
Agreement. In August 1999, the Arbitration Panel (the "Tribunal") issued a
partial award that required the Inventors to refrain from using the trade-name
and know-how associated with Halotron(TM), to produce all documents,
information and test data relating to the Halotron(TM) products, to allow the
Company to inspect the Inventors' business location to verify compliance with
the partial award, to disclose all patent, trademark or tradename applications
related to Halotron(TM) products and transfer ownership of such to the Company,
and to provide all documents relating to the sale of Halotron(TM) products.
The Tribunal reserved its decision on monetary damages to which the Company
may be entitled and rejected the Inventors' counterclaims except that the
Inventors may be entitled to royalties after the date of the partial award if
the Inventors fully comply with the requirements of the partial award. Based on
information available to the Company, the Inventors have not complied with any
of the requirements of the partial award. The Company is in the process of
preparing a motion to the Tribunal seeking a final award.
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."
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.
The information set forth in Notes 10 and 14 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.
17
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
- --------------------------------------------------------------------------
Matters
- -------
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "APFC." The table below sets forth the high and low bid prices of the
Common Stock on the Nasdaq National Market for the periods indicated.
Nasdaq National Market
High Low
Fiscal Year 1999
----------------
1st Quarter $ 8 $6 1/2
2nd Quarter 9 1/16 7 3/8
3rd Quarter 8 1/2 7 5/8
4th Quarter 9 7/16 7 5/8
Fiscal Year 1998
----------------
1st Quarter 8 1/4 6 3/8
2nd Quarter 11 5/8 5 3/4
3rd Quarter 11 1/4 9 1/2
4th Quarter 10 3/8 7 3/8
At December 1, 1999, there were approximately 1,300 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 6 to Notes to 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,
- ------------
1999 1998 1997 1996 1995
-----------------------------------------------------------
......(in thousands except per share amounts).....
STATEMENT OF OPERATIONS DATA:
Sales and operating revenues $ 72,834 $ 52,339 $ 44,050 $ 42,381 $ 39,250
Cost of sales 45,834 35,792 36,420 32,579 29,861
Gross profit 27,000 16,547 7,630 9,802 9,389
Operating expenses 10,024 9,246 9,509 9,367 11,210
Impairment charge 52,605
Employee separation and management
reorganization cost 3,616 226
Operating income (loss) 16,976 7,301 (58,100) 435 (2,047)
Equity in real estate venture 300 200 700
Interest and other income 1,588 1,294 1,115 1,381 1,429
Interest and other expense 6,951 5,734 2,001 2,836 1,709
Income (loss) before credit for
income taxes 11,613 3,161 (58,786) (320) (2,327)
Credit for income taxes (10,101) (109) (791)
Net income (loss) before
extraordinary losse 11,613 3,161 (48,685) (211) (1,536)
Extraordinary loss-debt extinguishments 174 5,172
Net income (loss) 11,439 (2,011) (48,685) (211) (1,536)
Basic net income (loss) per share 1.41 (.24) (6.01) (.03) (.19)
Diluted net income (loss) per share $ 1.39 $ (.24) $ (6.01) $ (.03) $ (.19)
BALANCE SHEET DATA:
Cash and cash equivalents and
short-term investments $ 40,434 $ 20,389 $ 18,881 $ 20,501 $ 26,540
Restricted cash 1,195 1,176 3,580 4,969 3,743
Inventories and accounts and notes receivable 18,883 23,193 17,304 16,199 13,086
Property, plant and equipment - net 17,254 19,529 19,314 77,217 80,944
Intangible assets-net 34,210 38,252 1,540 1,760 2,995
Development property 6,440 7,036 7,362 8,631 10,296
Real estate equity investments 11,237 17,112 20,248 18,698 17,725
Total assets 132,882 130,759 90,081 150,019 157,789
Working capital 53,088 34,786 23,479 24,905 26,440
Notes payable and current portion
of long-term debt 1,195 1,176 6,166 7,334 8,500
Long-term debt 67,000 70,000 24,900 29,452 34,054
Shareholders' equity $ 52,204 $ 44,029 $ 45,551 $ 94,156 $ 94,251
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 suppression systems
ranging from portable fire extinguishers to airport firefighting vehicles. The
perchlorate, sodium azide and Halotron(TM) facilities are located on the
Company's property in Southern Utah and the chemicals produced and sold at these
facilities collectively represent the Company's specialty 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.
The Company believes that North American demand for AP is currently
approximately 20 to 25 million pounds annually. However, supply capacity has
historically been substantially in excess of these estimated demand levels. In
an effort to rationalize the economics of the existing AP market, the Company
entered into the Purchase Agreement with Kerr-McGee. Upon consummation of the
Acquisition, the Company effectively became the sole North American producer of
AP.
Sales and Operating Revenues. Sales of the Company's perchlorate chemical
products, consisting almost entirely of AP sales, accounted for approximately
67%, 67% and 52% of revenues during the fiscal years ended September 30, 1999,
1998 and 1997, respectively. In general, demand for AP is driven by a
relatively small number of DOD and NASA contractors; as a result, any one
individual AP customer usually accounts for a significant portion of the
revenues of AP manufacturers. For example, Thiokol accounted for approximately
35%, 39% and 35% of the Company's revenues during the fiscal years ended
September 30, 1999, 1998 and 1997, respectively. In addition, Alliant accounted
for approximately 14%, 16% and 10% of the Company's revenues during fiscal 1999,
1998 and 1997, respectively.
Sodium azide sales accounted for approximately 19%, 21% and 30% of sales
during fiscal years ended September 30, 1999, 1998 and 1997, respectively.
Autoliv, the Company's principal sodium azide customer, accounted for
approximately 17%, 19% and 28% of the Company's revenues during fiscal 1999,
1998 and 1997, respectively.
The Company incurred significant operating losses in its sodium azide
operation in the 1997 fiscal year and prior fiscal years. Sodium azide
performance improved in the fourth quarter of fiscal 1997, principally as a
result of additional sodium azide deliveries under the Autoliv agreement
referred to below, and the operations were cash flow positive during the year
ended September 30, 1997. However, even though performance improved,
management's view of the economics of the sodium azide market changed during the
fourth quarter of fiscal 1997. One major inflator manufacturer announced the
acquisition of non-azide based inflator technology and that it intended to be in
the market with this new technology by model year 1999. In addition, although
the Company had achieved significant gains in market share that appeared to
relate to the Company's anti-dumping petition and the Suspension Agreement,
management believed that the effects of the anti-dumping petition were likely
fully incorporated into the sodium azide market by the end of fiscal 1997.
Recognizing that the uncertainties respecting the market and discussed above
continued to exist, during the fourth quarter of fiscal 1997, management
concluded that the cash flows associated with sodium azide operations would not
be sufficient to recover the Company's investment in sodium azide related fixed
assets. As quoted market prices were not available, the present value of
estimated future cash flows was used to estimate the fair value of sodium azide
fixed assets. Under the requirements of SFAS No. 121, and as a result of this
valuation technique, an impairment charge of $52.6 million was recognized in the
fourth quarter of fiscal 1997. See
20
Note 13 to the Consolidated Financial Statements of the Company for further
discussion of the impairment charge.
Sales of Halotron(TM) amounted to approximately 2%, 3% and 4% of revenues
during the fiscal years ended September 30, 1999, 1998 and 1997, respectively.
Halotron(TM) is designed to replace halon-based fire suppression systems.
Accordingly, demand for Halotron(TM) depends upon a number of factors including
the willingness of consumers to switch from halon-based systems, as well as
existing and potential governmental regulations.
Real estate and related sales amounted to approximately 9%, 5% and 8% of
revenues during the fiscal years ended September 30, 1999, 1998 and 1997,
respectively. The nature of real estate development and sales is such that the
Company is unable reliably to predict any pattern of future real estate sales or
recognition of the equity in earnings of real estate ventures.
Environmental protection equipment sales accounted for approximately 3%, 4%
and 6% of revenues during the fiscal years ended September 30, 1999, 1998 and
1997, respectively.
Cost of Sales. The principal elements comprising the Company's cost of sales
are raw materials, electric power, labor, manufacturing overhead and the basis
in the real estate sold. The major raw materials used by the Company in its
production processes are graphite, sodium chlorate, ammonia, hydrochloric acid,
sodium metal, and nitrous oxide. Significant increases in the cost of raw
materials may have an adverse impact on margins if the Company is unable to pass
along such increases to its customers, although all the raw materials used in
the Company's manufacturing processes have historically been available in
commercial quantities with relatively stable pricing, and the Company has had no
difficulty obtaining necessary raw materials. The Company is in the process of
negotiating for its expected power requirements beyond April 2002 (see note 10
to the Consolidated Financial Statements of the Company). The costs of
operating the Company's specialty chemical plants are, however, largely fixed.
Operating Expenses. Operating (selling, general and administrative) expenses
were $10.0 million, $9.2 million and $9.5 million during the fiscal years ended
September 30, 1999, 1998 and 1997, respectively. Operating expenses in both
fiscal 1999 and fiscal 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 10 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%
in fiscal 1999 and 1998, and 17% in fiscal 1997. The Company's effective income
tax rate decreased to 17% in fiscal 1997 as a result of the establishment of a
$10.1 million deferred tax valuation allowance. The Company's effective tax
rate will be 0% until the Company's net operating losses expire or the Company
has taxable income necessary to eliminate the need for the valuation allowance
(see Note 8 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 10 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 earnings of real estate ventures is not predictable; (iii) the
recognition of revenues from environmental protection equipment orders not
accounted for as long-term contracts depends upon orders generated and the
timing of shipment of the equipment; (iv) weighted average common and common
equivalent shares for purposes of calculating diluted net income (loss) per
common share are subject to significant fluctuations based upon changes in the
market price of the Company's Common Stock due to outstanding warrants and
options; and (v) the magnitude, pricing and timing of AP, sodium azide,
Halotron(TM),
21
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, 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 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 9
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
Agreement (see Note 14 to the Consolidated Financial Statements of the Company).
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.
22
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.
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September 30,
1997
Sales and Operating Revenues. Sales increased $8.2 million, or 19%, to
$52.3 million in fiscal 1998 from $44.1 million in fiscal 1997. This increase
was attributable to increased sales in the Company's specialty chemical
operations. The increase in specialty chemical sales was partially offset by
decreases in environmental protection equipment and real estate sales.
Specialty chemical sales increased $9.7 million, or 26%, to $47.7 million in
fiscal 1998 from $38.0 million in fiscal 1997. This increase was principally
attributable to an increase in perchlorate sales of $12.3 million, partially
offset by a decrease in sodium azide sales. The increase in perchlorate sales
was attributable to additional AP sales volume subsequent to the Acquisition.
Sodium azide sales decreased $2.4 million, or 18%, to $10.9 million in fiscal
1998, from $13.3 million in fiscal 1997 due principally to a decrease in
shipments to Autoliv in the fourth quarter as a result of a strike at certain
General Motor's ("GM") facilities.
In May 1997, the Company entered into a three-year agreement with Autoliv.
The agreement provides for the Company 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 an additional six months through
December 31, 2000.
Environmental protection sales decreased $0.3 million, or 8%, to $2.1 million
in fiscal 1998 from $2.4 million in fiscal 1997 as a result of a decrease in
equipment shipments.
Real estate sales decreased $1.2 million, or 31%, to $2.5 million in fiscal
1998 from $3.7 million in fiscal 1997 due to a decrease in land sales in fiscal
1998 compared to fiscal 1997.
Cost of Sales. Cost of sales decreased $0.6 million, or 2%, in fiscal 1998 to
$35.8 million from $36.4 million in fiscal 1997. Cost of sales as a percentage
of sales decreased to 68% in fiscal 1998 as compared to 83% in fiscal 1997.
These decreases were primarily attributable to the increase in perchlorate sales
volume offset by a reduction in depreciation expense of approximately
$4.0 million as a result of the sodium azide impairment charge referred to
above.
Operating Expenses. Operating (selling, general and administrative) expenses
decreased $0.3 million, or 3%, in fiscal 1998 to $9.2 million from $9.5 million
in fiscal 1997.
Equity in Earnings of Real Estate Venture. During fiscal 1998 and 1997, the
Company recognized its share of the equity in the Company's Ventana Canyon joint
venture. The Company's equity in the earnings of the project amounted to
approximately $0.3 million and $0.2 million, respectively. Profits and losses
are split equally between the Company and its venture partner, a local real
estate development company.
23
Segment Operating Income (Loss). Operating income (loss) of the Company's
operating segments during the fiscal years ended September 30, 1998 and 1997 was
as follows:
--------------------------------------------------
1998 1997
--------------------------------------------------
Specialty chemicals $6,422,000 $(55,227,000)
Environmental protection equipment (2,000) (659,000)
Real estate 1,082,000 1,624,000
--------------------------------------------------
Total $7,502,000 $(54,262,000)
==================================================
The increase in operating income of the specialty chemicals segment was
attributable to the fixed asset impairment charge in fiscal 1997 of $52.6
million discussed above and the increase in perchlorate sales and operating
performance as a result of the Acquisition. The decrease in operating income of
the real estate segment was attributable to a decrease in revenues from $3.6
million in fiscal 1997 to $2.5 million in fiscal 1998.
Interest and Other Income. Interest and other income increased to $1.3
million in fiscal 1998 from $1.1 million in 1997. The increase was principally
due to higher average cash and cash equivalent balances.
Interest and Other Expense. Interest and other expense increased to $5.7
million in fiscal 1998 from $2.0 million in fiscal 1997. 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,
1999. Inflation may have an effect on gross profit in the future as certain of
the Company's agreements with AP and sodium azide customers require fixed
prices, although certain of such agreements contain escalation features that
should somewhat mitigate the risks associated with inflation.
Liquidity and Capital Resources
As discussed in Notes 6 and 7 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. The
Company repurchased and retired $3.0 million and $5.0 million principal amount
of Notes in fiscal 1999 and 1998, respectively. The Company incurred
extraordinary losses on debt extinguishment of approximately $0.2 million on
each of these repurchases principally as a result of writing off costs
associated with the issuance of the Notes.
Cash flows provided by operating activities were $22.6 million, $7.7 million
and $9.6 million during the fiscal years ended September 30, 1999, 1998 and
1997, respectively. The 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 changes in cash flows from operating
activities between fiscal 1998 and fiscal 1997 resulted principally from changes
in certain working capital balances. 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
24
contingencies, and the timing, pricing and magnitude of orders for AP, sodium
azide and Halotron(TM), may have an effect on the use and availability of cash.
Capital expenditures were $2.1, $2.8 million and $1.6 million during the
fiscal years ended September 30, 1999, 1998 and 1997, respectively. Capital
expenditures relate principally to specialty chemical 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, 1999, the Company made debt
related payments of approximately $48.6 million, repurchased $4.2 million in
common stock and issued $1.5 million in common stock as a result of the exercise
of outstanding stock options.
As discussed in Note 6 to the Consolidated Financial Statements of the
Company, in December 1999, the Company expects to make an offer to purchase
approximately $8.6 million in principal amount of Notes at 102%, or at a cost of
approximately $8.8 million. The Company will fund any purchases made under this
offer from existing cash balances.
During the three-year period ended September 30, 1999, the Company received
net cash of approximately $8.0 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 the end of calendar 2001.
As a result of the litigation and contingencies discussed in Note 10 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.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in major system failure or
miscalculations.
The Company has completed an evaluation and is in the process of resolving the
problems that might be associated with the Year 2000 issue. The Company's Year
2000 project has four major components:
1. Evaluation of all major manufacturing and business computing systems to
determine which systems are Year 2000 compliant.
2. For each computing system found not to be Year 2000 compliant, development
of a strategy to replace, modify or upgrade the system to a Year 2000
compliant system.
3. Evaluation of core vendors for Year 2000 compliance.
4. Preparation of contingency plans.
The Company's evaluation found that the most critical digital control system,
which is used in the manufacture of specialty chemical products, is Year 2000
compliant. The Company has received a letter of certification from its vendor,
and the Company has tested the system by turning the dates forward on the
computers to the year 2000, and all systems functioned normally.
25
The Company's accounting system has been upgraded to a Year 2000 compliant
version. This upgrade was completed in the fourth quarter of fiscal 1999. New
maintenance and manufacturing (MRP) software packages have been implemented, and
each is certified and tested as Year 2000 compliant.
The majority of PC computers used by the Company are Pentium class, running
Microsoft's Windows 95 operating system, and are Year 2000 compliant. The
Company's file servers are running on Pentium computers with Microsoft NT 4.0,
and each of these is also certified Year 2000 compliant. The Company also uses
Microsoft's office suite, which is Year 2000 compliant.
During the evaluation phase of its Year 2000 project, the Company identified
certain potential issues related to many of its programmable logic controller
units used in the manufacturing process and certain of the Company's laboratory
instruments and the computers and software with which they operate. The Company
has updated the equipment that was not Year 2000 compliant.
The Company has identified all critical vendors of raw materials, supplies and
services. Each such vendor has been contacted and asked to describe to the
Company their year 2000 readiness program. All such critical vendors have
indicated to the Company that they are or will be prepared for the Year 2000
issue. However, the Company can provide no assurance as to the readiness of its
critical vendors for the Year 2000 issue.
A contingency plan for plant and corporate operations has been prepared and
approved by senior management.
The Year 2000 issue and related risks could potentially have a material impact
on the Company's operations, working capital, results of operations and
financial condition. In a worst case situation, long delays or interruptions in
deliveries of critical raw materials, supplies or services could materially
impact the Company's ability to produce and deliver products. In addition,
problems encountered by the Company's customers could cause delays or possibly
cancellations of shipments and billings of the Company's products. The Company
has considered these risks, among others, in the preparation of its contingency
plan.
The Company recently reevaluated its estimates and assumptions of the costs
directly associated with its Year 2000 project and currently estimates that
approximately $0.5 million in costs will be incurred that are directly
associated with the project. Through September 30, 1999, the Company had
incurred most of these costs.
Given the inherent risks for a project of this nature, the costs involved
could differ materially from those anticipated by the Company in the event of
project failure. Accordingly, there can be no assurance that the Year 2000
project will be completed on schedule or within budget.
Forward-Looking Statements/Risk Factors
Certain matters discussed in this Report may be forward-looking statements
that are subject to risks and uncertainties that could cause actual results to
differ materially from those projected. Such risks and uncertainties include,
but are not limited to, the risk factors set forth below.
The following risk factors, among others, may cause the Company's operating
results and/or financial position to be adversely affected from time to time:
1. (a) Declining demand or downward pricing pressure for the Company's
products as a result of general or specific economic conditions, (b)
governmental budget decreases affecting the DOD or NASA that would cause a
decrease in demand for AP, (c) the results achieved by the Suspension
Agreement resulting from the Company's anti-dumping petition against
foreign sodium azide producers and the
26
possible termination of such agreement, (d) technological advances and
improvements with respect to existing or new competitive products causing a
reduction or elimination of demand for AP, sodium azide or Halotron(TM),
(e) the ability and desire of purchasers to change existing products or
substitute other products for the Company's products based upon perceived
quality, environmental effects and pricing, and (f) the fact that
perchlorate chemicals, sodium azide, Halotron(TM) and the Company's
environmental products have limited applications and highly concentrated
customer bases.
2. Competitive factors including, but not limited to, the Company's
limitations respecting financial resources and its ability to compete
against companies with substantially greater resources, significant excess
market supply in the sodium azide market and the development or penetration
of competing new products, particularly in the propulsion, airbag inflation
and fire suppression businesses.
3. Underutilization of the Company's manufacturing facilities resulting in
production inefficiencies and increased costs, the inability to recover
facility costs and reductions in margins.
4. Risks associated with the Company's real estate activities, including, but
not limited to, dependence upon the Las Vegas commercial, industrial and
residential real estate markets, changes in general or local economic
conditions, interest rate fluctuations affecting the availability and cost
of financing, the performance of the managing partner of its residential
real estate joint venture (GRLLC) and regulatory and environmental matters
that may have a negative impact on sales or costs.
5. The effects of, and changes in, trade, monetary and fiscal policies, laws
and regulations and other activities of governments, agencies or similar
organizations, including, but not limited to, environmental, safety and
transportation issues.
6. The cost and effects of legal and administrative proceedings, settlements
and investigations, particularly those investigations described in Note 10
to the Consolidated Financial Statements of the Company and claims made by
or against the Company relative to patents or property rights.
7. Integration of new customers and the ability to meet additional production
and delivery requirements resulting from the Acquisition.
8. The effects, if any, of problems associated with the Year 2000 issue.
9. The results of the Company's periodic review of impairment issues under
the provisions of SFAS No. 121.
10. The dependence upon a single facility for the production of most of the
Company's products.
11. Provisions of the Company's Certificate of Incorporation and By-laws and
recently-adopted Series D Preferred Stock, dividend of preference stock
purchase rights and related Rights Agreement could have the effect of
making it more difficult for potential acquirors to obtain a control
position in the Company. See Note 11 to the Consolidated Financial
Statements of 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.
27
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
Financial statements called for hereunder are included herein on the
following pages:
Page(s)
------
Independent Auditors' Report 37
Consolidated Balance Sheets 38
Consolidated Statements of Operations 39
Consolidated Statements of Cash Flows 40
Consolidated Statements of Changes in Shareholders' Equity 41
Notes to Consolidated Financial Statements 42-60
28
SUMMARIZED QUARTERLY FINANCIAL DATA
(unaudited)
(amounts in thousands except per share amounts)
------------------------------------------------
Quarters For Fiscal Year 1999
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.
------------------------------------------------
Quarters For Fiscal Year 1998
1st 2nd 3rd 4th Total
- --------------------------------------------------------------------------------
(1) (1) (1)
Sales and Operating Revenues $11,268 $14,119 $13,136 $13,816 $52,339
Gross Profit 3,162 4,990 4,089 4,306 16,547
Net Income Before
Extraordinary Loss 566 1,993 214 388 3,161
Net Income (Loss) 566 (3,012) 214 221 (2,011)
Diluted Net Income Before
Extraordinary Loss Per Share $ .07 $ .24 $ .02 $ .05 $ .38
Diluted Net Income
(Loss) Per Share $ .07 $ (0.36) $ .02 $ .03 $ (.24)
/(1)/ Net income (loss) includes an extraordinary loss on debt extinguishment of
approximately $5.0 million in the second quarter and $0.2 million in the
fourth quarter.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
Not Applicable.
29
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 2000 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission not later than January 28, 2000.
Item 11. Executive Compensation
- -------------------------------
The required information regarding executive compensation is incorporated
herein by reference from the Company's definitive proxy statement for its 2000
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission not later than January 28, 2000.
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 2000 Annual Meeting of Shareholders, to be
filed with the Securities and Exchange Commission not later than January 28,
2000.
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 2000 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission not later than January 28, 2000.
30
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.
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").
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").
31
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 91/4% Senior Notes due 2005 of the Registrant,
incorporated by reference to Exhibit 99.3 to the 1998 S-4.
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.
32
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.
* 10.4 Amended and Restated American Pacific Corporation Defined Benefit
Pension Plan.
* 10.5 Amended and Restated American Pacific Corporation Supplemental
Executive Retirement Plan effective January 1, 1999.
* 10.6 Trust Agreement for the Amended and Restated American Pacific
Corporation Supplemental Executive Retirement Plan.
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").
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.
33
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 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 35.
*27 Financial Data Schedule
* Filed herewith.
(b) Reports on Form 8-K
-------------------
Date of Report Event Reported
-------------- --------------
August 3, 1999 American Pacific Adopts Stockholder
Rights Plan
34
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 7, 1999 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 7, 1999
- --------------------------------------
John R. Gibson
Chief Executive Officer, President,
and Director
/s/ David N. Keys Date: December 7, 1999
- --------------------------------------
David N. Keys
Executive Vice President, Chief
Financial Officer, Secretary and Treasurer;
Principal Financial and Accounting Officer
and Director
35
/s/ Fred D. Gibson, Jr. Date: December 7, 1999
- ---------------------------------
Fred D. Gibson, Jr.
Director
/s/ C. Keith Rooker Date: December 7, 1999
- ---------------------------------
C. Keith Rooker
Director
/s/ Norval F. Pohl Date: December 7, 1999
- ---------------------------------
Norval F. Pohl, Ph.D.
Director
/s/ Thomas A. Turner Date: December 7, 1999
- ---------------------------------
Thomas A. Turner
Director
/s/ Berlyn D. Miller Date: December 7, 1999
- ---------------------------------
Berlyn D. Miller
Director
/s/ Jane L. Williams Date: December 7, 1999
- ---------------------------------
Jane L. Williams
Director
/s/ Victor M. Rosenzweig Date: December 7, 1999
- ---------------------------------
Victor M. Rosenzweig
Director
/s/ Dean M. Willard Date: December 7, 1999
- ---------------------------------
Dean M. Willard
Director
/s/ Eugene A. Cafiero Date: December 7, 1999
- ---------------------------------
Eugene A. Cafiero
Director
/s/ Jan H. Loeb Date: December 7, 1999
- ---------------------------------
Jan H. Loeb
Director
36
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, 1999 and
1998, 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, 1999. 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 generally accepted auditing
standards. 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, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1999 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
November 19, 1999
37
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
---------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 40,434,000 $ 20,389,000
Accounts and notes receivable 8,859,000 8,927,000
Related party notes receivable 447,000 536,000
Inventories 9,577,000 13,730,000
Prepaid expenses and other assets 680,000 839,000
Restricted cash 1,195,000 1,176,000
---------------------------------
Total Current Assets 61,192,000 45,597,000
PROPERTY, PLANT AND EQUIPMENT, NET 17,254,000 19,529,000
INTANGIBLE ASSETS, NET 34,210,000 38,252,000
REAL ESTATE EQUITY INVESTMENTS 11,237,000 17,112,000
DEVELOPMENT PROPERTY 6,440,000 7,036,000
DEBT ISSUE COSTS, NET 2,547,000 3,156,000
OTHER ASSETS 2,000 77,000
---------------------------------
TOTAL ASSETS $132,882,000 $130,759,000
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 6,909,000 $ 9,635,000
Notes payable and current portion of
long-term debt 1,195,000 1,176,000
---------------------------------
Total Current Liabilities 8,104,000 10,811,000
LONG-TERM PAYABLES 2,005,000 2,350,000
LONG-TERM DEBT 67,000,000 70,000,000
---------------------------------
TOTAL LIABILITIES 77,109,000 83,161,000
---------------------------------
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 - 8,467,791 in 1999 and 8,423,791 in 1998 847,000 842,000
Capital in excess of par value 79,757,000 79,488,000
Accumulated deficit (23,279,000) (34,718,000)
Treasury stock (635,354 shares in 1999 and 206,654 shares in 1998) (5,034,000) (1,486,000)
Note receivable from the sale of stock (87,000) (97,000)
---------------------------------
Total Shareholders' Equity 52,204,000 44,029,000
---------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $132,882,000 $130,759,000
=================================
See Notes to Consolidated Financial Statements.
38
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------
SALES AND OPERATING REVENUES $72,834,000 $52,339,000 $ 44,050,000
COST OF SALES 45,834,000 35,792,000 36,420,000
-----------------------------------------------
GROSS PROFIT 27,000,000 16,547,000 7,630,000
OPERATING EXPENSES 10,024,000 9,246,000 9,509,000
FIXED ASSET IMPAIRMENT CHARGE 52,605,000
EMPLOYEE SEPARATION AND MANAGEMENT REORGANIZATION
COSTS 3,616,000
-----------------------------------------------
OPERATING INCOME (LOSS) 16,976,000 7,301,000 (58,100,000)
EQUITY IN EARNINGS OF REAL
ESTATE VENTURE 300,000 200,000
INTEREST AND OTHER INCOME 1,588,000 1,294,000 1,115,000
INTEREST AND OTHER EXPENSE 6,951,000 5,734,000 2,001,000
-----------------------------------------------
INCOME (LOSS) BEFORE CREDIT FOR INCOME TAXES 11,613,000 3,161,000 (58,786,000)
CREDIT FOR INCOME TAXES (10,101,000)
-----------------------------------------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSSES 11,613,000 3,161,000 (48,685,000)
EXTRAORDINARY LOSS-DEBT EXTINGUISHMENTS 174,000 5,172,000
-----------------------------------------------
NET INCOME (LOSS) $11,439,000 $(2,011,000) $(48,685,000)
===============================================
BASIC NET INCOME (LOSS) PER SHARE:
INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS $ 1.43 $ .39 $ (6.01)
EXTRAORDINARY LOSS (.02) (.63)
-----------------------------------------------
NET INCOME (LOSS) $ 1.41 $ (.24) $ (6.01)
===============================================
AVERAGE SHARES OUTSTANDING 8,111,000 8,198,000 8,105,000
-----------------------------------------------
DILUTED NET INCOME (LOSS) PER SHARE:
INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS $ 1.41 $ .38 $ (6.01)
EXTRAORDINARY LOSS (.02) (.62)
-----------------------------------------------
NET INCOME (LOSS) $ 1.39 $ (.24) $ (6.01)
===============================================
DILUTED SHARES 8,236,000 8,321,000 8,105,000
-----------------------------------------------
See Notes to Consolidated Financial Statements.
39
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $11,439,000 $ (2,011,000) $(48,685,000)
---------------------------------------------
Adjustments to reconcile net income (loss ) to net cash from operating activities:
Depreciation and amortization 7,684,000 5,322,000 7,685,000
Fixed asset impairment charge 52,605,000
Employee separation and management reorganization costs 3,616,000
Basis in development property sold 1,913,000 822,000 1,498,000
Development property additions (96,000) (496,000) (229,000)
Equity in real estate venture (300,000) (200,000)
Cash received on equity in real estate venture 300,000 200,000
Extraordinary debt charges 174,000 5,172,000
Changes in assets and liabilities:
Short-term investments 2,000,000
Accounts and notes receivable 167,000 (3,275,000) (1,286,000)
Inventories 4,153,000 (2,614,000) 181,000
Restricted cash 2,404,000 1,389,000
Prepaid expenses and other 234,000 188,000 32,000
Accounts payable and accrued liabilities (3,071,000) 2,148,000 870,000
Deferred income taxes (10,101,000)
---------------------------------------------
Total adjustments 11,158,000 9,671,000 58,260,000
---------------------------------------------
Net cash from operating activities 22,597,000 7,660,000 9,575,000
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,100,000) (2,766,000) (1,557,000)
Payment for acquisition intangible (39,000,000)
Real estate equity advances (2,680,000)
Return of capital on real estate equity investments 5,875,000 3,135,000 1,130,000
---------------------------------------------
Net cash from investing activities 3,775,000 (38,631,000) (3,107,000)
---------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt related payments (3,053,000) (39,416,000) (6,168,000)
Issuance of common stock 274,000 940,000 236,000
Treasury stock acquired (3,548,000) (451,000) (156,000)
Issuance of notes 75,000,000
Debt issue costs (3,594,000)
---------------------------------------------
Net cash from financing activities (6,327,000) 32,479,000 (6,088,000)
---------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 20,045,000 1,508,000 380,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 20,389,000 18,881,000 18,501,000
---------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $40,434,000 $ 20,389,000 $ 18,881,000
=============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for interest $ 6,463,000 $ 5,118,000 $ 1,427,000
=============================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Excess additional pension liability $ 1,175,000
=============================================
See Notes to Consolidated Financial Statements.
40
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
Retained Note
Net Outstanding Par Value Capital in Earnings Receivable
Number of of Shares excess of (Accumulated Treasury from the Sale
Common Shares Issued Par Value Deficit) Stock of Stock
--------------------------------------------------------------------------------------------------
BALANCES,
OCTOBER 1, 1996 8,098,621 $823,000 $78,331,000 $ 15,978,000 $ (879,000) $(97,000)
Net loss (48,685,000)
Issuance of common stock 61,000 6,000 230,000
Treasury stock acquired (22,084) (156,000)
--------------------------------------------------------------------------------------------------
BALANCES,
SEPTEMBER 30, 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)
==================================================================================================
See Notes to Consolidated Financial Statements.
41
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
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, 1999 and 1998 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, 1999 or 1998.
Related Party Notes Receivable - Related party notes 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. 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 $52.6 million relating to certain
specialty chemical assets was recognized in fiscal 1997. (See Note 13.)
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 5.) 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
42
planning, development costs and carrying costs. Carrying costs include
interest and property taxes until projects are substantially complete. No
interest was capitalized on development property during the three-year
period ended September 30, 1999.
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, 1999:
-----------------------------------------------
Cash and cash equivalents, accounts and notes receivable, restricted
cash, 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 6) is substantially in excess of the recent trading prices of the
Company's common stock. During fiscal 1999, the Company repurchased $3.0
million in principal amount of its unsecured senior notes at a price of
about par (see Note 6). Although these notes are thinly traded, the Company
believes the recent repurchase price 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 when the product is shipped for other contracts. 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. Since the Company incurred a net loss before
extraordinary loss during the fiscal year ended September 30, 1997, diluted
per share calculations are based upon average shares outstanding during this
year. Accordingly, the effect of stock options and warrants outstanding for
approximately 3.8 million shares at September 30, 1997 was not included in
diluted net loss per share calculations. Diluted net income (loss) per share
amounts during the fiscal years ended September 30, 1999 and 1998 is
determined considering the dilutive effect of stock options and warrants.
The effect of stock options and warrants outstanding to purchase
approximately 2.9 million shares was not included in diluted per share
calculations during the 1999 and 1998 fiscal years 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 8.)
Estimates and Assumptions - The preparation of financial statements in
-------------------------
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates used by the
Company include estimated useful lives for depreciable and
43
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 1999, the Company adopted
-------------------------------------
SFAS No. 132, "Employers' Disclosures about Pensions and other
Postretirement Benefits" which is an amendment of SFAS No. 87, 88 and 106.
SFAS No. 132 revises employer's disclosures about pension and other
postretirement benefits plans but does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and
fair values of plan assets and eliminates certain disclosures. (See Note 9.)
During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement redefines
how operating segments are determined and requires qualitative disclosure of
certain financial and descriptive information about a company's operating
segments. (See Note 12.)
Recently Issued Accounting Standards - SFAS No. 133, "Accounting for
------------------------------------
Derivative Instruments and Hedging Activities" was issued in June 1998. The
statement establishes accounting and reporting standards for derivative
instruments, including certain derivatives instruments embedded in other
contracts, and for hedging activities. This statement is effective for all
fiscal quarters and all fiscal years beginning after June 15, 2000, although
earlier application is encouraged. This statement may not be applied
retroactively. The Company expects to adopt this statement effective July 1,
2000, and does not expect the adoption to have a material effect on its
financial position or results of operations.
Reclassifications - Certain reclassifications have been made in the 1998 and
-----------------
1997 consolidated financial statements in order to conform to the
presentation used in 1999.
2. INVENTORIES
Inventories at September 30, 1999 and 1998 consist of the following:
1999 1998
--------------------------------------------------
Work-in-process $5,938,000 $ 8,685,000
Raw material and supplies 3,639,000 5,045,000
--------------------------------------------------
Total $9,577,000 $13,730,000
==================================================
3. RESTRICTED CASH
At September 30, 1999, restricted cash consists of approximately $1.2
million held in a cash collateral account by a lender which provided a term
loan (the "AP Facility Loan") as the principal financing for an ammonium
perchlorate ("AP") manufacturing facility erected and operated by the
Company. Funds in the cash collateral account are restricted for future
indemnity payments relating to the AP Facility Loan. The AP Facility Loan
was repaid in 1994. The $1.2 million will be retained in the cash collateral
account until the balance remaining after any indemnity payments is returned
to Thiokol Propulsion, a division of Cordant Technologies Inc. ("Thiokol").
The Company's obligation to return such funds is included in the current
portion of long-term debt at September 30, 1999. Any indemnity payments made
will serve to reduce the cash collateral account and the Company's
obligation to Thiokol.
44
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1999 and 1998 are summarized
as follows:
1999 1998
-------------------------------------------------------
Land $ 117,000 $ 352,000
Buildings, machinery and equipment 25,158,000 24,741,000
Construction in progress 1,065,000 874,000
-------------------------------------------------------
Total 26,340,000 25,967,000
Less: accumulated depreciation 9,086,000 6,438,000
-------------------------------------------------------
Property, plant and equipment, net $17,254,000 $19,529,000
=======================================================
A fixed asset impairment charge of $52.6 million was recognized in 1997.
(See Note 13.)
5. 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, 1999.
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.
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, 1999
and as of and for the years ended December 31, 1998 and 1997 was as follows:
----------------------------------------------------------
September 30, December 31, December 31,
1999 1998 1997
----------------------------------------------------------
Income Statement:
Revenues $25,302,000 $36,975,000 $21,647,000
Gross Profit 4,983,000 2,766,000 3,422,000
Operating expenses 980,000 1,542,000 1,223,000
Net Income $ 4,003,000 $ 1,224,000 $ 2,199,000
Balance Sheet:
Assets $21,837,000 $25,007,000 $27,659,000
Liabilities 9,765,000 13,628,000 13,334,000
Equity $12,072,000 $11,379,000 $14,325,300
- ---------------------------------------------------------------------------------------------------------
45
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, 1999,
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
since 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 salable 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,
1999, approximately $3.1 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 $20.7 million at September 30, 1999 and $21.4
million and $25.7 million at December 31, 1998 and December 31, 1997,
respectively.
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 10.)
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt at September 30, 1999 and 1998 are
summarized as follows:
1999 1998
----------------------------------------
9 1/4% Senior unsecured notes $67,000,000 $70,000,000
Indemnity obligation (see Note 3) 1,195,000 1,176,000
----------------------------------------
Total 68,195,000 71,176,000
Less current portion 1,195,000 1,176,000
----------------------------------------
Total $67,000,000 $70,000,000
========================================
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 7 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
46
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.
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. In
December 1999, the Company expects to make an offer to purchase
approximately $8.6 million in principal amount of Notes at 102%, or at a
cost of approximately $8.8 million. Under the provisions of the Indenture,
the offer will remain open for 20 business days.
The Company repurchased and retired $3.0 million and $5.0 million in
principal amount of Notes in fiscal 1999 and fiscal 1998, respectively. The
Company incurred extraordinary losses on each of these debt extinguishments
of approximately $0.2 million, principally as a result of writing off costs
associated with the issuance of the Notes.
The Azide Notes were 11% noncallable subordinated secured term notes, which
were issued and sold in February 1992 to finance the design, construction
and start-up of the Company's sodium azide facility. A portion of the net
proceeds from sale of the Notes was applied to repurchase the Azide Notes
for approximately $28.2 million (approximately 113% of the outstanding
principal amount thereof). In connection with the repurchase, the Company
recognized an extraordinary loss on debt extinguishment of approximately
$5.0 million. The extraordinary loss consisted of the cash premium paid of
$3.2 million upon repurchase and a charge of $1.8 million to write off the
unamortized balance of debt issue and discount costs.
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.
The holders of the Warrants had certain put rights that required the holders
to deliver to the Secretary of the Company a written request (a "Put
Notice") at least ninety days prior to a Put Purchase Date (a defined term
in the Warrants). Since the last available Put Purchase Date under the
Warrants is December 31, 1999, and the Company has received no Put Notices,
the put rights under the Warrants have effectively expired. 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 Stock underlying the Warrants be registered on one occasion, as well
as certain incidental registration rights.
47
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,
----------------------------
2000 $ 1,195,000
2005 67,000,000
--------------------
Total $ 68,195,000
====================
7. ACQUISITION
On March 12, 1998 (the "Closing Date"), the Company acquired, pursuant to a
purchase agreement (the "Purchase Agreement") with Kerr-McGee, certain
intangible assets related to Kerr-McGee's production of AP (the "Rights")
for a purchase price of $39.0 million. 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
are not currently customers of the Company, and consult with the Company
regarding the production and marketing of AP. The Company has agreed that,
at Kerr-McGee's request, it will use reasonable efforts to market Reclaimed
Product on Kerr-McGee's behalf for up to three years following consummation
of the Acquisition.
48
The Company has determined that a business was not acquired in the
Acquisition and that the Rights acquired have no independent value to the
Company apart from the overall benefit of the transaction that, as a result
thereof, Kerr-McGee has ceased production of AP (except in the limited
circumstances referred to above), thereby leaving the Company as the sole
North American supplier of AP. The Company is amortizing the purchase price
of $39.0 million for the unidentified intangible over ten years, the length
of the terms of pricing contracts with two principal AP customers referred
to below.
In connection with the Acquisition, the Company entered into an agreement
with Thiokol with respect to the supply of AP through the year 2008. The
agreement, which was contingent upon consummation of the Acquisition,
provides that during its term Thiokol will make all of its AP purchases from
the Company. The agreement also establishes a pricing matrix under which AP
unit prices vary inversely with the quantity of AP sold by the Company to
all of its customers. The Company understands that, in addition to the AP
purchased from the Company, Thiokol may use AP inventoried by it in prior
years and AP recycled by it from certain existing rocket motors.
In connection with the Acquisition, the Company also entered into an
agreement with Alliant Techsystems Incorporated ("Alliant") to extend an
existing agreement through the year 2008. The agreement establishes prices
for any AP purchased by Alliant from the Company during the term of the
agreement as extended. Under this agreement, Alliant agrees to use its
efforts to cause the Company's AP to be qualified on all new and current
programs served by Alliant's Bacchus Works.
8. 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 credit for income
taxes for the years ended September 30:
===================================================
1999 1998 1997
---------------------------------------------------
Current $ $ $
Deferred (federal and state) (10,101,000)
---------------------------------------------------
Credit for income taxes $ $ $(10,101,000)
===================================================
A valuation allowance for a deferred tax asset was established in the amount
of $10.4 million in 1997 and such allowance has decreased to $9.5 million at
September 30, 1999. The valuation allowance is necessary due to the
uncertainty related to the realizability of future tax benefits. The
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 $1.2 million, may be carried
49
forward indefinitely as a credit against regular tax. The net operating loss
carryforwards, valued at approximately $41.7 million, will begin to expire
for tax purposes in 2009 as follows:
-------------------------------------------------------------------------
NOL Deduction Tax Rate NOL Asset
-------------------------------------------------------------------------
Expiration of net operating losses
2009 $13,999,000 34.0% $ 4,760,000
2010 14,080,000 34.0% 4,787,000
2011 and thereafter 13,597,000 34.0% 4,673,000
-------------------------------------------------------------------------
TOTAL $41,676,000 $14,170,000
=========================================================================
The Company's effective tax rate was 0% in fiscals 1999 and 1998, and 16.7%
in fiscal 1997 as a result of the establishment of the valuation allowance.
The Company's effective tax rate will be approximately 0% until the net
operating losses expire or until the Company believes the valuation
allowance is no longer required. Income taxes for the years ended September
30, 1999, 1998 and 1997, differ from the amount computed at the federal
income tax statutory rate as a result of the following:
=====================================================================
1999 % 1998 % 1997 %
---------------------------------------------------------------------
Expected provision (credit) for
Income taxes $ 3,890,000 34.0% $(518,000) (34.0)% $(20,591,000) (34.0)%
Adjustment:
Nondeductible expenses 29,000 0.3% 16,000 1.1% 59,000 0.1%
Tax benefit (provision) limitation due to the
valuation allowance (3,919,000) (34.3)% 502,000 32.9% 10,431,000 17.2%
---------------------------------------------------------------------
Credit for income taxes $ $ $(10,101,000) (16.7)%
=====================================================================
The components of net deferred taxes at September 30, 1999, 1998 and 1997
consisted of the following:
1999 1998 1997
------------------------------------------------
Deferred tax assets:
Net operating losses $14,170,000 $ 19,272,000 $ 16,278,000
Alternative minimum tax credits 1,187,000 976,000 1,233,000
Employee separation and management reorganization costs
534,000 795,000 1,172,000
Inventory capitalization 375,000 500,000 436,000
Accruals 447,000 490,000 408,000
Other 978,000 461,000 250,000
------------------------------------------------
Total deferred tax assets $17,691,000 $ 22,494,000 $ 19,777,000
------------------------------------------------
Deferred tax liabilities:
Property $(3,993,000) $ (5,416,000) $ (4,350,000)
Accrued income and expenses (332,000) (661,000) (653,000)
State taxes (600,000) (600,000) (600,000)
Other taxes payable (98,000) (1,476,000) (1,251,000)
Amortization (838,000) (1,315,000) (1,020,000)
Other (2,372,000) (2,093,000) (1,472,000)
------------------------------------------------
Total deferred tax liabilities (8,233,000) (11,561,000) (9,346,000)
------------------------------------------------
Preliminary net deferred tax asset 9,458,000 10,933,000 10,431,000
Valuation allowance for deferred tax asset (9,458,000) (10,933,000) (10,431,000)
------------------------------------------------
Net deferred taxes $ $ $
================================================
50
9. 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:
---------------------------------------------------------------
1999 1998
---------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation, beginning of year $13,495,000 $11,275,000
Service cost 994,000 687,000
Interest cost 992,000 863,000
Actuarial (gains)/losses (862,000) 1,320,000
Benefits paid (697,000) (650,000)
---------------------------------------------------------------
Benefit obligation, end of year $13,922,000 $13,495,000
---------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets, beginning of year $10,177,000 $ 9,937,000
Actual return on plan assets 1,223,000 582,000
Employer contribution 750,000 308,000
Benefits paid (697,000) (650,000)
---------------------------------------------------------------
Fair value of plan assets, end of year $11,453,000 $10,177,000
---------------------------------------------------------------
Reconciliation of Funded Status:
Funded status $(2,469,000) $(3,318,000)
Unrecognized net actuarial (gains)/losses (118,000) 1,236,000
Unrecognized transition obligation 458,000 611,000
Unrecognized prior service costs 387,000 423,000
---------------------------------------------------------------
Accrued benefit liability recognized $(1,742,000) $(1,048,000)
===============================================================
=========================================
1999 1998 1997
-----------------------------------------
Net Periodic Pension Cost:
Service cost $ 994,000 $ 687,000 $ 687,000
Interest cost 992,000 863,000 772,000
Expected return on assets (819,000) (783,000) (704,000)
Net total of other components 277,000 189,000 231,000
-----------------------------------------
Net periodic pension cost $1,444,000 $ 956,000 $ 986,000
-----------------------------------------
Actuarial Assumptions:
Discount rate 7.75% 6.75% 7.75%
Rate of compensation increase 5.00% 5.00% 5.00%
Expected return on plan assets 8.00% 8.00% 8.00%
=========================================
51
In connection with the Company's 1997 reorganization discussed in Note 15,
an accrued benefit liability of approximately $1.4 million was recognized
related to the Company's Supplemental Executive Retirement Plan ("SERP"). At
that time, the former Chief Executive Officer was the sole participant in
the SERP. Effective January 1, 1999, the Company amended and restated the
SERP and added the Company's Chief Executive Officer and Chief Financial
Officer as participants. Benefits paid under the plan were approximately
$0.1 million in fiscal 1999 and 1998, respectively. Net periodic pension
cost was approximately $0.3 million and $0.1 million during the years ended
September 30, 1999 and 1998, respectively. At September 30, 1999, the
accrued pension liability recognized was approximately $1.6 million. During
fiscal 2000, the Company expects to establish and fund a trust for the SERP.
10. 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 spent approximately
$1.0 million in both fiscal 1999 and fiscal 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, 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. The lawsuits are currently in
a discovery phase.
The Company is a party to an agreement with Utah Power and Light Company
("UPL") for its electrical requirements. The agreement provides for the
supply of power for a minimum of a ten-year period, which began in 1988, and
obligates the Company to purchase minimum amounts of power, while assuring
the Company competitive pricing for its electricity needs for the duration
of the agreement. Under the terms of the agreement, the Company's minimum
monthly charge for firm and interruptible demand is approximately $22,000.
The agreement has a three year notice of termination provision and, on April
7, 1999, UPL provided written notice of termination effective April 7, 2002.
The Company is in the process of negotiating for its expected power
requirements beyond April 7, 2002.
See Note 14 for a discussion of certain litigation involving Halotron.
The Company and its subsidiaries 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 5, 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
52
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, 1999, 1998 and 1997. Future minimum rental payments
under this lease for the years ending September 30, are as follows:
2000 $ 550,000
2001 275,000
----------------------
Total $ 825,000
======================
11. 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 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.
53
Option and warrant transactions are summarized as follows:
---------------------------------------------------
Shares Under Options and
Warrants Option Price
---------------------------------------------------
October 1, 1996 3,295,050 $ 3.88 - $ 21.50
Granted 587,000 6.38 - 7.13
Exercised, expired or canceled (75,050) 3.88 - 12.63
---------------------------------------------------
September 30, 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
---------------------------------------------------
In February 1992, the Company issued $40,000,000 in Azide Notes with
Warrants. See Note 6 for a description of the Warrants. Shares under options
and warrants at September 30, 1999 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, 1999:
- ---------------------------------------------------------------------------------------------------------------------------
Options and Warrants Outstanding Options Exercisable
---------------------------------------------------------------------------------------------
Average Remaining
Range of Number Contractual Weighted Average Weighted Average
Exercise Price Outstanding Life (Years) Exercise Price Number Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
$ 4.88 40,000 .50 $ 4.88 40,000 $ 4.88
6.38 - 8.00 991,000 3.20 7.16 841,500 7.07
14.00 2,857,000 4.25 14.00 2,857,000 14.00
-------------------------------------------------------------------------------------------------
3,888,000 3.90 $12.94 3,738,500 $13.07
=================================================================================================
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 costs for the stock
option grants been determined based on the fair value at the date of grant
for awards consistent with the provision of SAFS No. 123, the Company's
diluted net income (loss) per common share would have changed to the pro
forma amounts indicated below for the years ended September 30:
--------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------
Net income (loss) - as reported $11,439,000 $(2,011,000) $(48,685,000)
Net income (loss) - pro forma 10,941,000 (2,680,000) (49,791,000)
Diluted net income (loss) per share - as reported $ 1.39 $ (.24) $ (6.01)
Diluted net income (loss) per share - pro forma 1.33 (.32) (6.14)
--------------------------------------------------------------
The fair value of each option granted 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, 5.5% in 1998 and 6.1% in 1997 and (iv) the
expected average life of 3.3 years. The weighted average fair values of the
options granted were $3.26, $2.71 and $2.97 in the fiscal years 1999, 1998
and 1997, respectively. Because the SFAS No. 123 method of
54
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.
12. 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 75%, 70% and 60% of
specialty chemical segment sales during the fiscal years ended September 30,
1999, 1998 and 1997, 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 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
A Perchlorates $25,814,000 $20,421,000 $15,661,000
B Perchlorates 10,197,000 8,633,000 4,614,000
C Sodium Azide 12,406,000 9,884,000 11,715,000
During fiscal 1997, the Company recognized an impairment charge of
approximately $52.6 million associated with the sodium azide operations of
the specialty chemicals segment. (See Note 13). 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 7).
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 10).
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, 1999, the Company's real estate operating segment had
approximately 80 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 5).
Additional information about the Company's operations in different segments
for each of the last three fiscal years ended September 30, is provided
below.
55
-----------------------------------------------
1999 1998 1997
-----------------------------------------------
Revenues:
Specialty chemicals $ 64,497,000 $ 47,718,000 $ 37,976,000
Environmental protection 2,121,000 2,153,000 2,429,000
Real estate 6,216,000 2,468,000 3,645,000
-----------------------------------------------
Total revenues $ 72,834,000 $ 52,339,000 $ 44,050,000
===============================================
Gross profit (loss):
Specialty chemicals $ 23,526,000 $ 14,273,000 $ 5,200,000
Environmental protection (247,000) 733,000 432,000
Real estate 4,096,000 1,559,000 2,016,000
-----------------------------------------------
Total segment gross profit $ 27,375,000 $ 16,565,000 $ 7,648,000
===============================================
Operating income (loss):
Specialty chemicals $ 14,847,000 $ 6,422,000 $(55,227,000)
Environmental protection (888,000) (2,000) (659,000)
Real estate 3,485,000 1,082,000 1,624,000
-----------------------------------------------
Total segment operating income (loss) 17,444,000 7,502,000 (54,262,000)
General corporate (468,000) (201,000) (3,838,000)
Equity in earnings of real estate venture 300,000 200,000
Net interest (5,363,000) (4,440,000) (886,000)
-----------------------------------------------
Income (loss) before income taxes and extraordinary losses $ 11,613,000 $ 3,161,000 $(58,786,000)
===============================================
Depreciation and amortization:
Specialty chemicals $ 6,905,000 $ 4,718,000 $ 6,749,000
All other segments and corporate 291,000 604,000 936,000
-----------------------------------------------
Total depreciation and amortization $ 7,196,000 $ 5,322,000 $ 7,685,000
===============================================
Capital Expenditures:
Specialty chemicals $ 1,820,000 $ 2,284,000 $ 1,524,000
All other segments and corporate 280,000 482,000 33,000
-----------------------------------------------
Total capital expenditures $ 2,100,000 $ 2,766,000 $ 1,557,000
===============================================
Assets:
Specialty chemicals $ 67,750,000 $ 76,265,000 $ 32,166,000
Environmental protection 1,954,000 1,345,000 1,667,000
Real estate 18,347,000 23,881,000 29,215,000
Corporate 44,831,000 29,268,000 27,033,000
-----------------------------------------------
Total assets $132,882,000 $130,759,000 $ 90,081,000
===============================================
The Company's operations are located in the United States. Export sales,
consisting almost entirely of environmental protection equipment sales to
the Far and Middle East, have represented only approximately 2% to 3% of the
Company's revenues during each of the last three fiscal years.
13. 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 automotive airbag safety 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.
56
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 airbags. Deliveries under
the contract commenced in July 1997. The agreement has been extended an
additional six months through December 31, 2000.
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 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.
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.
The Company incurred significant operating losses in its sodium azide
operation in the fiscal year 1997 and prior fiscal years. Such operating
history was partially expected by the Company as a result of the generally
lengthy process of qualification for use of new material in automotive
safety equipment. Sodium azide performance improved in the fourth quarter of
fiscal 1997, principally as a result of additional sodium azide deliveries
under the Autoliv agreement referred to above, and the operations were cash
flow positive during the year ended September 30, 1997. Capacity utilization
rates increased from approximately 45% in the third quarter of fiscal 1997
to approximately 55% in the fourth quarter of 1997. However, even though
performance improved, management's view of the economics of the sodium azide
market changed significantly during the fourth quarter of fiscal 1997.
During late August,
57
September, October and November of 1997 the following events or developments
occurred that changed the Company's view of the economics of the sodium
azide market:
. The Company was unsuccessful in its attempts to sell sodium azide to
major users other than Autoliv. With the procurement cycle for the
automotive model year beginning in July or August, the Company previously
believed it would be successful in achieving significant sales to other
major users.
. One major inflator manufacturer announced the acquisition of non-azide
based inflator technology and that they intended to be in the market with
this new technology by model year 1999. This announcement, coupled with
the fact that other inflator manufacturers appear to be pursuing non-
azide based inflator technology more aggressively than before, caused a
reduction in the Company's estimates of annual sodium azide demand
requirements and, possibly more importantly, the duration that such
requirements would exist.
. The effects of the antidumping petition appeared to have been fully
incorporated into the sodium azide market by the end of fiscal 1997. At
September 30, 1997, management believed that the antidumping related
environment would remain unchanged as a result of the continued strength
and outlook of the U.S. dollar relative to the Japanese yen (the home
country currency of the Company's major competitor).
As a result of these events and developments, the Company's view of the
economics of the sodium azide market and the Company's future participation
in such market degraded substantially by October 30, 1997 and management
concluded that the cash flows associated with sodium azide operations would
not be sufficient to recover the Company's investment in sodium azide
related fixed assets. As quoted market prices were not available, the
present value of estimated future cash flows was used to estimate the fair
value of sodium azide fixed assets. Under the requirements of SFAS No. 121,
and as a result of this valuation technique, an impairment charge of $52.6
million was recognized in the fourth quarter of fiscal 1997.
This impairment charge was recorded as a reduction of the sodium azide
building and equipment and related accumulated depreciation in the amounts
of approximately $69.5 million and $16.9 million, respectively, to reduce
the carrying value of these assets to $13.5 million, or the estimate of
their fair value.
The Company will continue to use the sodium azide assets in its operations
as long as the cash flows generated from the use of such assets are
positive. The Company estimates that cash flows will be negligible around
calendar 2005 and as such the sodium azide assets are being depreciated over
the lesser of their useful lives or through fiscal 2005.
14. HALOTRON(TM)
In August 1991, the Company entered into an agreement (the "Halotron(TM)
Agreement") granting the Company the option to acquire the exclusive
worldwide rights to manufacture and sell Halotron I (a replacement for halon
1211). Halotron(TM) products are fire suppression systems, including a
series of chemical compounds and application technologies, designed to
replace halons, chemicals presently in wide use as a fire suppression 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
58
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, rights to reclaim, store and distribute halon and rights to
utilize the productive capacity of the Inventors' Swedish manufacturing
facility. 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 provides 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 against the Inventors
to enforce, among other things, the Company's rights under the Halotron(TM)
Agreement. In August 1999, the Arbitration Panel (the "Tribunal") issued a
partial award that required the Inventors to refrain from using the trade-
name and know-how associated with Halotron(TM), to produce all documents,
information and test data relating to the Halotron(TM) products, to allow
the Company to inspect the Inventors' business location to verify compliance
with the partial award, to disclose all patent, trademark or tradename
applications related to Halotron(TM) products and transfer ownership of such
to the Company, and to provide all documents relating to the sale of
Halotron(TM) products.
The Tribunal reserved its decision on monetary damages to which the Company
may be entitled and rejected the Inventors' counterclaims except that the
Inventors may be entitled to royalties after the date of the partial award
if the Inventors fully comply with the requirements of the partial award.
Based on information available to the Company, the Inventors have not
complied with any of the requirements of the partial award. The Company is
in the process of preparing a motion to the Tribunal seeking a final award.
15. EMPLOYEE SEPARATION AND MANAGEMENT REORGANIZATION COSTS
During the fourth quarter of fiscal 1997, the Company implemented a
management reorganization plan. As a result, the former Chief Executive
Officer, Executive Vice President and two other senior executives separated
their employment with the Company and the Company vacated approximately one-
half of its leased corporate office facilities space. In addition,
activities associated with the Company's environmental protection equipment
division were relocated to the Company's Utah facilities.
The Company recognized a charge of $3.6 million to account for the costs
associated with the employee separations and vacating leased space. The
charge consisted principally of four years of salary and
59
benefits payable to the former Executive Vice President under the terms of
an employment agreement, the accrued benefit liability relating to the
former Chief Executive Officer under the terms of the Company's SERP and
severance costs payable to the two other former senior executives.
Relocation costs amounted to approximately $0.4 million and are classified
in operating expenses in the accompanying consolidated statement of
operations.
60