================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: AUGUST 31, 2003 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File Number 1-1520
Registrant’s telephone number, including area code
GENCORP INC.
(Exact name of registrant as specified in its charter)
OHIO 34-0244000
(State of Incorporation) (I.R.S. Employer Identification No.)
HIGHWAY 50 AND AEROJET ROAD
RANCHO CORDOVA, CALIFORNIA 95670
(Address of Principal Executive Offices) (Zip Code)
P.O. BOX 537012
SACRAMENTO, CALIFORNIA 95853-7012
(Mailing Address) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (916) 355-4000
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][X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [x][X] No [ ]
As of March 21,September 30, 2003, there were 43,501,03943,989,168 outstanding shares of the
Company’sCompany's Common Stock, $0.10 par value.
GenCorp Inc.
Quarterly Report on Form 10-QFor the Quarterly Period Ended February 28, 2003
Table of Contents
Item | ||||
Number | Page | |||
PART I – FINANCIAL INFORMATION | ||||
1 | Financial Statements | 1 | ||
2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | ||
3 | Quantitative and Qualitative Disclosures About Market Risk | 29 | ||
4 | Controls and Procedures | 29 | ||
PART II – OTHER INFORMATION | ||||
1 | Legal Proceedings | 30 | ||
4 | Submission of Matters to a Vote of Security Holders | 30 | ||
6 | Exhibits and Reports on Form 8-K | 31 | ||
SIGNATURES | ||||
Signatures | 32 |
Part–- FINANCIAL INFORMATION
Item
ITEM 1. Financial Statements
GenCorp Inc.
Condensed Consolidated Statements of Income(Unaudited)
Three months ended | |||||||||||
February 28, | |||||||||||
2003 | 2002 | ||||||||||
(Dollars in | millions, except per share amounts) | ||||||||||
Net Sales | $ | 271 | $ | 249 | |||||||
Costs and Expenses | |||||||||||
Cost of products sold | 228 | 210 | |||||||||
Selling, general and administrative | 18 | 14 | |||||||||
Depreciation and amortization | 18 | 16 | |||||||||
Interest expense | 5 | 3 | |||||||||
Other (income) expense, net | (3 | ) | (1 | ) | |||||||
Unusual items | — | 2 | |||||||||
Income Before Income Taxes | 5 | 5 | |||||||||
Provision for income taxes | 2 | 2 | |||||||||
Net Income | $ | 3 | $ | 3 | |||||||
Earnings Per Share of Common Stock | |||||||||||
Basic | $ | 0.07 | $ | 0.07 | |||||||
Diluted | $ | 0.07 | $ | 0.07 | |||||||
Weighted average shares of common stock outstanding | 43.0 | 42.7 | |||||||||
Weighted average shares of common stock outstanding, assuming dilution | 43.1 | 43.1 | |||||||||
Dividends Declared Per Share of Common Stock | $ | 0.03 | $ | 0.03 | |||||||
FINANCIAL STATEMENTS
GENCORP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
See Notes to Unaudited Condensed Consolidated Financial Statements.
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GenCorp Inc.Condensed Consolidated Balance Sheets
February 28, | November 30, | ||||||||
2003 | 2002 | ||||||||
(Unaudited) | |||||||||
(Dollars in millions, | |||||||||
except per share amounts) | |||||||||
Current Assets | |||||||||
Cash and cash equivalents | $ | 45 | $ | 48 | |||||
Accounts receivable | 140 | 139 | |||||||
Inventories, net | 178 | 167 | |||||||
Recoverable from the U.S. Government and other third parties for environmental remediation costs | 24 | 24 | |||||||
Deferred income taxes | 4 | — | |||||||
Prepaid and other expenses | 12 | 5 | |||||||
Total Current Assets | 403 | 383 | |||||||
Noncurrent Assets | |||||||||
Property, plant and equipment, net | 482 | 481 | |||||||
Recoverable from the U.S. Government and other third parties for environmental remediation costs | 205 | 208 | |||||||
Deferred income taxes | — | 9 | |||||||
Prepaid pension asset | 341 | 337 | |||||||
Goodwill | 132 | 126 | |||||||
Other noncurrent assets, net | 94 | 92 | |||||||
Total Noncurrent Assets | 1,254 | 1,253 | |||||||
Total Assets | $ | 1,657 | $ | 1,636 | |||||
Current Liabilities | |||||||||
Short-term borrowings and current portion of long-term debt | $ | 21 | $ | 22 | |||||
Accounts payable | 87 | 89 | |||||||
Reserves for environmental remediation | 39 | 39 | |||||||
Income taxes payable | 17 | 22 | |||||||
Current deferred income taxes | — | 1 | |||||||
Other current liabilities | 201 | 200 | |||||||
Total Current Liabilities | 365 | 373 | |||||||
Noncurrent Liabilities | |||||||||
Convertible subordinated notes | 150 | 150 | |||||||
Other long-term debt, net of current portion | 226 | 215 | |||||||
Reserves for environmental remediation | 297 | 301 | |||||||
Postretirement benefits other than pensions | 172 | 176 | |||||||
Deferred income taxes | 1 | — | |||||||
Other noncurrent liabilities | 67 | 61 | |||||||
Total Noncurrent Liabilities | 913 | 903 | |||||||
Total Liabilities | 1,278 | 1,276 | |||||||
Commitments and Contingent Liabilities Shareholders’ Equity | |||||||||
Preference stock, par value of $1.00 per share; 15 million shares authorized; none issued or outstanding | – | – | |||||||
Common stock, par value of $0.10 per share; 150 million shares authorized; 43.7 million shares issued, 43.0 million outstanding as of February 28, 2003 (43.5 million shares issued, 43.0 million shares outstanding as of November 30, 2002) | 4 | 4 | |||||||
Other capital | 13 | 13 | |||||||
Retained earnings | 358 | 356 | |||||||
Accumulated other comprehensive income (loss), net of income taxes | 4 | (13 | ) | ||||||
Total Shareholders’ Equity | 379 | 360 | |||||||
Total Liabilities and Shareholders’ Equity | $ | 1,657 | $ | 1,636 | |||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
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GenCorp Inc.Condensed Consolidated Statements of Cash Flows(Unaudited)
Three months ended | |||||||||||
February 28, | |||||||||||
2003 | 2002 | ||||||||||
(Dollars in millions) | |||||||||||
Operating Activities | |||||||||||
Net income | $ | 3 | $ | 3 | |||||||
Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
Net loss related to reacquisition of minority ownership interest in subsidiary | – | 2 | |||||||||
Depreciation and amortization and gains on disposition of assets | 18 | 16 | |||||||||
Deferred income taxes | 8 | (4 | ) | ||||||||
Changes in assets and liabilities, net of effects of acquisitions of businesses: | |||||||||||
Current assets | (11 | ) | 26 | ||||||||
Noncurrent assets | (1 | ) | 1 | ||||||||
Current liabilities | (24 | ) | (24 | ) | |||||||
Noncurrent liabilities | (6 | ) | (23 | ) | |||||||
Net Cash Used in Operating Activities | (13 | ) | (3 | ) | |||||||
Investing Activities | |||||||||||
Capital expenditures | (9 | ) | (6 | ) | |||||||
Proceeds from asset dispositions | 7 | – | |||||||||
Acquisition of businesses, net of cash acquired | – | (8 | ) | ||||||||
Net Cash Used in Investing Activities | (2 | ) | (14 | ) | |||||||
Financing Activities | |||||||||||
Borrowings on revolving credit facility, net | 15 | 3 | |||||||||
Net short-term debt repayments | – | (2 | ) | ||||||||
Net proceeds from the issuance of long-term debt | (5 | ) | 25 | ||||||||
Dividends paid | (1 | ) | (1 | ) | |||||||
Other equity transactions | – | 1 | |||||||||
Net Cash Provided by Financing Activities | 9 | 26 | |||||||||
Effect of exchange rate fluctuations on cash and cash equivalents | 3 | 1 | |||||||||
Net (Decrease) Increase in Cash and Cash Equivalents | (3 | ) | 10 | ||||||||
Cash and Cash Equivalents at Beginning of Period | 48 | 44 | |||||||||
Cash and Cash Equivalents at End of Period | $ | 45 | $ | 54 | |||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
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GenCorp Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Basis of Presentation and Nature of Operations
BASIS OF PRESENTATION AND NATURE OF OPERATIONS The accompanying Unaudited Condensed Consolidated Financial Statements of GenCorp Inc. (GenCorp or the Company) include the accounts of the parent company and its wholly-owned and majority-owned subsidiaries. These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all of the information and notes required by accounting principles generally accepted in the United States. These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in the GenCorp Annual Report on Form 10-K for the year ended November 30, 2002, as filed with the United States Securities and Exchange Commission (SEC).
In the opinion of management, the accompanying Unaudited Condensed
Consolidated Financial Statements reflect all adjustments consisting only of normal recurring accruals, necessary for a fair
presentation of the Company’sCompany's financial position, results of operations and cash
flows for the periods presented. During the third quarter of 2003, the Company's
GDX Automotive recorded a $3 million charge related to the correction of
accounting for certain customer pricing allowances and vendor rebates, which
individually and in the aggregate, were not material to the periods in which
they were initially recorded. All significant intercompany balances and
transactions have been eliminated in consolidation. The preparation of the
consolidated financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. In
addition, our operating results for interim periods may not be indicative of the
results of operations for a full year.
Certain reclassifications have been made to financial information for prior
periods to conform to the current period’speriod presentation.
Headquartered in Sacramento, California, the Company
GenCorp is a multinational manufacturing and engineering company operating
primarily in North America and Europe. The Company’s continuingCompany's operations are organized
into three segments: GDX Automotive, Aerospace and Defense, and Fine Chemicals.
The Company’sCompany's GDX Automotive segment is a major automotive supplier, engaged in
the development manufacture and salemanufacture of highly engineered extruded and molded rubber
and plastic sealing systems for vehicle bodies and windows for automotive original equipment manufacturers.
The Aerospace and Defense segment includes the operations of
Aerojet-General Corporation (Aerojet or AGC). Aerojet’s business primarily serves high technology markets that include and development activities related
to real property located in California. Aerojet designs, develops and
manufactures space and strategic rocket propulsion and tactical weapons. Primary customers served includeweapons under
contracts with the major prime contractors to the U.S. government, the
Department of Defense and the National Aeronautics and Space Administration. In
October 2002, Aerojet acquired the assets of the General Dynamics Space
Propulsion and Fire Suppression business for $93 million, including transaction
costs.
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Company also has significant undeveloped real estate holdingsacquisition will be funded
with the proceeds of the $150 million senior subordinated notes offering
completed in California.August 2003 (Note 7), a portion of the proceeds of which were used
to temporarily repay borrowings under the Company's revolving credit facility
pending completion of the acquisition.
The Company’s real estate activities are a component of its Aerospace and Defense segment. The Company’sCompany's Fine Chemicals segment consists of the operations of Aerojet
Fine Chemicals LLC (AFC). AFC’s sales are derived primarily from the sale of custom manufacturedAFC manufactures active pharmaceutical ingredients and
advanced/registered intermediates tofor pharmaceutical and biotechnology companies.
Information on the Company’sCompany's operations by segment is provided in Note 11.
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12.
2. Earnings Per Share of Common Stock
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
A reconciliation of the numerator and denominator used to calculate basic
and diluted earnings per share of common stock (EPS) is presented in the
following table (in(dollars in millions, except per share amounts)amounts; shares in
thousands):
Three months ended February 28, | |||||||||
2003 | 2002 | ||||||||
Numerator for Basic and Diluted EPS | |||||||||
Net income | $ | 3 | $ | 3 | |||||
Denominator for Basic EPS | |||||||||
Weighted average shares of common stock outstanding | 43.0 | 42.7 | |||||||
Denominator for Diluted EPS | |||||||||
Weighted average shares of common stock outstanding | 43.0 | 42.7 | |||||||
Employee stock options | — | .4 | |||||||
Other | .1 | — | |||||||
43.1 | 43.1 | ||||||||
Basic EPS | $ | 0.07 | $ | 0.07 | |||||
Diluted EPS | $ | 0.07 | $ | 0.07 | |||||
3. Inventories
February 28, | November 30, | |||||||||
2003 | 2002 | |||||||||
(Millions) | ||||||||||
Raw materials and supplies | $ | 31 | $ | 32 | ||||||
Work-in-process | 15 | 16 | ||||||||
Finished goods | 14 | 15 | ||||||||
Approximate replacement cost of inventories | 60 | 63 | ||||||||
LIFO reserves | (4 | ) | (4 | ) | ||||||
56 | 59 | |||||||||
Long-term contracts at average cost | 179 | 164 | ||||||||
Progress payments | (57 | ) | (56 | ) | ||||||
Inventories | $ | 178 | $ | 167 | ||||||
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STOCK BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards No. 123 (SFAS
123), Accounting for Stock-Based Compensation and Statement of Financial
Accounting Standards No. 148 (SFAS 148), Accounting for Stock-Based Compensation
- - Transition and Disclosure, the Company applies the existing accounting rules
under APB Opinion No. 25, Accounting for Stock Issued to Employees, which
provides that no compensation expense is charged for options granted at an
exercise price equal to the market value of the underlying common stock on the
date of grant. Had compensation expense for the Company's stock option plans
been determined based upon the fair value at the grant date for awards under
these plans using market-based option valuation models, net income (loss) and
the effect on net income (loss) per share would have been as follows (dollars in
millions, except per share amounts):
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the input assumptions can materially affect the
fair value estimate, it is the Company's opinion that the existing models do not
necessarily provide a reliable single measure of the fair value of the employee
stock options.
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Property, Plant and Equipment
February 28, | November 30, | ||||||||
2003 | 2002 | ||||||||
(Millions) | |||||||||
Land | $ | 50 | $ | 50 | |||||
Buildings and improvements | 298 | 299 | |||||||
Machinery and equipment | 732 | 708 | |||||||
Construction-in-progress | 29 | 23 | |||||||
1,109 | 1,080 | ||||||||
Less: accumulated depreciation | (627 | ) | (599 | ) | |||||
Total property, plant and equipment, net | $ | 482 | $ | 481 | |||||
INVENTORIES
5. Other Current Liabilities
February 28, | November 30, | ||||||||
2003 | 2002 | ||||||||
(Millions) | |||||||||
Accrued liabilities for goods and services | $ | 89 | $ | 95 | |||||
Advanced payments on contracts | 10 | 6 | |||||||
Accrued compensation and employee benefits | 34 | 37 | |||||||
Other postretirement benefits | 29 | 29 | |||||||
Other | 39 | 33 | |||||||
Total other current liabilities | $ | 201 | $ | 200 | |||||
PROPERTY, PLANT AND EQUIPMENT
6. Long-term Debt
February 28, | November 30, | ||||||||
2003 | 2002 | ||||||||
(Millions) | |||||||||
Revolving credit facility | $ | 60 | $ | 45 | |||||
Term Loan A | 66 | 71 | |||||||
Term Loan B | 115 | 115 | |||||||
Convertible subordinated notes | 150 | 150 | |||||||
Other | 6 | 6 | |||||||
Total debt | 397 | 387 | |||||||
Less: amounts due within one year | (21 | ) | (22 | ) | |||||
Long term debt | $ | 376 | $ | 365 | |||||
OTHER CURRENT LIABILITIES
On August 11, 2003, the Company sold $150 million aggregate principal
amount of senior subordinated notes due August 2013 in a private placement
pursuant to Rule 144A under the Securities Act of 1933. Interest on the senior
subordinated notes accrues at a rate of 9-1/2% per annum and is payable on
August 15 and February 15, beginning February 15, 2004. All or any portion of
the senior subordinated notes may be redeemed by the Company on or after August
15, 2008 at redemption prices beginning at 104.75% and reducing to 100.00% by
2011. The senior subordinated notes are unsecured and subordinated to all of the
Company's existing and future senior indebtedness, including borrowings under
its senior credit facility. The terms of the senior subordinated notes include
certain restrictive covenants, that, among other things, limit the incurrence of
additional indebtedness, certain restricted payments, asset sales, stock
dividends, investments and mergers and consolidations. The senior subordinated
notes are fully and unconditionally guaranteed on a senior subordinated
unsecured basis by the Company's material domestic subsidiaries.
In connection with the issuance of the senior subordinated notes and the
ARC Propulsion acquisition, the Company obtained the consent of lenders to an
amendment and waiver under its senior credit facility. The amendment and waiver,
among other things, permitted the issuance of the senior subordinated notes and,
subject to certain limitations, provides for use of the proceeds to finance the
purchase price of the ARC acquisition. The amendment and waiver also amended
certain of the financial and other covenants contained in the senior credit
facility to account for the ARC Propulsion acquisition and the additional
indebtedness represented by the senior subordinated notes issued in connection
with this acquisition. After the issuance of the senior subordinated notes, the
Company obtained the consent of the lenders under its senior credit
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As required under the Restated Credit Facility, the
The Company entered into interest rate swap agreements effective January
10, 2003 on $100 million of its variable rate term loan debt for a two yeartwo-year
period. Under the swap agreements, the Company makes payments based on a fixed
rate of 6.02 percent and receives a LIBORLondon InterBank Offered Rate (LIBOR) based
variable rate (5.13(4.86 percent as of February 28,August 31, 2003). The interest rate swaps are
accounted for as cash flow hedges pursuant to SFASStatement of Financial Accounting
Standards No. 133 (SFAS 133), Accounting for
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Derivative Instruments and Hedging
Activities,(SFAS 133), and there was no material ineffectiveness recognized in earnings. As
of February 28,August 31, 2003, the fair value of these swaps was a liability of $1 million
included in other noncurrent liabilities with an offsetting amount recorded as
an unrealized loss in other comprehensive income.
7. Commitments and Contingencies
a. Legal proceedings
8. COMMITMENTS AND CONTINGENCIES A. LEGAL PROCEEDINGS Groundwater Cases
Along with other industrial Potentially Responsible Parties (PRPs) and area
water purveyors, Aerojet was sued in 17 cases by approximately 1,500 private
plaintiffs residing in the vicinity of the defendants’ manufacturingdefendants' facilities in Sacramento,
California, and the Company’sCompany's former facility in Azusa, California. The Azusa cases have been coordinated for trial in Los Angeles, California. The Sacramento cases have been stayed through July 2003. The
individual plaintiffs generally seek damages for illness, death, and economic
injury allegedly caused by their ingestion of groundwater contaminated or served
by defendants, without specifying actual damages. Aerojet and other industrial
defendants involved in the
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Thethe Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA) and the
Resource Conservation and Recovery Act (RCRA).
The Azusa cases, coordinated for trial in Los Angeles, California, are
proceeding under two master complaints and pretrial discovery is in process.
Because California Public Utilities Commission (PUC) regulated water purveyors
cannot be held liable if the water consumed met state and federal quality
standards, the Company currently expects the trial court in Los Angeles will hold an
evidentiary hearing to determine whether the PUC regulated water entity
defendants served water in violation of state or federal drinking water
standards. If it is determined that the regulated water purveyors served water
not in violation of drinking water standards, the water purveyor defendants will
be dismissed from the litigation, potentially leaving the Company and other
defendants as remaining parties to assert their defenses.
The long-standing stay in the Sacramento cases has been lifted and the
parties are stayed at least until July 2003.addressing preliminary pleading issues. Discovery is likely to
commence in earnest in 2004.
Aerojet has notified its insurers, retained outside counsel and intends to
conduct a vigorous defense against all claims.
McDonnell Douglas Environmental Remediation Cost Recovery Dispute
Aerojet and McDonnell Douglas Corporation (MDC), an operating unit of The
Boeing Corporation, and AerojetCompany, are engaged in a dispute in federal courtthe U.S. District Court for the
Eastern District of California regarding the costs associated with the environmental contamination of the
Inactive Rancho Cordova Test Site (IRCTS). In 1961, IRCTS was transferred by
Aerojet to a predecessor of MDC and was subsequently reacquired by Aerojet in
1984. The dispute involves the appropriate shares of responsibility for environmental contamination of IRCTS by MDC and Aerojet. TheAn initial federal lawsuit filed by Aerojet against MDC in 1994 was
settled under ain 1999 (1999 Settlement Agreement). Pursuant to the 1999 Settlement
Agreement, in which Aerojet agreed to participate with MDC in the interim funding of
certain remediation efforts at IRCTS, subject to a final cost allocation.
In 2001, there was a disagreement between Aerojet and MDC regarding the
interpretation of the 1999 Settlement Agreement. In December 2001, MDC filed a
second lawsuit in Federalfederal court alleging that Aerojet’s interpretation of a subsequent cost sharing agreement between the parties was incorrect and constituted a breach ofAerojet breached the 1999
Settlement Agreement.Agreement, McDonnell Douglas Corporation v. Aerojet-General
Corporation,, Case No. CIV-01-2245, U.S. District Court, E.D. CA. Under that
lawsuit, MDC sought to have Aerojet bear a fifty50 percent interim share (rather than
the ten10 percent interim share accepted by Aerojet) of the costs of investigating
and remediating offsite perchlorate groundwater contamination, near Mather Field, allegedly
associated with activities on IRCTS.
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During
In November 2002, Aerojet and MDC entered into discussions to settle the
second lawsuit by renegotiating the temporary allocation of certain costs
associated with the environmental contamination at IRCTS. As a consequence of those discussions, Aerojet and MDC haveThe parties reached an
agreement in principle allocatingto settle the disputedallocation dispute relating to costs
associated with the environmental contamination at IRCTS. While the parties have reached an agreement in principle,However, a formal and
complete written agreement resolving the dispute has not yet been completed and therefore has not yet been entered into by MDC and Aerojet.
completed.
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Aerojet and several other defendants have been sued by private homeowners
residing in the vicinity of Chino and Chino Hills, California. The cases have
been consolidated and are pending in the U.S. District Court for the Central
District of California —-- Baier, et al. v. Aerojet-General Corporation, et al.,
Case No. EDCV 00 618VAP (RNBx) CA;Kerr, et al. v. Aerojet-General Corporation,
Case No. EDCV 01-19VAP (SGLx),and Taylor, et al. v. Aerojet-General
Corporation, et al.,Case No. EDCV 01-106 VAP (RNBx). Plaintiffs generally
allege that defendants released hazardous chemicals into the air at their
manufacturing facilities, which allegedly caused illness, death, and economic
injury. Various motions have reduced the number of plaintiffs from 80 to 48.
Discovery is proceeding in the cases. Aerojet has notified its insurers and is
vigorously defending the actions.
Water Entity Cases
In October 1999, Aerojet was sued by American States Water Company (ASWC),
a local water purveyor, and certain of its affiliates seekingfor damages, including unspecified past costs, and
replacement water for contaminated drinking water wells near Aerojet’sAerojet's
Sacramento, California, manufacturing facility.facility and other future damages.
American States Water Company, et al. v. Aerojet-General Corporation, et al.,
Case No. 99AS05949, Sacramento County Superior Court. The plaintiffs also sued
the State of California for inverse condemnation. While both cases were
consolidated in 2001, American States Water Company and the State of California
recently entered into two separate settlement agreements to resolve the dispute.
The trial court approved the settlementsettlements with the California State Water
Resources Control Board; however, an additional hearing is expected prior to the court rendering its decision on whether to approve the settlement withBoard and the Central Valley Regional Water Quality Control
Board. DiscoveryBoard (Central Valley RWQCB). Aerojet unsuccessfully opposed the settlement and
filed petitions to the Third District Court of Appeals and California Supreme
Court seeking to overturn the settlement, claiming the settlement was not in
good faith. The appellate courts denied review of the settlement. The trial date
scheduled for October 2003 has been ongoingdeferred to November 2003 to permit recently
initiated settlement discussions between Aerojet and trialASWC to proceed (Note 15).
Of significance to the case is currently scheduledAerojet's recent agreement with the Sacramento
County Water Agency (the County) in which Aerojet agreed to commencetransfer all
remediated groundwater from its Sacramento California site to the County.
Subject to various provisions of the County agreement including approval under
California Environmental Quality Act (CEQA), the County will assume
responsibility for providing replacement water to ASWC and other impacted water
purveyors up to the amount of remediated water Aerojet transferred to the
County. Aerojet has also agreed to pay the County approximately $13 million over
several years toward the cost of constructing a replacement water supply
project. If the amount of Aerojet's transferred water is in Septemberexcess of 2003.
the
replacement water provided to the impacted water purveyors, the County has
committed to make water available for the development of Aerojet's land in an
amount equal to the excess.
Separately, between April 2000 and October 2001, six local water agencies
and water purveyors sued Aerojet and other named defendants to recover damages
relating to alleged contamination of drinking water wells in the Baldwin Park
Operable Unit (BPOU) of the San Gabriel Basin Superfund site (BPOU drinking
water well lawsuits). The plaintiffs included the San Gabriel Basin Water
Quality Authority, the Upper San Gabriel Valley Municipal Water District, the
Valley County Water District (Valley), the California Domestic Water Co. and San
Gabriel Valley Water Company who were seeking, among other things, funding for a
water treatment plant at the La Puente Valley County Water District (La Puente)
well field. In January 2001, Aerojet and certain other cooperating potentially
responsible parties (PRPs) reimbursed
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-8-
contamination of their drinking water
wells. While Aerojet was served in the case filed by Valley, the case has been
inactive. The primary claim in these cases is for the recovery of past and
future CERCLA response costs for treatment plants at plaintiffs’plaintiffs' well sites.
All of the BPOU drinking water well lawsuits were settled and dismissed by
the plaintiffs without prejudice on or about September 16, 2002 in accordance
with a settlement described as the Project Agreement and more fully describeddiscussed
below under Santhe heading "San Gabriel Valley Basin, California." The settlement
of plaintiffs’plaintiffs' claims was approved by the United States Environmental Protection
Agency (EPA). The settlement agreement requires the cooperating PRPs to fund the
construction, maintenance and operation of certain water treatment facilities
and to reimburse certain costs of the various water purveyors. As a consequence,
all the past cost claims in those actions arewere settled and released. While plaintiffs’ claims against Aerojet have been dismissed, Aerojet has filed third party claims against certain of theand
other cooperating PRPs and these claims areintend to seek recovery from those PRPs who did not
participate in the process of being settled.
settlement.
In October 2002, Aerojet, along with approximately 60 other individual and
corporate defendants, was recently served with four civil suits filed in the U.S.
District Court for the Central District of California that seek recovery of
costs allegedly incurred in response to the contamination present at the South
El Monte Operable Unit (SEMOU) of the San Gabriel Valley Superfund site. The
cases are denominated as follows:The City of Monterey Park v. Aerojet-General
Corporation, et al.,(CV-02-5909 (CV-02-5909 ABC (RCx));San Gabriel Basin Water Quality
Authority v. Aerojet-General Corporation, et al.,(CV-02-4565 (CV-02-4565 ABC (RCx));San
Gabriel Valley Water Company v. Aerojet-General Corporation, et al., (CV-02-6346
ABC (RCx)) andSouthern California Water Company v. Aerojet-General Corporation,
et al.,(CV-02-6340 (CV-02-6340 ABC (RCx)). The cases have been coordinated for ease of
administration by the court. Aerojet filed its answer to the complaint filed by
the San Gabriel Valley Water Quality Authority and motions to dismiss the other
three complaints. The March 31, 2003 tentative ruling by the court indicated thatruled on Aerojet's motions to dismiss, and dismissed
several alleged causes of action in the complaints will be dismissed.such complaints. The court has not yet rendered a final decision.
Theseremaining claims are
based upon allegations of discharges from a former site in the El Monte area, as
more fully discussed below under Santhe heading "San Gabriel Valley Basin,
California - South El Monte Operable Unit." Aerojet has notified its insurers and is vigorously defending the
actions as its investigations do not identify a credible connection between the
contaminants identified by the water entities in the SEMOU and those detected at
Aerojet’sAerojet's former facility located in El Monte, California, near the SEMOU (East
Flair Drive site).
Aerojet has notified its insurers of these claims. Vinyl Chloride Toxic Tort Cases
Between the early 1950’s1950's and 1985, GenCorp produced polyvinyl chloride
(PVC) resin at its former Ashtabula, Ohio facility. PVC is the most common form
of plastic currently on the market. A building block compound of PVC is vinyl
chloride (VC), now listed as a known carcinogen by several governmental
agencies. OSHA has strictly regulated workplace exposure to VC since 1974.
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1996,the mid-1990's, GenCorp has been named in 2328 toxic tort cases
involving alleged exposure to VC. Thirteen of these cases were filed during 2002. With the exception of one case brought by the
family of a former Ashtabula employee, GenCorp is alleged to be a
“supplier/manufacturer”"supplier/manufacturer" of PVC and/or a civil co-conspirator with other VC and
PVC manufacturers. Plaintiffs generally allege that GenCorp suppressed
information about the carcinogenic risk of VC to industry workers, and placed VC
or PVC into commerce without sufficient warnings. Of these 2328 cases, ten14 have
been settled or
-9-
dismissed on terms favorable to the Company, including the case
where GenCorp was the employer. During 2002,2003, one case was dismissed against
GenCorp and other alleged co-conspirators because Plaintiffthe plaintiff could not
establish any evidence of fraud or conspiracy to commit fraud, and since the
case is still pending against the VC exposure.
suppliers, no appeal has been taken.
Another case was dismissed in 2003 on statute of limitations grounds and the
appeal by the plaintiff in that case was later dismissed.
Of the remaining thirteen14 pending cases, there are four2 cases which allege VC
exposure through various aerosol consumer products. In these cases, VC is
alleged to have been used as an aerosol propellant during the 1960’s,1960's, and the
suits name numerous consumer product manufacturers, in addition to more than 30
chemical manufacturers. GenCorp used VC internally, but never supplied VC for
aerosol or any other use. The other nine12 cases involve employees at VC or PVC
facilities which had no connection to GenCorp.GenCorp, one of which is a class action
seeking a medical monitoring program for former employees at a PVC facility in
New Jersey. The complaints in each of these cases assert GenCorp’sGenCorp's involvement
in the alleged conspiracy in these cases stems from GenCorp’sGenCorp's membership in trade associations.
GenCorp is vigorously defending against all claims in these cases.
Asbestos Litigation
Over the years, both GenCorp and Aerojet have from time to time been named
as defendants in lawsuits alleging personal injury or death due to exposure to
asbestos in building materials or in manufacturing operations. The lawsuits have
been filed throughout the country, with the majority filed in Northern
California. Since 1998, more than 50 of these asbestos lawsuits have been
resolved, with the majority being dismissed and a substantial minoritymany being settled for less than
$30 thousand each. Approximately 3035 asbestos cases are currently pending.
In November 2002, a jury verdict against Aerojet in the amount of
approximately $5 million in the Circuit Court of the City of St. Louis,
Missouri, led to a judgment of approximately $2 million after setoff. The case isGoede et
al. v. ChestertunChesterton Inc.,Case No. 012-9428, Circuit Court, City of St. Louis, MO.
The $3 million setoff was based on plaintiffs’plaintiffs' settlements with other
defendants. Post-trial motions filed by Aerojet and the plaintiffs recentlywere denied
by the trial court. Aerojet has filed post-trial motions. Plaintiffs are seekinga notice of appeal and will be asking the
appellate court to vacate the judgment and order a new trial to recover punitive damages; andbased on, among
other things, the trial court's actions during trial that denied Aerojet is seeking a new trial because the
Company was not allowedopportunity to introduce all its evidencetestimony from certain witnesses against plaintiffs’ claims. On March 31, 2003and certain evidence
at trial. Aerojet filed its opening brief with the trialappellate court issued its memorandum and order denying plaintiffs’ and the Company’s motions. The Company intends to file an appeal to vacate the judgment.
on September
2, 2003.
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In October 2000, a group of hourly retirees filed a class actionfederal lawsuit disputing retiree medical benefits and namingagainst
GenCorp and OMNOVA Solutions Inc. (OMNOVA) as defendants,disputing certain retiree medical
benefits. Wotus, et al. v. GenCorp Inc., et al.,U.S.D.C., N.D. OH (Cleveland,
OH), Case No. 5:00-CV-2604. The retirees soughtseek rescission of the then current
Hourly Retiree Medical Plan established in springthe Spring of 1994, and the
reinstatement of the prior plan terms. The crux of the dispute relates to union
and GenCorp negotiated modifications into retiree benefits that, in exchange for
other consideration, now require retirees to make benefit contributions as a
result of caps on Company paidCompany-paid retiree medical costcosts implemented in fallthe Fall of
1993. A retiree’sretiree's failure to pay contributions results in a termination of
benefits.
The plaintiffs are seeking class action certification by motion and the
briefs have been filed before the trial court. The trial court has not yet ruled
on the plaintiffs' motion for class action certification; however, a decision by
the court is expected before the end of the second quarter 2004. The putative
class representatives currently consist of four hourly retirees from the
Jeannette, Pennsylvania facility of OMNOVA, the company spun-off from GenCorp on
October 1, 1999, two hourly retirees from OMNOVA’sOMNOVA's former Newcomerstown, Ohio
facility, and three hourly retirees from GenCorp’sGenCorp's former tire plants in Akron,
Ohio, Mayfield, Kentucky, and Waco, Texas. The
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putative class encompasses all eligible hourly retirees formerly represented by the unions URW or USWA. The unions, however, are not party to the suit and have agreed not to support such litigation pursuant to an agreement negotiated with GenCorp. GenCorp prevailed in a similar class action filed in 1995 involving salaried employees and arising at its Wabash, Indiana location.Divine, et al. v. GenCorp Inc.,U.S.D.C., N.D. IN (South Bend, IN), Case No. 96-CV-0394-AS.
Plaintiff retirees and the Company defendants filed cross-motions for summary
judgment which were denied on December 20, 2002. In February 2003, the court
approved a case management plan and discovery will proceed throughout most of
2003.
GenCorp has given notice to its insurance carriers and intends to
vigorously defend against the retirees’retirees' claims. OMNOVA has requested defense and
indemnification from GenCorp should plaintiffs prevail inregarding this matter. GenCorp has denied this
request and OMNOVA’s claim will likely be decided through binding arbitration pursuant tothe party-defendants are now engaged in alternative dispute
resolution (ADR) proceedings under their agreements entered into during the
GenCorp-OMNOVA spin-off in 1999.
GenCorp initiated the arbitration and the parties are in the process of meeting with the selected arbitrator to determining briefing and hearing procedures. Under the ADR process, it is expected that the dispute will be resolved by a ruling of the arbitrator before the end of the second quarter 2004. Olin Corporation v. GenCorp Inc.
In August 1991, Olin Corporation (Olin) advised GenCorp that under a 1962
manufacturing agreement with Olin (1962 Agreement), it believed GenCorp to be
jointly and severally liable for certain Superfund remediation costs, estimated
by Olin to be $70 million. The costs are associated with a former Olin
manufacturing facility and its waste disposal sites in Ashtabula County, Ohio.
In 1993, GenCorp sought a declaratory judgment in federal court (Ohio Court)
that the Company is not responsible for such environmental remediation costs.
Olin counterclaimed seeking a judgment that GenCorp is jointly and severally
liable for a share of remediation costs. Olin v. GenCorp hasInc., Case No.
5:93CV2269, U.S. District Court, N.D. Ohio.
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Olin’sOlin's counterclaim that under the
terms of the 1962 Agreement Olin had a contractual obligation to insure against
environmental and other risks and that its failure to protect such insurance
payments under these policies precluded Olin from recovery against GenCorp for
these remediation costs. Further, GenCorp argued that any failure on Olin’sOlin's part
to comply with the terms of such insurance policies would result in GenCorp
being entitled to breach of contract remedies resulting in a reduction in any
CERCLA liability amounts determined to be owed to Olin that would have otherwise
been recovered from Olin’sOlin's insurance carriers (Reduction Claims).
In 1999, the Ohio Court rendered an interim decision on CERCLA liability.
The Ohio Court found GenCorp 30 percent liable and Olin 70 percent liable for
remediation costs at “Big"Big D Campground”Campground" landfill (Big D site). The Ohio Court
also found GenCorp 40 percent liable and Olin 60 percent liable for remediation
costs, including costs for off-site disposal (other than the Big D)D site) and
costs attributable to contamination at the Olin TDI facility, a plant built and
operated by Olin on GenCorp property near the Big D site. On May 9, 2002, the
Ohio Court issued a memorandum opinion stating that it intended to enter a
judgment in Olin’sOlin's favor in the amount of approximately $19 million, plus
prejudgment interest against GenCorp, for CERCLA contribution liability. In that
same opinion, the Ohio Court deferred concluding whether and to what extent
GenCorp would be entitled to receive a credit against its CERCLA contribution
liability based on the Company’sCompany's Reduction Claims against Olin, pending the
outcome of Olin’sOlin's litigation against its insurance carriers for coverage under
Olin’sOlin's insurance policies.
The Company has appealed its CERCLA contribution liability. The Company
believes that it is not directly or indirectly liable as an arranger for Olin’sOlin's
waste disposal at the Big D site and that it
-11-
did not either actively control
Olin’sOlin's waste disposal choices or operate the plant on a day-to-day basis.
Outside counsel have advised the Company that many aspects of the Company’sCompany's
appeal of its CERCLA liability have considerable merit. Management believes it
will prevail on appeal.
Irrespective of the outcome of its appeal, the Company believes it has
contractual protection against Olin’sOlin's claims by virtue of Olin’sOlin's obligations to
procure and protect insurance. The Ohio Court had previously resolved that
pursuant to the terms of the 1962 Agreement, it was Olin’sOlin's contractual
obligation to obtain insurance coverage, and the evidence adduced during the
litigation showed that Olin had in place insurance coverage during the period in
question in the amount of $40 million to $50 million.
On September 5, 2002, Olin advised the Ohio Court and GenCorp that on August 27, 2002, the U.S. District Court for the Southern District of New York (NY Court) had ruled Olin failed to protect its right to payments under its insurance policies for the Big D site. The NY Court based its ruling on the fact that Olin had failed to timely notify its insurance carriers of its claims. Olin also informed the Ohio Court it would appeal the NY Court decision and pressed the Ohio Court to enter judgment.
If the NY Court decision is affirmed on Olin’sOlin's appeal, the Ohio Court could
rule inGenCorp v. Olin Corporationin one of two ways: (a) it could find that
Olin’sOlin's late notice constituted a breach of its obligation under the 1962
Agreement to protect the insurance; or (b) it could conclude that Olin’sOlin's conduct
does not fully reduce GenCorp’sGenCorp's liability. If the Ohio Court rules that Olin’sOlin's
late notice is a breach of the 1962 Agreement, the question will become a
determination of the damages suffered by GenCorp as a result of the breach.
GenCorp has
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—-- an amount in this case that is more than sufficient to
cover GenCorp’sGenCorp's entire liability.
On September 13, 2002, GenCorp filed a motion asking the Ohio Court to
reconsider its decision to enter judgment for Olin, or in the alternative, to
consider GenCorp’sGenCorp's Reduction Claims that could result in a ruling in favor of
GenCorp. The parties exchanged briefs on these issues.
The Ohio Court issued a memorandum opinion and judgment order on November
21, 2002 entering “final”"final" judgment in favor of Olin in the amount of
approximately $19 million plus prejudgment interest in the amount of
approximately $10 million. However, the Ohio Court did not decide GenCorp’sGenCorp's
Reduction Claims against Olin, but did state that two matters related to the
Company’sCompany's Reduction Claims were “pivotal”"pivotal" to the ultimate determination of this
case: (i) whether there was an insurable event upon which Olin could recover had
Olin complied with the applicable contract provisions and (ii) whether GenCorp
is entitled to receive a credit based on Olin’sOlin's failure to provide timely notice
that foreclosed insurance recovery. The Ohio Court further determined that
GenCorp’sGenCorp's Reduction Claims “are"are held in abeyance pending the resolution of
[Olin’s][Olin's] appeal in the New York insurance litigation.”" Management has been
advised by outside counsel that GenCorp’sGenCorp's recovery on its Reduction Claims could
range from a nominal amount to an amount sufficient to reduce the judgment
against GenCorp in its entirety.
Outside counsel to the Company advised that because the Ohio Court’sCourt's
opinion and judgment was based on the 1962 Agreement and because the Ohio Court
failed to resolve GenCorp’sGenCorp's Reduction Claims against Olin, it was likely that
the decision and order issued by the Ohio Court on November 21, 2002 would not
be considered a final judgment. Consequently, and in reliance upon
-12-
its outside
counsel, the Company believed that it was not likely that a final judgment
giving rise to liability had actually occurred. The Company filed its notice of
appeal, in any event, to preserve its appellate rights. Given Olin’sOlin's contractual
obligation to have obtained and complied with the terms of its insurance
policies and the NY Court’sCourt's finding that Olin failed to give proper notice of a
claim under these insurance policies, neither management nor outside counsel
could then, or at this time, estimate the possible amount of liability arising
from this case, if any.
In addition to several procedural motions pending before the Ohio Court
since early December 2002, GenCorp asked the Ohio Court to waive the standard
bond requirement and stay any attempt to execute on the Ohio Court’sCourt's judgment
pending appeal. Olin opposed the stay, but stated it would not oppose a stay if
GenCorp posted the normal supersedeas bond. On January 22, 2003, the Ohio Court
denied all pending motions and issued a Judgment Order stating the case was
“terminated”"terminated" on the Ohio Court’sCourt's docket. However, in its Memorandum Opinion and
Order of the same date, the Ohio Court stated “["[w]hether there was an insurable
event upon which Olin would have been entitled to recovery had it provided its
insurers with timely notice ... and... whether GenCorp is entitled to credit
based upon Olin’sOlin's omission which foreclosed insurance recovery for Big D, remain
unresolved.”
"
GenCorp filed its notice of appeal on December 20, 2002. In light of the
Ohio Court’sCourt's January 22, 2003 judgment and the accompanying opinion, on January
27, 2003, GenCorp filed a motion to dismiss its appeal on the grounds that the
November 21, 2002 and January 22, 2003 orders and judgments were not final. The
Company sought an appellate ruling that in effect would have directed the Ohio
Court to address GenCorp’sGenCorp's Reduction Claims before entering any final judgment.
In addition, GenCorp had motions pending which asked: (i) the appellate court to
stay
-16-
GenCorp’sGenCorp's appeal; and (ii) the Ohio
Court to accept a letter of credit in lieu of bond should a bond be required.
Olin opposed both. GenCorp’sGenCorp's motions were denied by the Sixth Circuit Court of
Appeals on February 13, 2003. GenCorp thereafter decided to postposted a bond and pursueinitiated an appeal of
the Ohio Court's partial judgment in the Sixth Circuit, rather than seek further
review of the finality issue at that time. The parties have negotiatedsubmitted their
briefs to the appeal briefing schedule. GenCorp’sCourt and have requested oral argument, which is expected to be
set, if granted, later this year. GenCorp's Reduction Claims portion of the case
is on hold pending action by the Second Circuit Court of Appeals on Olin’sOlin's
appeal of the August 27, 2002 judgment in favor of its insurance carriers as
described above.
above and the appeal of the Ohio Court rulings.
In summary, while the Ohio Court has found the Company liable to Olin for a
CERCLA contribution payment, the Company has concluded it is not currently
appropriate to accrue any additional amount related to that finding because: (a)
the Company previously accrued the entire amount of its estimated potential
liability for contamination at the Olin TDI facility and related offsite
contamination, except for disposal at the Big D site; (b) the Company believes
it will prevail on appeal on the basis that it is not derivatively or directly
liable as an arranger for disposal at the Big D site, both as a matter of fact
and as supported by other case law; and (c) irrespective of whether, upon exhausting all avenues of appeal,
there is a finding of CERCLA liability, the Company believes that: (i) if Olin
prevails in its appeal of the NY Court ruling, the Company will make no payment
to Olin; or (ii) if Olin fails in its appeal, that Olin’sOlin's breach of its
contractual obligations to provide insurance will result in a reduction in or
elimination of some or all of such liability, and for all these reasons, the
possible amount of additional liability arising from this case, if any, cannot
be established at this time.
-13-
Other Legal Matters
The Company and its affiliated companies are subject to other legal
actions, governmental investigations, and proceedings relating to a wide range
of matters in addition to those discussed above. In the opinion of the Company,
after reviewing the information whichthat is currently available with respect to such
matters and consulting with the Company’sCompany's counsel, any liability which may
ultimately be incurred with respect to these other matters is not expected to
materially affect the consolidated financial condition of the Company. The
effect of the resolution of these matters on results of operations cannot be
predicted because any such effect depends on both future results of operations
and the amount and timing of the resolution of such matters.
b. Environmental Matters
B. ENVIRONMENTAL MATTERS Sacramento, California
In 1989, a federal district court in California approved a Partial Consent
Decree (Decree) requiring Aerojet to conduct a Remedial
Investigation/Feasibility Study (RI/FS) of Aerojet’sAerojet's Sacramento, California
site. The Decree required Aerojet to prepare a RI/FS report on specific
environmental conditions present at the site and alternatives available to
remediate such conditions. Aerojet also is required to pay for certain
governmental oversight costs associated with Decree compliance. Beginning in the
mid 1990s,1990's, the State of California expanded its surveillance of perchlorate and
nitrosodimethylamine (NDMA). Under the RI/FS, traces of these chemicals were
detected using new testing protocols in public water supply wells near Aerojet’sAerojet's
Sacramento site.
-17-
Aerojet’sAerojet's efforts
to estimate these costs is contained below under the heading “Environmental"Environmental
Reserves and Estimated Recoveries.”
"
During the third quarter, Aerojet entered into an agreement with the
Sacramento County Water Agency (the County) whereby it agreed to transfer all
remediated groundwater from its Sacramento California site to the County.
Subject to various provisions of the County agreement including approval under
California Environmental Quality Act (CEQA), the County will assume
responsibility for providing replacement water to ASWC and other impacted water
purveyors up to the amount of remediated water Aerojet transferred to the
County. Aerojet has also agreed to pay to the County over several years
approximately $13 million toward the cost of constructing a replacement water
supply project. If the amount of Aerojet's transferred water is in excess of the
replacement water provided to the impacted water purveyors, the County has
committed to make water available for the development of Aerojet's land in an
amount equal to the excess. The liability for these payments is included in the
Company's reserves for environmental remediation.
On April 15, 2002, the United States District Court approved and entered a
Stipulation and Order Modifying the Partial Consent Decree (Stipulation and
Order). Among other things, the Stipulation and Order removed approximately
2,600 acres of Aerojet’sAerojet's property from the requirements of the Decree and from
the Superfund site designation, enabling the Company to put the 2,600 acres to
more productive use. The stipulated order alsoStipulation and Order (i) requires GenCorp to provide a
guarantee of up to $75 million (in addition to a prior $20 million guarantee), to
assure that remediation activities at the Sacramento site are fully funded; (ii)
requires Aerojet to provide a short-term and long-term plan to replace lost
water supplies; and (iii) divides the Superfund site into “Operable Units”"Operable Units" to
allow Aerojet
-14-
and the regulatory agencies to more efficiently address and restore priority areas. For the first three years of the Stipulation and Order, the new guarantee is partially offset by financial assurances provided in conjunction with the Baldwin Park Operable Unit (BPOU) agreement (discussed below). Obligations under the $75 million aggregate guarantee are limited to $10 million in any fiscal year. Both the $75 million aggregate guarantee and the $10 million annual limitation are subject to adjustment annually for inflation.
Aerojet leased a portion of its Sacramento facility to Douglas Aircraft
for rocket assembly and testing from 1957 to 1961 and sold approximately 3,800
acres, including the formerly leased portion, to Douglas Aircraft in 1961.
Aerojet reacquired the property known as the “IRCTS”IRCTS from the MDC, the successor to
Douglas Aircraft and now an operating unit of theThe Boeing Corporation,Company, in 1984. Both
MDC and Aerojet were ordered to investigate and remediate environmental
-18-
orders(orders. Aerojet-General Corporation
v. McDonnell Douglas Corporation, et al.,Case No. CVS 94-1862 WBS JFM).JFM. In 1999,
Aerojet and MDC entered into a settlement agreement to allocate responsibility
for a portion of the costs incurred under the orders and to negotiate
responsibility for the remaining costs. On December 7, 2001, MDC subsequently brought suit
against Aerojet in the U.S. District Court for the Eastern District of
California alleging breach of the settlement agreement and seeking specific
performance and declaratory relief.(McDonnell Douglas Corporation v.
Aerojet-General Corporation,Civ.S-01-2245, in the U.S. District Court for the Eastern District of California filed December 7, 2001.) Civ.S-01-2245. The alleged breach involves
interpretation of the 1999 settlement agreement and subsequent cost sharing
agreement between MDC and Aerojet pertaining to contribution by each company
toward investigation and remediation costs ordered by the DTSC and the Central
Valley RWQCB. DTSC and the Central Valley RWQCB issued their orders alleging
both companies were responsible for environmental contamination allegedly
existing at and migrating onto and from the IRCTS site, an approximately 3,800
acre portion of Aerojet’sAerojet's approximately 12,000 acre Sacramento facility.
In November 2002, Aerojet and MDC have tentatively agreedentered into discussions to a settlement ofsettle the
second lawsuit by establishing newrenegotiating the temporary allocationsallocation of certain costs
subjectassociated with the environmental contamination at IRCTS. The parties reached an
agreement in principle to final allocation.
settle the allocation dispute relating to costs associated with the environmental contamination at IRCTS. However, a formal and complete written agreement resolving the dispute has not yet been completed. San Gabriel Valley Basin, California
Baldwin Park Operable Unit
BALDWIN PARK OPERABLE UNIT
Aerojet, through its former Azusa, California site, was named by the EPA
as a PRP in the portion of the San Gabriel Valley Superfund Site known as the
Baldwin Park Operable Unit. A Record of Decision (ROD) regarding regional
groundwater remediation was issued and Aerojet and 18 other PRPs received
Special Notice Letters requiring groundwater remediation. All of the Special
Notice Letter PRPs are alleged to have been a source of volatile organic
compounds (VOCs). Aerojet’sAerojet's investigation demonstrated that the groundwater
contamination by VOCs is principally upgradient of Aerojet’sAerojet's former property and
that lower concentrations of VOC contaminants are present in the soils of
Aerojet’s presently and historically owned properties.Aerojet's former property. The EPA contends that of the 19 PRPs identified by
the EPA, Aerojet is one of the four largest sources of VOC groundwater
contamination at the BPOU. Aerojet contests the EPA’sEPA's position regarding the
source of contamination and the number of responsible PRPs.
-15-
In May 1997, as a result of the development of more sensitive measuring
methods, perchlorate was detected in wells in the BPOU. NDMA was also detected
using newly developed measuring methods. Suspected sources of perchlorate
include Aerojet’sAerojet's solid rocket development and manufacturing activities in the
1940s1940's and 1950s,1950's, military ordnance produced by another company at a facility
adjacent to the Aerojet facilities in the 1940s,1940's, the burning of confiscated
fireworks by local fire departments, and fertilizer used in agriculture. NDMA is
a suspected by-productbyproduct of liquid rocket fuel activities by Aerojet in the same
time period. ItNDMA is also a contaminant in cutting oils used by many businesses
and is found in many foods. In addition, new regulatory standards for a chemical known as 1,4 dioxane require additional treatment.is
present and is being treated at the BPOU. Aerojet may be a
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Aerojet has been a leader in the development of new, low cost technologies for the treatment of perchlorate, NDMA and 1,4 dioxane.
On June 30, 2000, the EPA issued a Unilateral Administrative Order (UAO) ordering the PRPs to implement a remedy consistent with the ROD, but still encouraging the PRPs to attempt to negotiate an agreement with the local purveyors. The PRPs agreed to comply.
On November 23, 1999, the California Regional Water Quality Control Board,
Los Angeles Region (Los Angeles RWQCB) issued orders to Aerojet and other PRPs
to conduct groundwater investigations on their respective sites. As a result,
the Los Angeles RWQCB ordered Aerojet to conduct limited soil gas extraction,
which Aerojet is implementing, and evaluatingto evaluate remedies for perchlorate
contamination in soils.
Following extended negotiations, Aerojet, along with seven other PRPs
(collectively, the “Cooperating Respondents”"Cooperating Respondents") signed a Project Agreement in late
March 2002 with Water Quality Authority, Watermaster, Valley County Water
District, La Puente Valley Water District, San Gabriel Valley Water Company,
Suburban Water Systems and California Domestic Water Company (collectively, the
Water Entities)"Water Entities"). The Project Agreement became effective on May 9, 2002,
following approval by a California Superior Court and the finalization of policy
language on the $100 million Baldwin Park Operable Unit Manuscript Environmental
Site Liability Policy from Chubb Custom Insurance Company covering certain
Project risks.
The basic structure of the Project Agreement is for the Cooperating Respondents to fund and financially assure (in the form of cash or letters of credit) the cost of certain treatment and water distribution facilities to be owned and operated by the Water Entities. Actual funding would be provided by funds placed in escrow at the start of each three-month period to cover anticipated costs for the succeeding quarter.
The Cooperating Respondents will also fund operation and maintenance of
treatment facilities (not including ordinary operating expenses of the local water purveyors,Water
Entities, certain costs for replacement water that may be incurred by such Water
Entities and related administrative costs, collectively, O(collectively, "O&M costs)Costs")). The
Cooperating Respondents are required to maintain sufficient financial assurance
to cover the estimated O&M Costs for two years. Actual payments for O&M paymentsCosts
would be made at the start of each three-month period to cover anticipated costs
for the succeeding six-month period. When fully constructed, six treatment
facilities will be treating in excess of 25,000 gallons per minute for the
purposes of ROD implementation and to provideproviding a potable water supply. The Project
Agreement has a term of 15 years. The Project Agreement also settles the past
environmental claims of the Water Entities.
-16-
Aerojet and the other Cooperating Respondents have entered into an interim
allocation agreement that establishes the interim payment obligations of Aerojet
and the remaining Cooperating Respondents for the costs of the Project
Agreement. Aerojet anticipates that the partiesCooperating Respondents may seek to
mediate final allocation, but, if unsuccessful, litigation could occur. Under
the interim allocation, Aerojet is responsible for approximately two-thirds of
all project costs, pending completion of any allocation proceeding. All project
costs are subject to reallocation among the Cooperating Respondents.
A significant amount of public funding is available to offset project
costs. To date, Congress has appropriated approximately $40$47 million (so called
Title 16 and Dreier funds), which is potentially available for payment of
project costs. All such funding will require Water Quality
-20-
$25$28 million of the funding will have been
allocated to the project by the end of 2003 and that additional funds may follow
in later years.
As part of the EIS sale to Northrop in October 2001, the EPA approved a
Prospective Purchaser Agreement with Northrop to absolve it of pre-closing
liability for contamination caused by the Azusa facility, which liability will
remain with Aerojet. As part of that agreement, Aerojet agreed to put $40
million into an irrevocable escrow for the BPOU project to fund Aerojet’sAerojet's
obligations under the Project Agreement. In addition, GenCorp agreed to provide
a $25 million guarantee of Aerojet’sAerojet's obligations under the Project Agreement.
During the first three years of the Project Agreement, the GenCorp guarantee is
partially offset by other financial assurances provided in conjunction with the
Project Agreement.
As part of the agreement to sell the EIS business to Northrop, Aerojet
paid the EPA $9 million to be offset against Aerojet’sAerojet's share of the EPA’sEPA's total
claimed past costs (EPA now claims past costs are approximately $28 million). A
very substantial share of the EPA’sEPA's past costs related to the period prior to
1997 when the sole contamination being considered involved VOCs. Aerojet
believes that it is responsible for less than ten percent of these costs. As a
result, in the allocation with the other PRPs, Aerojet will seek to recover a
significant portion of the $9 million paid to the EPA from the other PRPs.
Unresolved at this time is the issue of California’sCalifornia's past costs which were last
estimated at approximately $4 million.
Aerojet intends to defend itself vigorously to assure that it is
appropriately treated with other PRPs and that costs of any remediation are
properly spread overallocated among all users of the San Gabriel Valley aquifer. In addition,PRPs. Aerojet has notified its insurers and is
also pursuing claims under its insurance remedies.
policies.
On November 9, 2001, GenCorp received a General Notice Letter from the EPA
asserting that GenCorp is a PRP for the BPOU. This General Notice Letter was
received more than ten years after the General Notice given to GenCorp’sGenCorp's
subsidiary, Aerojet. The EPA alleged that in the 1940s1940's and early 1950s GenCorp’s predecessor,1950's
GenCorp, then known as The General Tire & Rubber Company, participated in a
joint venture with Aerojet Engineering Corporation, a predecessor tonow known as Aerojet-General
Corporation, sharing 50 percent of the profits on certain U.S. Navy contracts
for JATO rockets and that it had some role in managing the joint venture at the
Azusa facility. GenCorp strongly disagrees with the EPA designation. The EPA is factually incorrect; at all times, Aerojet was the
sole party that owned or operated the Azusa site during the early production of
the JATO rockets. GenCorp strongly disagrees with the EPA’sEPA's PRP designation and
plans to resist the designation at every level possible.
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On February 28, 2002, the EPA issued a unilateral First Amended
Administrative Order For Remedial Design and Remedial Action (Amended Order) for
the BPOU. The Amended Order does not materially alter the obligations of Aerojet
under the earlier UAO; however, the Amended Order names GenCorp as a Respondent
on the basis of the allegations made in the General Notice Letter. The Amended
Order does not require GenCorp to undertake any action unless Aerojet fails to
perform its obligations under the UAO. It states that GenCorp is being added to
the Amended Order “as"as a backup”backup" to Aerojet’s performance;Aerojet's performance, and it provides that
GenCorp is deemed to be in compliance with the Amended Order on the effective
date of the Amended Order. The EPA has not claimed since the effective date that
GenCorp has any current obligation under the order. Because GenCorp does not
believe it was properly designated a PRP at the site, the Company is evaluating an appropriate response to the Amended Orderwould contest
should the EPA claim action is required.
South El Monte Operable Unit
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Aerojet’sAerojet's former El Monte facility.
On January 22, 2001, Aerojet filed an appeal of the order with the Los Angeles
RWQCB asserting selective enforcement. The appeal had been held in abeyance
pending negotiations with the Los Angeles RWQCB, but due to a two-year
limitation on the abeyance period, the appeal was dismissed without prejudice.
In March 2001, Aerojet submitted a limited work plan to the Los Angeles RWQCB.
On February 21, 2001, Aerojet received a General Notice Letter from the EPA
Region IX naming Aerojet as a PRP to the SEMOU of the San Gabriel Valley
Superfund site. Aerojet continues to negotiate with the Los Angeles RWQCB for a
limited investigation of this former facility. Aerojet has begun the process of
obtaining access agreements should the Los Angeles RWQCB approve Aerojet’sAerojet's work
plan. Because its appeal was dismissed without prejudice, Aerojet may refile its
appeal if negotiations with the Los Angeles RWQCB are unsuccessful.
On April 1, 2002, Aerojet received a special notice letter from the EPA (dated March 28, 2002) that requested Aerojet to enter into negotiations with the EPA regarding the performance of a remedial design and remedial action for the SEMOU. In light of this letter, Aerojet performed a limited site investigation of the East Flair Drive Site. The data collected and summarized in the Field Investigation Report showed that chemicals including TCE and PCE were present in the soil and groundwater at and near the East Flair Drive Site. The Field Investigation Report also showed that the hydraulic gradient at the East Flair Drive Site is oriented toward the northeast. This finding indicates that the site is not a likely source of contamination at the SEMOU, as the ground water flow at the site is away from the SEMOU and not toward it. Given the data indicating that the East Flair Drive Site is not a source of the contamination at the SEMOU, Aerojet requested that the EPA reconsider its issuance of the SEMOU special notice letter.
To date, Aerojet has not received a response to the Field Investigation
Report from eitherthe EPA. In early May 2003, Aerojet received a response from the Los
Angeles RWQCB orand has subsequently held several meetings with the EPA.Los Angeles
RWQCB regarding the work plan. Aerojet also continues to work cooperatively with
the Los Angeles RWQCB for a limited investigation of the East Flair Drive Site and with the EPA regarding the SEMOU.
On August 29, 2003, the USEPA issued a Unilateral Administrative Order
(UAO) against Aerojet and approximately 40 other parties requiring them to
conduct the remedial design and remedial action in the SEMOU. The impact of the
UAO on the recipients is not clear as the remedy is already being implemented by
the water entities.
Aerojet has been served with four civil suits filed in the U.S. District Court
for the Central District of California thatby four public and private water
companies. The suits seek recovery of costs allegedly incurred in response to
the contamination present atin the SEMOU.
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Plaintiffs allege that groundwater in
the SEMOU is contaminated with chlorinated solvents that were released into the
environment by Aerojet and other parties causing plaintiffs to incur unspecified
response costs and other damages. Aerojet's investigations to date have not
identified a credible connection between the contaminants identified by the
water entities in the SEMOU and those detected at Aerojet's former facility
located at 9100 & 9200 East Flair Drive, El Monte, California, which lies in or
near the SEMOU.
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The Company has studied remediation alternatives for its closed Lawrence, Massachusetts facility, which was primarily contaminated with PCBs, and has begun site remediation and off-site disposal of debris. As part of these remediation efforts, the Company is working with local, state and federal officials and regulatory agencies to return the property to a beneficial use. The time frame for the remediation and redevelopment project is currently estimated to range from two to four years.
The Company is also currently involved, together with other companies, in
approximately 22 other Superfund and non-Superfund remediation sites. In many
instances, the Company’sCompany's liability and proportionate share of costs have not
been determined largely due to uncertainties as to the nature and extent of site
conditions and the Company’sCompany's involvement. While government agencies frequently
claim PRPs are jointly and severally liable at such sites, in the Company’sCompany's
experience, interim and final allocations of liability costs are generally made
based on relative contributions of waste. Based on the Company’sCompany's previous
experience, its allocated share has frequently been minimal, and in many
instances, has been less than one percent. Also, the Company is seeking recovery
of its costs from its insurers.
Environmental Reserves and Estimated Recoveries
ENVIRONMENTAL RESERVES AND ESTIMATED RECOVERIES (i) Reserves
The Company periodically preparesconducts complete reexaminations of estimated
future remediation costs that could be incurred by the Company. These periodic
reexaminations take into consideration the investigative work and analysis of
the Company’sCompany's engineers, engineering studies performed by outside consultants,
and the advice of its legal staff and outside attorneys regarding the status and
anticipated results of various administrative and legal proceedings. In most
cases only a range of reasonably possible costs can be estimated. In
establishing the Company’sCompany's reserves, the most probable estimated amount is used
when determinable and the minimum is used when no single amount is more
probable.
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Company’sCompany's environmental reserve activity for the nine
months ended August 31, 2003, is shown below (in millions):
November 30, 2002 | February 28, 2003 | |||||||||||
Reserve | Expenditures | Reserve | ||||||||||
Aerojet | $ | 318 | $ | 3 | $ | 315 | ||||||
Other Sites | 22 | 1 | 21 | |||||||||
Total | $ | 340 | $ | 4 | $ | 336 | ||||||
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(ii) Estimated Recoveries
On January 12, 1999, Aerojet and the U.S. government implemented the October
Pursuant to a 1997 Agreement in Principle (Global Settlement) resolving certain prior environmental and facility disagreements, with retroactive effect to December 1, 1998. The Global Settlement covered all environmental contamination at the Sacramento and Azusa sites. Under the Global Settlement, Aerojet and the U.S. government resolved disagreements about an appropriate cost-sharing ratio.which
was implemented in 1999 (Global Settlement), up to 88 percent of the
environmental costs associated with Aerojet's Sacramento site and its former
Azusa site, can be recovered through the establishment of prices for Aerojet's
products and services sold to the U.S. government. The Global Settlement
contemplates that the cost-sharingcost sharing ratio will continue for a number of years.
Pursuant to the Global Settlement covering environmental costs associated with Aerojet’s Sacramento site and its former Azusa site, the Company can recover up to 88 percent of its environmental remediation costs for these sites through the establishment of prices for Aerojet’s products and services sold to the U.S. government.
The ability of Aerojet to continue recovering these costs from the U.S.
government depends on Aerojet’sAerojet's sustained business volume under U.S. government
contracts and programs and the relative size of Aerojet’s commercial business.
contracts.
In conjunction with the sale of EIS,a business by Aerojet entered into an agreement withto Northrop wherebyGrumman
Corporation (Northrop) in 2001, Northrop will reimburse Aerojet will be reimbursed by Northrop for 50 percent
of environmental expenditures eligible for recovery under the Global Settlement.
Amounts reimbursed are subject to annual limitations, with excess amounts
carrying over to subsequent periods, the total of which will not exceed $190 million over the term of the agreement, which ends in 2028.periods. As of February 28,August 31, 2003, $176$171 million in
potential future reimbursements was available over the remaining life of the
agreement.
Estimated recoveries from the U.S. government and others for environmental
remediation costs totaled $216 million at August 31, 2003 and $232 million at
November 30, 2002
The effect of the final resolution of environmental matters and the
Company’sCompany's obligations for environmental remediation and compliance cannot be
accurately predicted due to the uncertainty concerning both the amount and
timing of future expenditures. The Company believes, on the basis of presently
available information, that the resolution of environmental matters and the
Company’sCompany's obligations for environmental remediation and compliance will not have
a material adverse effect on the Company’sCompany's results of operations, liquidity or
financial condition. The Company will continue its efforts to mitigate past and
future costs through pursuit of claims for recoveries from insurance coverage
and other PRPs and continued investigation of new and more cost effective
remediation alternatives and associated technologies.
8. Arrangements
9. ARRANGEMENTS WITH OFF-BALANCE SHEET RISK
As of August 31, 2003, obligations required to be disclosed in accordance
with Off-Balance Sheet Risk
In November 2002, the FASB issued Interpretation No. 45, (FIN 45 or the Interpretation),Guarantor’sGuarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness
of Others, which clarifies the requirements consisted of:
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Statementcredit expiring in 2003
and 2004 and securing obligations for environmental remediation, insurance
coverage and litigation.
- - Up to $120 million aggregate in guarantees by GenCorp of Financial Accounting Standards No. 5 (SFAS 5),AccountingAerojet's
obligations to government agencies for Contingencies, relating to a guarantor’s accounting for and disclosures of certain guarantees. FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. FIN 45 elaborates on the existing disclosure requirements for most guarantees. It also clarifies that at the time a company issues certain types of guarantees, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The Interpretation’s initial recognition and measurement provisions do not apply to certain agreements which areenvironmental remediation
activities, subject to the Interpretation’s disclosure requirements only. The initial recognitionpartial offsets for other financial assurances
provided in conjunction with these obligations. (See Note 8(b).)
- - $36 million in guarantees by GenCorp of bank loans and measurement provisions apply on a
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prospective basis to guarantees issued or modified after December 31, 2002. The adoptionlines of FIN 45 did not have acredit of
its subsidiaries.
- - Guarantees, jointly and severally, by its material impact on the Company’s resultsdomestic subsidiaries,
of operations, financial condition, or liquidityGenCorp's obligations under its bank credit agreements and did not result in the recording of any additional liabilities as of February 28, 2003 associated with guarantees covered by this Interpretation.
As of February 28, 2003, obligations subject to the Interpretation’s disclosure requirements consisted of:
9. Shareholders’ Equity
its $150
million senior subordinated notes due August 2013. (See Note 7 and Note
13)
10. SHAREHOLDERS' EQUITY
On February 5,July 11, 2003, the Company’sCompany's Board of Directors declared a quarterly
dividend of three cents$0.03 per share on the Company’s ten centsCompany's $0.10 par value common stock. The
dividends weredividend was paid on February 28,August 29, 2003.
10. Accumulated Other Comprehensive Income, Net of Income Taxes
11. ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES
Comprehensive income encompasses net income and other comprehensive income
items, which includes all other non-owner transactions and events that change
shareholders’shareholders' equity. The Company’sCompany's other comprehensive lossincome includes the
effects of foreign currency translation adjustments and the change in the fair
value of interest rate swaps (Note 6)(See Note 7). The components of other comprehensive
income and the related income tax effects are presented in the following table:
Three months ended | ||||||||||
February 28, | ||||||||||
2003 | 2002 | |||||||||
(Millions) | ||||||||||
Net income | $ | 3 | $ | 3 | ||||||
Other comprehensive income, net of income taxes | ||||||||||
Effects of foreign currency translation adjustments | 18 | (5 | ) | |||||||
Change in fair value of interest rate swap | (1 | ) | — | |||||||
Total comprehensive income (loss) | $ | 20 | $ | (2 | ) | |||||
11. Operating Segments and Related Disclosures
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1) The Company evaluates segment performance based on several factors, of which the primary financial measure is segment operating profit. Segment operating profit represents net sales from continuing operations less applicable costs, expenses and provisions for restructuring and unusual items relating to operations. Segment operating profit excludes corporate income and expenses, provisions for unusual items not related to operations, interest expense, income taxes and any minority interest.
Three months ended | ||||||||||
February 28, | ||||||||||
2003 | 2002 | |||||||||
(Millions) | ||||||||||
Net Sales | ||||||||||
GDX Automotive | $ | 191 | $ | 190 | ||||||
Aerospace and Defense | 63 | 54 | ||||||||
Fine Chemicals | 17 | 5 | ||||||||
$ | 271 | $ | 249 | |||||||
Income (Loss) Before Income Taxes | ||||||||||
GDX Automotive | $ | 5 | $ | 6 | ||||||
Aerospace and Defense | 9 | 16 | ||||||||
Fine Chemicals | 2 | (3 | ) | |||||||
Segment operating profit | 16 | 19 | ||||||||
Interest expense | (5 | ) | (3 | ) | ||||||
Corporate and other expenses, net | (6 | ) | (9 | ) | ||||||
Other unusual items | — | (2 | ) | |||||||
$ | 5 | $ | 5 | |||||||
12. New Accounting Pronouncements
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13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In connection with the offer and sale of the senior subordinated notes due 2013,
the Company is providing condensed consolidating financial information for its
material domestic subsidiaries that have guaranteed the senior subordinated
notes and for those subsidiaries that have not guaranteed the senior
subordinated notes. These wholly owned subsidiary guarantors (principally,
Aerojet and AFC) have, jointly and severally, fully and unconditionally
guaranteed the senior subordinated notes.
The subsidiary guarantees are senior subordinated obligations of each
subsidiary guarantor and rank (i) prior in right of payment with all senior
indebtedness, (ii) equal in right of payment with all senior subordinated
indebtedness and, (iii) senior in right of payment to all subordinated
indebtedness, in each case, of that subsidiary guarantor. The subsidiary
guarantees are effectively subordinated to any secured indebtedness of the
subsidiary guarantor with respect to the assets securing that indebtedness.
Absent both default and notice as specified in the Company's senior credit
facility and agreements governing the Company's outstanding convertible notes
and the senior subordinated notes, there are no restrictions on the Company's
ability to obtain funds from its subsidiary guarantors by dividend or loan.
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<
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14. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),Consolidation of Variable Interest Entities, an Interpretation of ARB No. 5151.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The
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isdid not expected to
have a material effect on the Company’s results of operations, liquidity, or financial condition.
13. Subsequent Events
In March 2003, one of the Company’s European subsidiaries entered into a $25 million credit facility to provide working capital for its European operations. The credit facility is secured by certain assets of the Company’s European operations.
In March 2003, the Company announced that it had signed a memorandum of understanding to enter into a joint venture with a real estate management and development firm. The project the proposed joint venture expects to develop is a commercial office complex on a 20-acre parcel of Aerojet’s land.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain information contained in this report should be considered “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. These statements present (without limitation) the expectations, beliefs, plans and objectives of management and future financial performance and/or assumptions underlying or judgments concerning matters discussed in this document. The words “believe,” “estimate,” “anticipate,” “project,” and “expect,” and similar expressions are intended to identify forward-looking statements. All forward-looking statements involve certain risks, estimates, assumptions and uncertainties with respect to future sales and activity levels, cash flows, contract performance, the outcome of contingencies including environmental remediation, and anticipated costs of capital.
Some important risk factors that could cause the Company’s actual results or outcomes to differ from those expressed in its forward-looking statements include, but are not limited to, the following:
(list is continued on following page)
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(list is continued from previous page)
This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. Additional risk factors may be described from time to time in the Company’s filings with the U.S. Securities and Exchange Commission. All such risk factors are difficult to predict, contain material uncertainties that may affect actual results, and may be beyond the Company’s control.
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Results of Operating Segments
The following section pertains to activity included in the Company’s Unaudited Condensed Consolidated Statements of Income, which are contained in Part I, Item 1 of this report, and focuses on the Company’s continuing operations. See Note 11 to the Unaudited Condensed Consolidated Financial Statements for financial results for each of the Company’s operating segments.
GDX Automotive
GDX Automotive sales for the first quarter of 2003 were $191 million compared to $190 million in the first quarter of 2002. Sales increases from favorable exchange rates of $16 million in the first quarter of 2003 were offset by lower volumes and pricing concessions to major customers.
Operating profit was $5 million for the first quarter of 2003 compared to $6 million for the first quarter of 2002. Operating profit improvements from favorable exchange rates and cost reductions of $6 million from operating efficiencies in the first quarter of 2003 were offset by reduced income from employee retirement benefit plans of $2 million, pricing concessions and lower sales volumes.
Aerospace and Defense
Aerospace and Defense sales for the first quarter of 2003 were $63 million, including $12 million from General Dynamics Space Propulsion and Fire Suppression business (GDSS) acquired in October 2002, compared to $54 million reported in the first quarter of 2002. Contributing to the increase in sales were increased volumes on programs for national missile defense and the Boeing Phantom HyFly program. These sales increases were offset by lower sales on various other programs.
Operating profit of $9 million for the first quarter of 2003 was $7 million lower than the first quarter of 2002, attributable primarily to a $5 million reduction in income from employee retirement benefit plans.
During the first quarter of 2003, Aerospace and Defense successfully completed the final test firing of the Atlas V solid rocket motor and the successful testing of the Boeing Phantom HyFly dual combustion ramjet test flight engines for the Defense Advanced Research Projects Agency and the Office of Naval Research.
Contract backlog was $751 million at the end of the first quarter of 2003 compared to $773 million as of November 30, 2002. Funded backlog, which includes only those contracts for which money has been directly authorized by the U.S. Congress, or for which a firm purchase order has been received by a commercial customer, was $363 million at the end of the first quarter of 2003 compared to $416 million as of November 30, 2002. Funding for the Titan program was restructured in the first quarter of 2003, reducing funded backlog by $58 million. Aerojet expects this funding to be incrementally restored in future years.
Fine Chemicals
Fine Chemicals sales in the first quarter of 2003 totaled $17 million compared to $5 million in the first quarter of 2002. The improvement reflects strong demand for products launched in 2001 and 2002.
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Fine Chemicals reported an operating profit of $2 million for the first quarter of 2003 compared to a loss of $3 million for the first quarter of 2002. The significant improvement in Fine Chemicals’ operating profit reflects higher sales volumes and reduced labor costs resulting from restructuring initiatives.
Interest and Other Expenses
Interest expense increased to $5 million in the first quarter of 2003 from $3 million in the first quarter of 2002 due primarily to higher debt resulting from the acquisition of GDSS.
Corporate and other expenses decreased in the first quarter of 2003 to $6 million compared to $9 million in the first quarter of 2002. Corporate and other expenses in 2003 include $3 million in foreign currency exchange rate gains, increases in professional service fees and compensation costs, and a reduction of $3 million in income from employee retirement benefit plans. Corporate and other expenses in the first quarter of 2002 included $6 million in costs for the accounting review related to the restatement of 1999 and 2000 financial results.
Other Information
Environmental Matters
GenCorp’s policy is to conduct its businesses with due regard for the preservation and protection of the environment. The Company devotes a significant amount of resources and management attention to environmental matters and actively manages its ongoing processes to comply with extensive environmental laws and regulations. The Company is involved in the remediation of environmental conditions that resulted from generally accepted manufacturing and disposal practices in the 1950’s and 1960’s followed at certain GenCorp plants. In addition, the Company has been designated a PRP with other companies at third party sites undergoing investigation and remediation.
The nature of environmental investigation and cleanup activities often makes it difficult to determine the timing and amount of any estimated future costs that may be required for remediation measures. The Company reviews these matters and accrues for costs associated with the environmental remediation when it becomes probable that a liability has been incurred and the amount of the Company’s liability can be reasonably estimated. The Company’s Unaudited Condensed Consolidated Balance Sheet (which are included in Part I, Item 1 of this report) as of February 28, 2003 reflects accruals of $336 million and amounts recoverable of $229 million from the U.S. Government and other third parties for such costs. Pursuant to U.S. Government procurement regulations and a Global Settlement covering environmental contamination at the Company’s Sacramento and former Azusa, California sites, Aerojet can recover a substantial portion of its environmental costs for its Aerospace and Defense segment through the establishment of prices for the Company’s products and services sold to the U.S. Government. The ability of Aerojet to continue recovering these costs from the U.S. Government depends on Aerojet’s sustained business volume under U.S. Government contracts and programs and is subject to the limitations of the Northrop Grumman agreement.
The effect of the final resolution of environmental matters and Aerojet’s obligations for environmental remediation and compliance cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures due to regulatory or technological changes. However, management believes, on the basis of presently available information, that the resolution of
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environmental matters and the Company’s obligations for environmental remediation and compliance will not have a material adverse effect on the Company’sCompany's results of operations, liquidity, or
financial condition.
The Company will continue its efforts to mitigate past and future costs through pursuit of claims for recoveries from insurance coverage and other PRPs and continued investigation of new and more cost effective remediation alternatives and associated technologies.
For additional discussion of environmental and related legal matters, see Note 7(b) in Notes to Unaudited Condensed Consolidated Financial Statements.
New Accounting Pronouncements
In JanuaryMay 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS 149 is intended to result in more consistent reporting
of contracts as either freestanding derivative instruments subject to Statement
133 in its entirely, or as hybrid instruments with debt host contracts and
embedded derivative features. SFAS 149 is effective for contracts entered into
or modified after June 30, 2003. The adoption of SFAS 49 did not have a material
effect on the Company's results of operations, liquidity, or financial
condition.
In May 2003, the FASB Interpretationissued Statement of Financial Accounting Standards
No. 46 (FIN 46)150 (SFAS 150),Consolidation Accounting for Certain Financial Instruments with
Characteristics of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46Both Liabilities and Equity. SFAS 150 requires certain
variable interest entitiesfinancial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity to be consolidated by the primary beneficiaryclassified as liabilities.
Many of the entity if thethese instruments previously were classified as equity investorsor temporary
equity and as such, SFAS 150 represents a significant change in practice in the
entity do not have the characteristicsaccounting for a number of a controlling financial interest or do not have sufficientmandatorily redeemable equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all new variable interest entitiesfinancial instruments created or
acquiredmodified after JanuaryMay 31, 2003. For variable interest entities created or acquired prior2003, and to February 1, 2003,other instruments at the provisionsbeginning of FIN 46 must be applied for the
first interim or annual period
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FIN 46 isSFAS 150 did not expected to have a material
effect on the Company’sCompany's results of operations, liquidity, or financial
condition.
Liquidity and Capital Resources
LIQUIDITY AND CAPITAL RESOURCES
The Company broadly defines liquidity as its ability to generate
sufficient operating cash flows, as well as its ability to obtain debt and
equity financing and to convert to cash those assets that are no longer required
to meet its strategic and financial objectives. Changes in net cash provided by
operating activities generally reflect earnings plus depreciation and
amortization and other non-cash charges and the effect of changes in working
capital. Changes in working capital generally are the result of timing
differences between the collection of customer receivables and payment for
materials and operating expenses.
expenses
Net cash used inprovided by (used in) operating activities
As
Operating activities provided net cash of February 28, 2003, the Company’s cash and cash equivalents totaled $45$7 million and the ratio of current assets to current liabilities, or current ratio, was 1.10. As of November 30, 2002, the Company’s cash and cash equivalents were $48 million and the current ratio was 1.03.
Net cash used in operating activities for the first threenine
months of 2003 was $13compared to a $40 million compared with $3 millionuse of cash in the first threenine months of
2002. The increase in operating cash flow in 2003 reflects improved operating
results for the Aerospace and Defense and Fine Chemical segments (after
adjusting for the non-cash impact of employee retirement benefit plans) offset
in part by reduced profits for the GDX Automotive segment. Operating cash flows
in 2003 also reflect a reduction in working capital usage, primarily in the
Aerospace and Defense segment, as compared to the same period in 2002. Net cash
used in operating activities for the first threenine months of 2003fiscal 2002 was
negatively affected by working capital requirements.
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Net cash used in investing activities
requirements, including needs for
Aerojet's fixed-price production contracts such as the Atlas V program.
Net cash used in investing activities
The Company used $111 million in cash for investing activities for the
first threenine months of 2003 was $2compared to $35 million versus $14 millionused for the comparable period
in 2002. Included in cash used in investing activities in 2003 is $95 million of
restricted cash from the net proceeds of the senior subordinated notes issued in
August 2003. Capital expenditures totaled $9$36 million for the first threenine months
of 2003 and $6$31 million for the first threenine months of 2002. The Company’sCompany's capital
expenditures directly support the Company’sCompany's contract and customer requirements
and are primarily made for asset replacement and capacity expansion, cost
reduction initiatives and safety and productivity improvements. Investing
activities in the first quarternine months of 2003 included a cash inflow of $7 million
from the sale of GDX Automotive assets and operations in Viersen, Germany.Germany and $13 million
from the sale of a building complex (after transaction costs and tenant
improvement obligations). Investing activities for the first quarternine months of 2002
included a net cash outflow of approximately $8 million related to the Company’sCompany's
reacquisition of the minority interest in AFC.
Net cash provided by financing activities
Net cash provided by financing activities for the first threenine months of
2003 was $9$113 million compared with $26$66 million for the first threenine months of
2002. Cash flow related tofrom financing activities in both periods relaterelates primarily to
activities involving the Company’s Restated Credit Facility,Company's borrowings, net of repayments. The Company
paid dividends of $1$4 million in both periods presented.
On February 28, 2002August 11, 2003, GenCorp sold $150 million aggregate principal amount
of its 9-1/2% the senior subordinated notes due August 2013. Issuance of the
senior subordinated notes generated
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amendeddoes not complete the ARC Propulsion
acquisition by December 31, 2003, GenCorp will be required to use the balance of
the net proceeds to repay in full outstanding indebtedness under term loan A,
plus accrued and unpaid interest, with the remainder to be used to repay
outstanding indebtedness under term loan B, plus accrued and unpaid interest,
subject to modification in accordance with the terms of the amendment and
waiver. Once repaid, term loan A and term loan B indebtedness may not be
reborrowed.
In April 2002, GenCorp sold $150 million aggregate principal amount of its
Credit Facility to provide an additionalconvertible subordinated notes due 2007 in a private placement. The net proceeds
of the offering were approximately $144 million. The Company used approximately
$25 million of the net proceeds to repay in full term loan (Term Loan C). The $25 million was repaid on April 5, 2002. The CompanyC and does not have
the ability to re-borrowreborrow these funds.
Outlook
The Company also used approximately $119
million to repay outstanding debt under the revolving credit facility. Amounts
repaid against the outstanding debt under the revolving credit facility may be
reborrowed at any time or from time to time and may be used for any purpose,
subject to the limits contained in the senior credit facility.
Liquidity
At August 31, 2003 and November 30, 2002, unrestricted cash and cash
equivalents totaled $61 million and $48 million, respectively, and availability
under the Company's credit facilities totaled $97 million and $75 million,
respectively. Restricted cash of $95 million at August 31, 2003, must be used
either to fund the acquisition of ARC Propulsion or, in the event the
acquisition does not close by December 31, 2003, to repay term loans.
The Company currently believes that its existing cash and cash
equivalents, forecasted operating cash flows for the next twelve months,from operations and asset sales and
borrowings available under its credit facilities will provide sufficient funds
to meet its operating plan for the next twelve months. ThisThe operating plan for
this period provides for full operation of the Company’sCompany's business, interest and
principal payments on the Company’sCompany's debt and anticipated dividend payments.
The Company is pursuing its appeal of a partial judgment in the case ofGenCorp Inc. v. Olin Corporation, rather than seek further review of an Order of the United States Sixth Circuit Court of Appeals issued on February 13, 2003. In order to move forward with this appeal, the Company posted a bond covering the judgment and related interest in the amount of $30 million. While the bond reduces liquidity, the Company currently believes that its existing cash and cash equivalents, forecasted operating cash flows and borrowings available under its credit facilities will provide sufficient funds to meet its operating plan for the next twelve months. See Note 7(a) in Notes to Unaudited Condensed Consolidated Financial Statements.
The Company intends to continue to access capital markets to raise debt or equity financing to fund strategic acquisitions, as well as to provide additional liquidity for its operational requirements for the next twelve months. The timing, terms, size and pricing of any cash financing will depend on investor interest and market conditions, and there can be no assurance that the Company will be able to obtain any such financing.
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If the Company experiences adverse economic developments and is not able
to raise debt or equity financing in the capital markets or to obtain bank
borrowings, the Company believes that it can generate additional funds to meet
its liquidity requirements for the next twelve months by reducing working
capital requirements, deferring capital expenditures, implementing cost
reduction initiatives in addition to those already included in the Company’sCompany's
operating plan, selling assets, or through a combination of these means.
Major factors that could adversely impact the Company’sCompany's forecasted
operating cash and its financial condition are described in “Forward-Looking Statements” above."Forward-Looking
Statements" and "Risk Factors" below. In addition, the Company’sCompany's liquidity and
financial condition will continue to be affected by changes in prevailing
interest rates on the portion of debt that bears interest at variable interest
rates.
Item
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Quantitative and Qualitative Disclosures About Market Risk
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company’sCompany's disclosures related
to certain market risks as reported under Part II, Item 7A, “Quantitative"Quantitative and
Qualitative Disclosures About Market Risk,”" in the Annual Report of GenCorp to
the U.S. Securities and Exchange Commission on Form 10-K for the year ended
November 30, 2002, except as noted below.
Interest Rate Risk
INTEREST RATE RISK
The Company uses interest rate swaps and a combination of fixed and
variable rate debt to reduce its exposures to interest rate risk. As required under the Restated Credit Facility, theThe Company
entered into interest rate swap agreements, effective January 10, 2003, on $100
million of its variable-rate debt (see Note 67 in Notes to Unaudited Condensed
Consolidated Financial Statements). The remaining variable-rate debt under the
Company’s Restated Credit FacilityCompany's bank credit agreements of approximately $141$92 million is subject to
fluctuations in market interest rates. A one-percentage point increase in
interest rates on the unhedged variable-rate debt as of February 28,August 31, 2003, would
decrease annual pretax income by $1 million.
Item
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ControlsCONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and Procedures
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procedures. The Company's
principal executive officer and its principal financial and
accounting officer, based on their evaluation of the Company's
disclosure controls and procedures, as defined in Exchange Act Rules
13a - 14(c), as of August 31, 2003, have concluded that the
Company's disclosure controls and procedures are adequate and
effective for the purposes set forth in the definition in Exchange
Act rules.
(b) Changes in internal controls. There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect the Company's internal controls subsequent to
the date of their evaluation.
PART II –- OTHER INFORMATION
Item
ITEM 1. Legal Proceedings
LEGAL PROCEEDINGS
Except as disclosed in Note 7(a)8(a), Note 8(b) and Note 7(b)15 in Part I and
incorporated herein by reference, there have been no significantmaterial developments in
the pending legal proceedings as previously reported in the Annual Report of
GenCorp Inc. to the SEC on Form 10-K for the year ended November 30, 2002.2002 and
subsequent periodic reports filed with the SEC. Reference is made to Item 3,
Legal Proceedings in ourthe Company's Annual Report on Form 10-K for the year ended
November 30, 2002.
2002 and to Part II, Item 4. Submission1, Legal Proceedings in our Quarterly
Report on Form 10-Q for the quarters ended May 31, 2003 and February 28, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
No. Description
--- -----------
2.1 First Amendment to Purchase Agreement, dated August 29, 2003,
between Aerojet-General Corporation and Atlantic Research
Corporation (filed as Exhibit 2.2 to GenCorp's Registration
Statement on Form S-4 (File No. 333-109518) and incorporated
herein by reference)
2.2 Second Amendment to Purchase Agreement, dated September 30,
2002, between Aerojet-General Corporation and Atlantic
Research Corporation.
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Matters to a Vote of Security Holders
At the Company’s Annual Meeting of Shareholders on March 26, 2003, holdersIncorporation of GenCorp Common Stock elected J. Gary Cooper, James M. Osterhoff,Inc. filed with
the Secretary of State of Ohio on August 7, 2003 (filed as
Exhibit 3.1 to GenCorp's Registration Statement on Form S-4
(File No. 333-109518) and Steven G. Rothmeierincorporated herein by reference)
4.1 Indenture, dated as directorsof August 11, 2003, between GenCorp Inc.,
the Guarantors named therein and The Bank of New York, as
trustee (filed as Exhibit 4.1 to serve GenCorp's Registration
Statement on Form S-4 (File No. 333-109518) and incorporated
herein by reference)
4.2 Registration Rights Agreement, dated as of August 11, 2003,
among GenCorp Inc., the Guarantors named therein and the
Initial Purchasers named therein (filed as Exhibit 4.2 to
GenCorp's Registration Statement on Form S-4 (File No.
333-109518) and incorporated herein by reference)
4.3 Form of Initial Notes (included in Exhibit 4.1)
4.4 Form of Exchange Notes (including in Exhibit 4.1)
10.1 Amendment No. 1 to Amended and Restated Credit Agreement and
Limited Waiver and consent, dated July 29, 2003, among GenCorp
Inc., Deutsche Bank Trust Company Americas (f/k/a three-year term expiring in 2006. Previously, James J. Didion, William K. HallBankers
Trust Company), for itself, as a Lender, and Dr. Sheila E. Widnall were elected as directorsAdministrative
Agent for the Lenders, and Terry L. Hall was appointedthe other Lenders signatory thereto
(Filed as Exhibit 10.1 to serve three-year terms that continue until March 2005GenCorp's Registration statement on
Form S-4 (File No. 333-109518) and J. Robert Anderson, Irving Gutin,incorporated herein by
reference.)
10.2 Amendment No. 2 to Amended and Robert A. Wolfe were electedRestated Credit dated August
25, 2003, among GenCorp Inc., Deutsche Bank Trust Company
Americas (f/k/a Bankers Trust Company), for itself, as directorsa
Lender, and as Administrative Agent for the Lenders, and the
other Lenders signatory thereto (Filed as Exhibit 10.2 to
serve three-year terms that continue until March 2004.
Shareholders also ratifiedGenCorp's Registration statement on Form S-4 (File No.
333-109518) and incorporated herein by reference.)
31.1 Certification of Chief Executive Officer required by Rule
13a-14(a) under the BoardSecurities Exchange Act of Directors’ appointment1934, as
amended.
31.2 Certification of Ernst & Young LLPChief Financial Officer required by Rule
13a-14(a) under the Securities Exchange Act of 1934, as
the Company’s independent auditors for 2003.
Following is the final resultamended.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the votes cast:
Broker | ||||||||||||||||
Nominee | For | Withheld | Nonvotes | Total | ||||||||||||
J. Gary Cooper | 37,833,347 | 1,470,861 | — | 39,304,208 | ||||||||||||
James M. Osterhoff | 37,811,376 | 1,492,832 | — | 39,304,208 | ||||||||||||
Steven G. Rothmeier | 37,860,511 | 1,443,697 | — | 39,304,208 |
Sarbanes-Oxley Act of 2002. B) |
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Item 6. Exhibits and Reports on Form 8-K
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Signatures
On July 28, 2003, the Company filed an 8-K under Item 5 thereof with
respect to its press release dated July 24, 2003 in which the Company
announced that its Aerojet subsidiary is selling a 96,000 square foot
office complex on approximately 11 acres in Sacramento County for $14.9
million and its press release dated July 25, 2003 in which the Company
announced that it is planning to issue $175 million senior subordinated
notes due 2013 in a private placement to institutional investors.
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CERTIFICATIONS
I,
GenCorp Inc.
Date: October 15, 2003 By: /s/ Terry L. Hall
certify that:
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CERTIFICATIONS
I,-----------------------------------
Terry L. Hall
President and Chief Executive
Officer
Date: October 15, 2003 By: /s/ Yasmin R. Seyal
certify that:
----------------------------------- Yasmin R. Seyal Senior Vice President, Chief Financial Officer |
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CERTIFICATIONSPursuant to 18 United States Code § 1350
The undersigned hereby certifies that to his knowledge the quarterly report of GenCorp Inc. (the “Company”) filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.
The undersigned hereby certifies that to her knowledge the quarterly report of GenCorp Inc. (the “Company”) filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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