SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2001
Commission File Number 1-8137
AMERICAN PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 59-6490478
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
3770 Howard Hughes Parkway, Suite 300,
Las Vegas, Nevada 89109
(Address of principal executive office) (Zip Code)
(702) 735-2200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
($.10 par value)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of October 31, 2001, was approximately $46.5 million. Solely for
the purposes of this calculation, shares held by directors and officers of the
Registrant have been excluded. Such exclusion should not be deemed a
determination by the Registrant that such individuals are, in fact, affiliates
of the Registrant.
The number of shares of Common Stock, $.10 par value, outstanding as of October
31, 2001 was 6,997,000.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III Hereof
Definitive Proxy Statement for 2001 Annual Meeting of Stockholders to be
filed not later than January 28, 2002.
Part IV Hereof
S-14 Registration Statement (2-70830); Annual Reports on Forms 10-K for the
years ended September 30, 2000, 1999, 1997, 1995, 1994 and 1993; S-2
Registration Statement (33-36664); Quarterly Reports on Form 10-Q for the fiscal
quarters ended June 30, 1999, and March 31, 1998; Form 8-A dated August 6, 1999;
S-3 Registration Statement (33-52196); S-8 Registration Statement (333-53449);
S-8 Registration Statement (333-62566); S-4 Registration Statement (333-49883)
and Current Reports on Forms 8-K dated February 28, 1992, February 19, 1998 and
November 9, 1999.
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PART I
Item 1. Business
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Overview
American Pacific Corporation (the "Company") is principally engaged in the
production of a specialty chemical, ammonium perchlorate ("AP"), which is used
as an oxidizing agent in composite solid propellants for rockets, booster motors
and missiles. AP is employed in the Space Shuttle, the Minuteman missile, the
Titan space launch vehicle, the Delta and Atlas families of commercial space
launch vehicles, a number of defense related missiles and rockets, and most
other solid fuel rocket motors. AP customers include contractors of the National
Aeronautics and Space Administration ("NASA"), the Department of Defense ("DOD")
and certain commercial space launch vehicle programs used to launch satellites
for communication, navigation, intelligence gathering, space exploration,
weather forecasting and environmental monitoring.
The Company also produces a variety of other specialty chemicals and
environmental protection equipment for niche applications, including: (i) other
perchlorate chemicals used principally in explosives and the inflation of
automotive airbags, (ii) sodium azide, used primarily in the inflation of
automotive airbags and certain pharmaceutical applications; (iii) Halotron(TM)
products, used to extinguish fires; and (iv) water treatment equipment, used to
disinfect effluents from sewage treatment and industrial facilities and for the
treatment of seawater. In addition, the Company has interests in two real estate
assets in the Las Vegas, Nevada area, consisting of approximately 58 remaining
acres of undeveloped land in an industrial park and a 50% interest in a
master-planned residential community on approximately 320 acres, which is
substantially completed.
During 1998, the Company entered into a purchase agreement with Kerr-McGee
Chemical Corporation ("Kerr-McGee"). On March 12, 1998, the Company sold $75.0
million principal amount of unsecured senior notes (the "Notes"), consummated an
acquisition (the "Acquisition") of certain assets from Kerr-McGee described
below and repurchased the remaining $25.0 million principal amount outstanding
of subordinated secured notes (the "Azide Notes").
The Company commenced commercial sales of sodium azide in fiscal 1994. In
January 1996, the Company filed an antidumping petition with the United States
International Trade Commission ("ITC") and the United States Department of
Commerce ("Commerce") in response to the unlawful pricing practices of Japanese
producers of sodium azide. In the fiscal years 2000 and 1997, the Company
recognized impairment charges of $9.1 million and $52.6 million, respectively,
relating to the fixed assets used in the production of sodium azide. See Note 12
to the Consolidated Financial Statements of the Company.
In February 1992, the Company acquired (by exercise of an option previously
granted to it) the worldwide rights to Halotron(TM), a fire extinguishing system
that includes chemical compounds and application technology to replace halons,
which have been found to be ozone layer-depleting chemicals. Halotron(TM) has
applications as a fire extinguishing agent for military, commercial and
industrial uses.
In fiscal 1999, subsequent to the consummation and successful integration
of the Acquisition, the Company began exploring a number of merger, acquisition
and sale possibilities. To date, none of these options have led to a transaction
that the Company believed would be in the best interests of its shareholders.
The Company continues to remain open to and pursue such strategic and financial
alternatives that appear to create value for the shareholders of the Company.
See Note 11 to the Consolidated Financial Statements of the Company for
financial information concerning the Company's operating segments. The Company's
perchlorate chemicals accounted for approximately 68%,
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69% and 67% of revenues during the years ended September 30, 2001, 2000 and
1999, respectively. The term "Company" used herein includes, where the context
requires, one or more of the direct and indirect subsidiaries or divisions of
American Pacific Corporation.
Specialty Chemicals
Perchlorate Chemicals
Strategy
The Company's strategy is to maintain and enhance its position as the
premier world-wide producer of AP and other perchlorate chemicals. Upon
consummation of the Acquisition, the Company effectively became the only North
American producer of AP.
Market
AP is the sole oxidizing agent for solid fuel rockets, booster motors and
missiles used in space exploration, commercial satellite transportation and
national defense programs. A significant number of existing and planned launch
vehicles providing access to space use solid fuel and thus depend, in part, upon
AP. Many of the rockets and missiles used in national defense programs are also
powered by solid fuel.
The Company has supplied AP for use in space programs for over 40 years,
beginning with the Titan program in the early 1960's. Today, its principal space
customers are Alliant Techsystems, Inc. ("Alliant") for the Space Shuttle
Program, the Delta family of commercial rockets and the Titan program, and
Aerojet for the Atlas family of commercial rockets. The Company has sold AP to
the Ariane space program, although no sales were made to this program in fiscal
2001. The Company is also a qualified supplier of AP to a number of defense
programs, including the Minuteman, Navy Standard Missile, Patriot, and Multiple
Launch Rocket System programs, and to certain foreign defense programs.
Demand for AP declined throughout the 1990's. In 1998, supply capacity was
substantially in excess of demand levels and, in an attempt to rationalize the
AP industry, the Company consummated the Acquisition with Kerr-McGee. See
"Perchlorate Chemicals - Kerr-McGee Acquisition." Sales volume levels for AP
declined from approximately 16.4 million pounds in fiscal 2000 to approximately
12.6 million pounds in fiscal 2001. AP sales volumes in 1999 were approximately
20.2 million pounds. The recent weakness in sales volumes is primarily
attributable to lower requirements for applications in certain commercial space
launch vehicles used primarily in satellite launches, particularly
telecommunication satellites. In addition, purchases of AP for use in the solid
rocket motors for the Space Shuttle have declined as a result of existing excess
inventory levels. The Company believes that such excess should be reduced over
the next few years considering the number of shuttle flights planned for the
construction and servicing of the International Space Station. The Company also
understands that existing plans call for significant AP requirements over the
next several years for use in the Minuteman program. Although the Company has
not yet experienced a specific increase in defense related orders, the tragic
events on September 11, 2001, in New York City and Washington D.C. and the
Unites States of America's declared war on terrorism, may result in increased
orders for AP used in certain defense programs. Accordingly, the Company
estimates that the North American demand for AP could increase to an annual
level of between 16.0 million and 20.0 million pounds over the next few years,
although there can be no assurance given with respect to these estimates. The
Company has no ability to influence North American demand for AP.
The Company produces other perchlorate chemicals including sodium
perchlorate, which is used principally in cast explosives, and potassium
perchlorate, which is primarily used in the inflation of certain types
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of automotive airbags. The dollar amount of sales of these chemicals has
historically been relatively small compared to AP sales.
Customers
Prospective purchasers of AP consist principally of contractors in programs
of NASA and the DOD. As a practical matter, the specialized nature of the
activities of these contractors restricts competitive entry by others.
Therefore, there are relatively few potential customers for AP, and individual
AP customers account for a significant portion of the Company's revenues.
Prospective customers also include companies providing commercial satellite
launch services and agencies of foreign governments and their contractors,
although historically sales to foreign agencies and their contractors have not
accounted for significant percentages of AP sales. See "Competition."
During 2001, Alliant acquired the Thiokol Propulsion Division ("Thiokol")
of Alcoa. Alliant (including Thiokol) accounted for 60%, 51% and 49% of the
Company's revenues during the fiscal years 2001, 2000 and 1999, respectively.
Thiokol Agreement
In connection with the Acquisition, the Company entered into an agreement
with Thiokol with respect to the supply of AP through the year 2008. The
agreement, as amended, provides that during its term Thiokol will make all of
its AP purchases from the Company. In addition to the AP purchased from the
Company, Thiokol may use AP inventoried by it in prior years. The agreement also
establishes a pricing matrix under which AP unit prices vary inversely with the
quantity of AP sold by the Company to all of its customers. AP unit prices in
the matrix at all quantity levels escalate each year through fiscal 2003 and, in
fiscal 2004, are adjusted downward by approximately 20%. After the adjustment,
AP unit prices continue to escalate each year through fiscal 2008. See below for
a discussion of the impact of the Alliant acquisition of Thiokol in 2001 on this
agreement.
Alliant Agreement
In connection with the Acquisition, the Company entered into an agreement
with Alliant to extend an existing agreement through the year 2008. The
agreement establishes prices for any AP purchased by Alliant from the Company
during the term of the agreement as extended. Under this agreement, Alliant
agrees to use its efforts to cause the Company's AP to be qualified on all new
and current programs served by Alliant's Bacchus Works. Alliant and the Company
have agreed that the individual agreements in place prior to Alliant's
acquisition of Thiokol will remain in place. All Thiokol programs existing at
the time of the Alliant acquisition (principally the Space Shuttle and
Minuteman) will continue to be priced under the Thiokol Agreement. All Alliant
programs (principally the Delta, Pegasus and Titan) will be priced under the
Alliant Agreement.
Backlog
As of October 31, 2001, the Company had a backlog of approximately $25.9
million for delivery of perchlorate chemicals in fiscal 2002.
Manufacturing Capacity and Process
Production of AP at the Company's current manufacturing facility in Iron
County, Utah commenced in July 1989. This facility, as currently configured, is
capable of producing 30.0 million pounds of AP annually and is readily
expandable to 40.0 million pounds annually. The Company also produces commercial
quantities of other perchlorate chemicals at this facility. AP produced at the
facility and propellants incorporating such AP have qualified for use in all
programs for which testing has been conducted, including the Space Shuttle,
Titan, Minuteman, Multiple Launch Rocket System, and the Delta and Atlas
programs.
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The Company's AP facility is designed to site particular components of the
manufacturing process in discrete areas of the facility. It incorporates modern
equipment and materials-handling systems designed, constructed and operated in
accordance with the operating and safety requirements of the Company's AP
customers, insurance carriers and governmental authorities.
AP is manufactured by electrochemical processes using the Company's
proprietary technology. The principal raw materials used in the manufacture of
AP (other than electrical energy) are salt, sodium chlorate, graphite, ammonia
and hydrochloric acid. All of the raw materials used in the AP manufacturing
process have been available in commercial quantities, and the Company has had no
difficulty in obtaining necessary raw materials. Prices paid by the Company for
raw materials have historically been relatively stable, although the Company has
recently experienced cost increases on certain raw materials, particularly those
requiring substantial energy costs to manufacture.
Electric energy is one of the Company's primary raw material costs for the
production of AP. The Company is a party to an agreement with Utah Power ("UP")
for its electrical requirements. The agreement provided for the supply of power
for a minimum of a ten-year period, which began in 1989. This agreement had a
three year notice of termination provision and, on April 7, 1999, UP provided
written notice of termination, effective April 7, 2002.
During the fiscal years 2001 and 2000, the Company experienced unusual
increases in its monthly power bills at its Utah production facilities as
compared to average historical monthly amounts. For the months of November and
December 2000, and January 2001, the Company received power bills from UP
totaling approximately $1.9 million, which were approximately $1.5 million in
excess of average historical monthly amounts. The Company claimed that UP had
improperly calculated replacement energy costs and breached the agreement by
failing to comply with the advance notice provisions of the agreement.
Accordingly, the Company disputed all power bills received from UP since January
1999, claiming it had been overcharged by approximately $2.9 million through
January 2001.
A partial settlement of this dispute was reached in which the Company and
UP entered into an amendment of the electric supply agreement dated February 21,
2001. Under the terms of the amendment, the Company has been placed on the
equivalent of Utah's Electric Service Schedule No. 9. Under this rate schedule,
the Company's estimated monthly power bills will be approximately 20% to 30%
higher than historical monthly amounts prior to the dispute. As a result, the
Company will experience an estimated annual increase in power costs that could
be as much as $0.6 million. This amendment has been approved by the Utah Public
Service Commission.
In May 2001, the Company and UP reached a settlement on the remaining
disputed matters. The settlement included both a cash payment from UP to the
Company and a demand curtailment arrangement under Utah's Electric Service
Schedule No. 71. Under the curtailment, the Company accepted UP's offer to
curtail demand during the months of June, July and August 2001. As a result of
the Company's lower perchlorate sales volumes in fiscal 2001, the Company
operated at lower total and peak electric energy consumption levels during these
months and, at the same time, met customers' product delivery requirements. The
settlement and curtailment arrangement resulted in approximately an additional
$2.2 million in cash flow (over the amount which would otherwise be expended on
monthly power bills under the February 21, 2001 amendment described above) to
the Company. The Company recognized (initially as an adjustment to inventories)
the entire $2.2 million resulting from the settlement and curtailment
arrangement in fiscal 2001. See Note 9 to the Consolidated Financial Statements
of the Company.
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Competition
Upon consummation of the Acquisition, the Company effectively became the
sole North American producer of AP. The Company is aware of production capacity
for AP in France, Japan and possibly China and Taiwan. Although the Company has
limited information with respect to these facilities, the Company believes that
these foreign AP producers operate lower volume, higher cost production
facilities and are not approved as AP suppliers for NASA or DOD programs, which
represent the majority of domestic AP demand. In addition, the Company believes
that the rigorous and sometimes costly NASA and DOD program qualification
process, the strategic nature of such programs, the high cost of constructing an
AP facility, and the Company's established relationships with key customers
constitute significant hurdles to entry for prospective competitors.
Kerr-McGee Acquisition
On March 12, 1998 (the "Closing Date"), the Company acquired, pursuant to a
purchase agreement (the "Purchase Agreement") with Kerr-McGee, certain
intangible assets related to Kerr-McGee's production of AP (the "Rights") for a
purchase price of $39.0 million. The Acquisition did not include Kerr-McGee's
production facilities (the "Production Facilities") and certain water and power
supply agreements used by Kerr-McGee in the production of AP. Under the Purchase
Agreement, Kerr-McGee ceased the production and sale of AP, although the
Production Facilities may continue to be used by Kerr-McGee for production of AP
under certain limited circumstances described below. Under the Purchase
Agreement, Kerr-McGee reserved a perpetual, royalty-free, nonexclusive license
to use any of the technology forming part of the Rights as may be necessary or
useful to use, repair or sell the Production Facilities (the "Reserved
License").
Under the Purchase Agreement, Kerr-McGee reserved the right to process and
sell certain reclaimed AP that is not suitable for use in solid fuel rocket
motors (the "Reclaimed Product"), and to produce and sell AP (i) to fulfill
orders scheduled for delivery after the closing, subject to making payments to
the Company with respect to such orders, as provided in the Purchase Agreement
and (ii) in the event of the Company's inability to meet customer demand or
requirements, breach of the Purchase Agreement or termination of the Company's
AP business.
The Purchase Agreement provides that, together with the Reserved License,
Kerr-McGee is permitted in its discretion to (i) lease, sell, dismantle,
demolish and/or scrap all or any portion of the Production Facilities, (ii)
retain the Production Facilities for manufacture of Reclaimed Product and (iii)
maintain the Production Facilities in a "standby" or "mothballed" condition so
they will be capable of being used to produce AP under the limited circumstances
referred to above.
Under the Purchase Agreement, Kerr-McGee has agreed to indemnify the
Company against loss or liability from claims associated with the ownership and
use of the Rights prior to consummation of the Acquisition or resulting from any
breach of its warranties, representations and covenants. The Company has agreed
to indemnify Kerr-McGee against loss and liability from claims associated with
the ownership and use of the Rights after consummation of the Acquisition or
resulting from any breach of its warranties, representations and covenants. In
addition, Kerr-McGee has agreed that it will, at the Company's request,
introduce the Company to AP customers that were not customers of the Company and
consult with the Company regarding the production and marketing of AP.
The Company has determined that a business was not acquired in the
Acquisition and that the Rights acquired have no independent value to the
Company apart from the overall benefit of the transaction and that, as a result
thereof, Kerr-McGee has ceased production of AP (except in the limited
circumstances referred to above), thereby leaving the Company as the sole North
American supplier of AP. Since they have no independent value to the Company,
the Company has assigned no value to the Rights and assigned the entire purchase
price to an intangible asset. The Company is amortizing the purchase price for
the intangible asset over ten years, the duration of the pricing agreements with
its principal AP customers referred to above.
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Financing
On March 12, 1998, the Company sold $75.0 million in Notes. A portion of
the net proceeds ($39.0 million) was used to effect the Acquisition. The Notes
mature on March 1, 2005. Interest on the Notes is paid in cash at a rate of
9-1/4% per annum on each March 1 and September 1, which commenced September 1,
1998. The indebtedness evidenced by the Notes represents a senior unsecured
obligation of the Company, ranks pari passu in right of payment with all
existing and future senior indebtedness of the Company and is senior in right of
payment to all future subordinated indebtedness of the Company. The Indenture
under which the Notes were issued contains various limitations and restrictions
including (i) change in control provisions, (ii) limitations on indebtedness and
(iii) limitations on restricted payments such as dividends, stock repurchases
and investments. Management believes the Company has complied with these
limitations and restrictions. In April 1998, the Company filed a Form S-4
registration statement with the Securities and Exchange Commission for the
purpose of effecting the exchange of the Notes for identical Notes registered
for resale under the federal securities laws. The exchange offer was consummated
on August 28, 1998. Since the issuance of the Notes, the Company has repurchased
and retired approximately $30.8 million in principal amount of Notes.
Within ninety days following the end of each fiscal year, the Indenture
requires the Company to make an offer to all holders of the Notes to purchase
Notes at an offer equal to 102% of the principal amount of the Notes to be
purchased, in an amount equal to 50% of the excess cash flow (a defined term in
the Indenture) for the applicable fiscal year. In December 2001, the Company
expects to make an offer to purchase approximately $3.6 million in principal
amount of Notes at 102%, or at a cost of approximately $3.7 million. Under the
provisions of the Indenture, the offer will remain open for twenty business
days.
A portion of the net proceeds from sale of the Notes was applied to
repurchase the Azide Notes (described below) for approximately $28.2 million
(approximately 113% of the outstanding principal amount thereof). In connection
with the repurchase, the Company recognized an extraordinary loss on debt
extinguishment of approximately $5.0 million. The extraordinary loss consisted
of the cash premium paid of $3.2 million upon repurchase and a charge of $1.8
million to write off the unamortized balance of debt issue and discount costs.
Sodium Azide
Sodium Azide Facility
In July 1990, the Company entered into agreements (the "Azide Agreements")
pursuant to which Dynamit Nobel A.G. ("Dynamit Nobel") has licensed to the
Company on an exclusive basis for the North American market its technology and
know-how for the production of sodium azide, the principal component of the gas
generant used in certain automotive airbag safety systems. In addition, Dynamit
Nobel provided technical support for the design, construction and startup of the
facility. The facility was constructed on land owned by the Company in Iron
County, Utah for its owner and operator, American Azide Corporation ("AAC"), a
wholly-owned indirect subsidiary of the Company, and has an annual design
capacity of 6.0 million pounds.
Financing
On February 21, 1992, the Company concluded a $40.0 million financing for
the design, construction and startup of the sodium azide facility through the
sale of the Azide Notes (11% noncallable subordinated secured term notes). As
described above, on March 12, 1998, the Company repurchased the then remaining
$25.0 million principal amount outstanding of the Azide Notes with funds
obtained through the issuance of the Notes. In connection with the issuance of
the Azide Notes, the Company issued Warrants ("the Warrants") to the purchasers
of the Azide Notes, which are exercisable for a 10-year period on or after
December 31, 1993, to purchase shares of the Company's Common Stock. The
exercise price of the Warrants is $14.00 per share. At a $14.00 per share
exercise price, 2,857,000 shares could be purchased under the Warrants. The
Warrants
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contain additional provisions for a reduction in exercise price in the event
that the Company issues or is deemed to issue stock, rights to purchase stock or
convertible debt at a price less than the exercise price in effect, or in the
event of certain stock dividends or in the event of certain stock splits,
mergers or similar transactions. The Warrants are exercisable, at the option of
their holders, to purchase up to 20% of the Common Stock of AAC, rather than the
Company's Common Stock. In the event of such an election, the exercise price of
the Warrants will be based upon a pro rata share of AAC's capital, adjusted for
earnings and losses, plus interest from the date of contribution.
The Company may call up to 50% of the Warrants at prices that would provide
a 30% internal rate of return to the holders thereof through the date of call
(inclusive of the Azide Notes' yield). The holders of the Warrants were also
granted the right to require that the Common Stock underlying the Warrants be
registered under the Securities Act of 1933, as amended, on one occasion, as
well as certain incidental registration rights.
Market
A number of firms have devoted extensive efforts to the development of
automotive airbag safety systems. These efforts initially resulted in the
acceptance by the automobile industry and the consuming public of an inflator
for automotive airbags that was based principally upon sodium azide, combined in
tablet or granule form with limited amounts of other materials. A number of
other inflator technologies have since been commercially developed and have
gained substantial market share.
The Company expects demand for airbag systems in North America and
worldwide to increase, although the level of demand for sodium azide will depend
upon the penetration of competing inflator technologies that are not based upon
the use of sodium azide. Based principally upon market information received from
inflator manufacturers, the Company expects sodium azide use to continue to
decline and that inflators using sodium azide will be phased out over some
period of time.
The Company initially believed that demand for sodium azide in North
America and the world would substantially exceed existing manufacturing capacity
and announced expansions or new facilities (including the AAC plant) by the 1994
model year (which for sodium azide sales purposes was the period June 1993
through May 1994). Currently, demand for sodium azide is substantially less than
supply on a worldwide basis. The Company believes this is the result of previous
capacity expansions by producers coupled with declining demand, although the
Company's information with respect to competitors' existing or planned capacity
is limited. By reason of this highly competitive market environment, and other
factors discussed below, sodium azide prices decreased significantly in the mid
1990's.
The Company believes that the price erosion of sodium azide has been due,
in part, to unlawful pricing procedures of Japanese sodium azide producers. In
response to such practices, in January 1996, the Company filed an antidumping
petition with the ITC and Commerce. In August 1996, Commerce issued a
preliminary determination that Japanese imports of sodium azide have been sold
in the United States at prices that are significantly below fair value.
Commerce's preliminary dumping determination applied to all Japanese imports of
sodium azide, regardless of end-use. Commerce's preliminary determination
followed a March 1996 preliminary determination by the ITC that dumped Japanese
imports have caused material injury to the U.S. sodium azide industry.
On January 7, 1997, the anti-dumping investigation initiated by Commerce,
based upon the Company's petition, against the three Japanese producers of
sodium azide was suspended by agreement. It is the Company's understanding that,
by reason of the Suspension Agreement, two of the three Japanese sodium azide
producers have ceased their exports of sodium azide to the United States for an
indeterminate period. As to the third and largest Japanese sodium azide
producer, which has not admitted any prior unlawful conduct, the Suspension
Agreement requires that it make all necessary price revisions to eliminate all
United States sales
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at below "Normal Value," and that it conform to the requirements of sections 732
and 733 of the Tariff Act of 1930, as amended, in connection with its future
sales of sodium azide in the United States.
The Suspension Agreement contemplates a cost-based determination of "Normal
Value" and establishes reporting and verification procedures to assure
compliance. Accordingly, the minimum pricing for sodium azide sold in the United
States by the remaining Japanese producer will be based primarily on its actual
costs, and may be affected by changes in the relevant exchange rates.
Finally, the Suspension Agreement provides that it may be terminated by any
party on 60 days' notice, in which event the anti-dumping proceeding would be
re-instituted at the stage to which it had advanced at the time the Suspension
Agreement became effective.
Customers
In May 1997, the Company entered into a three-year agreement with Autoliv
ASP, Inc. ("Autoliv") to supply sodium azide used by Autoliv in the manufacture
of automotive airbags. Deliveries under the agreement commenced in July 1997.
The agreement has been extended through December 31, 2002. Autoliv accounted for
approximately 12%, 14% and 17% of the Company's revenues during the fiscal years
2001, 2000 and 1999, respectively. The Company is also qualified to supply
sodium azide to TRW, Inc. ("TRW"), the other major supplier of airbag inflators
in the United States, but TRW's requirements have been supplied by competitors
of the Company.
Competition
The Company believes that current competing production capacity includes
one producer in Japan and at least three producers in India. In addition, idle
capacity is available and it is possible that domestic or foreign entities will
seek to develop additional sodium azide production facilities in North America.
However, the Company believes that the reduced level of demand and the
underutilization of existing production facilities makes this unlikely.
In the fiscal years 2000 and 1997, the Company recognized impairment
charges of $9.1 million and $52.6 million, respectively, relating to the fixed
assets used in the production of sodium azide. See Note 12 to the Consolidated
Financial Statements of the Company.
Azide Agreements
Under the Azide Agreements, Dynamit Nobel was to receive, for the use of
its technology and know-how relating to its batch production process of
manufacturing sodium azide, quarterly royalty payments of 5% of the quarterly
net sales of sodium azide by AAC for a period of 15 years from the date the
Company begins to produce sodium azide in commercial quantities. The Company and
Dynamit Nobel agreed to suspend the royalty payment effective as of July 1,
1995.
Halotron(TM)
Halotron(TM) is a fire extinguishing system designed to replace halons,
which are brominated CFC chemicals that have been widely used as fire
extinguishing agents in military, industrial, and commercial applications. The
impetus for the invention and improvement of Halotron(TM) was the discovery
during the 1980's that halons are highly destructive to the stratospheric ozone
layer, which acts as a shield against harmful solar ultraviolet radiation.
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Use of Halons
Halons have been used throughout the world in modalities that range from
hand-held fire extinguishers to extensively engineered fixed systems, but which
are generally of two types, streaming and total flooding systems. Streaming
systems rely upon the focused projection of a slowly gasifying liquid over
distances of up to 50 feet from the point of projection. Total flooding systems
release a quickly gasifying liquid into a confined space, rendering inert a
combustible atmosphere and extinguishing any ongoing combustion. Halon 1211,
principally a streaming agent, was used on aircraft and aircraft flightlines, on
small boats and ships, in chemically clean rooms and laboratories,
telecommunication facilities, hotels, textile manufacturing facilities and other
commercial and industrial facilities, including those in the petroleum
industries. Its worldwide production peaked in 1988 at 20,000 metric tons. Halon
1301, principally a flooding agent, protects such installations as computer,
electronic and equipment rooms, ship and other engine room spaces, petroleum
handling stations and repositories of literature and cultural heritage. Its
worldwide production peaked in 1988 at 12,500 metric tons.
Customers and Market
The end-user market for halons and consequently, Halotron(TM), is divided
into several segments. The government segment consists of the armed services and
other agencies, including the Department of Energy, NASA and governmental
offices, laboratories and data processing centers. Historically, military
applications have predominated in this segment. It will be critical to the
Company's efforts to market Halotron(TM) to the military that military
specifications for the procurement of halon replacements include Halotron(TM).
The Company is not aware of any military specifications for halon replacements
that have been issued to date.
Commercial market segments include fire critical industries such as
utilities, telecommunications, oil and gas exploration and production, textile
manufacturing, railroad, retail, wholesale, ocean transport and commercial
aviation. Other market segments include schools, hotels, other business
organizations and small users that typically follow selections made by the
industry users described above.
Halotron(TM) I, the first phase of Halotron(TM), has been extensively and
successfully tested. In 1993, Halotron(TM) I was approved by the United States
Environmental Protection Agency (the "EPA") as a replacement agent for Halon
1211 (the principal halon currently in use). During 1995, the Federal Aviation
Administration ("FAA") approved Halotron(TM) I as an acceptable airport ramp
firefighting agent, concluding that Halotron(TM) I will extinguish flightline
fires in a manner similar to halon 1211.
The Company, together with distributors Amerex Corporation ("Amerex"),
Badger Fire Protection, ("Badger"), Kidde Fyrnetics ("Kidde") and Buckeye Fire
Equipment Company ("Buckeye"), have successfully completed Underwriters
Laboratories' ("UL") fire tests for a number of sizes of portable and wheeled
fire extinguishers using Halotron(TM) I. Domestic distribution of the Buckeye
Halotron(TM) extinguisher line began in early 1996. In May 1998, Amerex began
distribution of a line of UL listed portable fire extinguishers using
Halotron(TM) I. In June 1998, Badger began distribution of a line of UL listed
portable fire extinguishers using Halotron(TM) I. In 1999, Kidde also began
distributing UL listed Halotron(TM) I portables. The Company now has four major
domestic fire extinguisher companies manufacturing and distributing UL listed
portable fire extinguishers using Halotron(TM) I. The Company is also marketing
Halotron(TM) I to other domestic and international fire extinguisher
manufacturers.
In fiscal 2001, sales of Halotron(TM) increased approximately 49% as
compared to fiscal 2000, continuing its recent growth pattern. The Company
expects additional penetration into this market in the future, although there
can be no assurance given with respect thereto.
In August 1997, the Company completed a study, which concluded that the
market for halon substitutes anticipated by the Company when it entered into the
Halotron(TM) business in 1992 had not materialized and that
11
the market for "in-kind" substitutes for Halon 1211 would remain substantially
smaller than the peak use in 1988. Although the study also concluded that the
Company's Halotron(TM) I product could command a significant percentage of this
smaller than anticipated market, there can be no assurance in that regard. In
order for the Company to achieve and maintain market share for Halotron(TM) I
and a long term presence in the industry, it may be necessary for the Company to
expend considerable additional funds and effort in research and development.
Although Halotron(TM) I has an Ozone Depletion Potential ("ODP") that is
significantly lower than that of halons and that meets current environmental
standards, potential users of halon replacements may eventually require a
product with zero ODP. Accordingly, the product life of Halotron(TM) I may be
limited, and the Company may be required to produce succeeding Halotron(TM)
phases that can meet increasingly stringent standards. There can be no assurance
that such phases will be capable of production or that a competitor or
competitors will not develop fire extinguishing agents with comparable or
superior qualities.
The Company's efforts to produce, market and sell Halotron(TM) are
dependent upon the political climate and environmental regulations that exist
and may vary from country to country. The magnitude of future orders received
will be dependent to a large degree upon political issues and environmental
regulations that are not within the Company's control, as well as additional
testing and qualification in certain jurisdictions, governmental budgetary
constraints and the ultimate market acceptance of these new products.
Competition
Potential halon alternatives (not in-kind) and substitutes (halocarbons)
compete as to performance characteristics, environmental effects and cost.
Performance characteristics include throwability, visibility after application,
after-fire damage, equipment portability and versatility, low and high
temperature performance, corrosion probability, shelf life and efficiency. The
environmental effects include ODP, global warming potential and toxicity.
Potential halon alternatives include water, carbon dioxide and a variety of
chemicals in liquid, foam and powder form. It is likely that competitors
producing alternatives and substitutes will be larger, will have experience in
the production of fire extinguishing chemicals and systems and will have greater
financial resources than those available to the Company. In 1996, Dupont
introduced a new substitute fire extinguishing agent called FE-36(TM), which is
intended to replace Halon 1211. In 2001, 3M introduced a Halon 1211 replacement
agent called Novec 1230(TM). There are also certain existing patents held by
others that may cover the use as a fire extinguishing agent of one of the key
raw materials the Company uses in the production of Halotron(TM) I. The Company
has recently experienced increases in the cost of this raw material. In
addition, there are currently no domestic use restrictions on halon, so that
potential customers for halon substitutes may continue to use existing
halon-based systems in their possession until the supply is exhausted, which is
believed to be a substantial period of time for some users.
Halotron(TM) Agreement
In 1991 and thereafter, the Company entered into a number of agreements
(collectively the "Halotron(TM) Agreement") with the inventors of Halotron(TM)
(the "Inventors"), granting the Company the option (which was exercised in
February 1992) to acquire the exclusive worldwide rights to manufacture and sell
Halotron(TM). The Halotron(TM) Agreement provides for disclosure to the Company
of all confidential and proprietary information concerning Halotron(TM) I. On
February 26, 1992, the Company acquired the rights provided for in the
Halotron(TM) Agreement, gave notice to that effect to the Inventors, and
exercised its option. In addition to the exclusive license to manufacture and
sell Halotron(TM) I, the rights acquired by the Company include rights under all
present and future patents relating to Halotron(TM) I throughout the world,
rights to related and follow-on products and technologies and product and
technology improvements. Upon exercise of the option, the Company paid the sum
of $0.7 million (the exercise price of $1.0 million, less advance payments
previously made) and subsequently paid the further total sum of $1.5 million in
monthly installments, commencing in March 1992. A license agreement between the
Company and the Inventors of Halotron(TM) I provided for a royalty to the
Inventors of 5% of the Company's net sales of Halotron(TM) I over a period of 15
years (however, see below for a
12
discussion of certain litigation associated with the Inventors' rights to
royalties). In addition, the Company entered into employment and consulting
agreements with the Inventors which have since been terminated.
See Item 3. Legal Proceedings and Note 13 to the Consolidated Financial
Statements of the Company for a discussion of litigation associated with the
Halotron(TM) Agreement.
Halotron(TM) Facility
The Company has designed and constructed a Halotron(TM) facility that has
an annual capacity of at least 6.0 million pounds, located on land owned by the
Company in Iron County, Utah.
Real Estate Assets
The Company has interests in two real estate assets under development in
Clark County, Nevada: the Gibson Business Park and the Ventana Canyon joint
venture residential project. The Company also owns 4,700 acres of land at the
site of its facility in Iron County, Utah that are dedicated to the Company's
growth and diversification.
At September 30, 2001, the Company owned approximately 58 acres of improved
undeveloped land at the Gibson Business Park near Las Vegas, Nevada. This land
is held for sale.
Ventana Canyon is a 320 acre master-planned community under development
near Las Vegas, Nevada. The community is primarily residential in character,
contemplating single family detached homes, townhomes and apartment buildings.
The project is owned by Gibson Ranch Limited Liability Company ("GRLLC"), to
which the Company has contributed approximately 240 acres and an unrelated local
real estate development group (the "Developer") has contributed the remaining 80
acres. The Developer is the managing member of GRLLC and manages the business
conducted by GRLLC. Certain major decisions, such as increasing debt and changes
in the development plan or budget may be made only by a management committee on
which the Company is represented. The property contributed by the Company had a
carrying value of approximately $12.3 million at the date of contribution in
1993.
The Company provides financing to the project under two revolving credit
facilities: (i) a $2.4 million facility with GRLLC (the "GRLLC Facility") and
(ii) a $1.7 million facility with the Developer (under which the Developer is
required to advance funds to GRLLC) (the "Developer Facility"). As of September
30, 2001 and 2000, all of the funds previously advanced under these facilities
had been repaid. The credit facilities remain in effect until the property is
fully developed. The profits and losses of GRLLC will be split equally between
the Company and the Developer after the return of the advances and agreed upon
values for initial contributions of property. The Company believes that
development and sale of the property will be completed by the end of calendar
2001, although no assurance can be given in this regard. If the development and
sale of the property continues beyond calendar 2001, there may be an adverse
impact on the earnings and cash flows of GRLLC.
Environmental Protection Equipment
The Company designs, manufactures and markets systems for the control of
noxious odors, the disinfection of waste water streams and the treatment of
seawater. Its OdorMaster(TM) systems eliminate odors from gases at sewage
treatment plants, composting sites and pumping stations and at chemical, food
processing and other industrial plants. These systems, which use electrochemical
technology developed in the Company's specialty chemical operations, chemically
deodorize malodorous compounds in contaminated air. Advanced OdorMaster(TM)
systems place two or three scrubber towers in series to treat complex odors,
such as those produced at sewage composting sites or in sewage sludge
conditioning systems. ChlorMaster(TM) Brine and Sea
13
water systems utilize a similar process to disinfect effluent at inland sewage
treatment and industrial plants and to control marine growths in condenser
cooling and service water at power and desalination plants and at oil drilling
production facilities on seacoasts and offshore.
The Company's customers for its OdorMaster(TM) System are municipalities
and special authorities (and the contractors who build the sewage systems for
such municipalities and authorities) and plant owners. Municipalities and
special authorities, and oil and other industrial companies are customers of its
ChlorMaster(TM) systems. Its systems are marketed domestically by independent
sales representatives and overseas by sales representatives and licensees. The
Company competes both with companies that utilize other decontamination
processes and those that utilize technology similar to the Company's. All are
substantially larger than the Company. The Company's success to date is derived
from the ability of its products both to generate sodium hypochlorite on site
and to decontaminate effectively. Its future success will depend upon the
competitiveness of its technology and the success of its sales representatives
and licensees.
At October 31, 2001, the environmental protection equipment division had no
significant backlog.
Research and Development
The Company's existing laboratory facilities are located on the premises of
the Company's perchlorate production activities and are used to support those
activities and its sodium azide and Halotron(TM) production activities. The
Company conducts research and development programs directed toward enhancement
of product quality and performance and the development of complementary or
related products at these facilities.
Insurance
The Company's insurance currently includes property insurance on all of its
facilities and business interruption insurance. The Company also maintains
certain liability insurance. Management believes that the nature and extent of
the Company's current insurance coverages are adequate. The Company has not
experienced difficulty obtaining these types of insurance.
Government Regulation
As a supplier to United States government projects, the Company has been
and may be subject to audit and/or review by the government of the negotiation
and performance of, and of the accounting and general practice relating to,
government contracts. Most of the Company's contracts for the sale of AP are in
whole or in part subject to the commercial sections of the Federal Acquisition
Regulations. The Company's AP pricing practices have been and may be reviewed by
its customers and by certain government agencies.
Environmental Regulation
The Company's operations are subject to extensive federal, state and local
regulations governing, among other things, emissions to air, discharges to water
and waste management. Management believes that the Company is currently in
compliance in all material respects with all applicable environmental, safety
and health requirements and, subject to the matters discussed below, does not
anticipate any material adverse effects from existing or known future
requirements. To meet changing licensing and regulatory standards, the Company
may be required to make additional significant site or operational
modifications, potentially involving substantial expenditures or the reduction
or suspension of certain operations. In addition, the operation of the Company's
manufacturing plants entails risk of adverse environmental and health effects
(not covered by insurance) and
14
there can be no assurance that material costs or liabilities will not be
incurred to rectify any future occurrences related to environmental or health
matters.
In 1997, the Southern Nevada Water Authority detected trace amounts of
perchlorate chemicals in Lake Mead and the Las Vegas Wash, bodies of water near
the Company's real estate development property in Henderson, Nevada. Lake Mead
is a source of drinking water for the City of Las Vegas, neighboring areas and
certain areas of metropolitan Southern California. Perchlorate chemicals
(including AP) are a potential health concern because they can interfere with
the production of a growth hormone by the thyroid gland, although they are not
currently included in the list of hazardous substances compiled by the EPA.
However, perchlorates have been added to the EPA's Contaminant Candidate List
and will likely eventually be regulated. The Company manufactured AP at a
facility on the Henderson site until the facility was destroyed in the May 1988
incident, described below, after which the Company relocated its AP production
to its current facilities in Iron County, Utah. For many years, Kerr-McGee
operated an AP production facility at a site near the Company's Henderson
property.
The Water Authority's testing has shown perchlorate concentrations of 8 to
14 parts per billion (ppb) in Clark County drinking water. In response to this
discovery, the Company has engaged environmental consultants to drill monitor
wells in order to characterize ground water at and in the vicinity of the
Henderson site. The results of the Company's tests have shown perchlorate
concentrations in the ground water at the Henderson property ranging from 0 to
approximately 750,000 ppb at certain monitoring wells. The results have also
indicated that the ground water containing perchlorate concentration from the
Henderson site has not reached the Las Vegas Wash or Lake Mead and, accordingly,
has not been introduced into any source of drinking water. It has been reported
that levels as high as 3.7 million ppb have been detected at a monitoring well
at the Kerr-McGee site. The State of California has adopted a preliminary
maximum standard of 18 ppb for perchlorate levels in drinking water, but there
are currently no federal or State of Nevada standards for acceptable levels of
perchlorate in ground water or drinking water. The Company is cooperating with
State and local agencies, and with Kerr-McGee and other interested firms, in the
investigation and evaluation of perchlorate found at its site and of the source
or sources of perchlorates in Lake Mead and potential remediation methods. Until
these investigations and evaluations have reached definitive conclusions, it
will not be possible for the Company to determine the extent to which, if at
all, the Company may be called upon to contribute to or assist with future
remediation efforts, or the financial impact, if any, of such contributions or
assistance. Accordingly, no accrual for potential costs has been made in the
accompanying Consolidated Financial Statements of the Company. See Note 9 to the
Consolidated Financial Statements.
Safety Considerations
AP, in the particle sizes and chemical purities produced by the Company, is
categorized for transportation purposes by the United States Department of
Transportation ("DOT") as a Class IV oxidizer. Such classification indicates
that the DOT considers AP to be non-explosive, non-flammable and non-toxic. The
Company's AP manufacturing plant was constructed in a manner intended to
minimize, to the extent of known technologies and safety measures, the
combination of AP with other materials in a manner that could result in
explosions or combustion. However, no assurance can be given that the Company's
safety precautions will be effective in preventing explosions, fires and other
such events from occurring. On July 30, 1997, an explosion and fire occurred at
the Company's AP production facility in Iron County, Utah. Although damage to
the Company's property was confined to a relatively small area, the incident
left one employee dead and three others injured, one seriously. As a result of
this incident, the Utah Occupational Safety and Health Division of the Utah
Labor Commission cited the Company for violation of certain applicable Utah
safety regulations in connection with the handling of AP and assessed fines
totaling $5,250. Although the Company has taken steps to improve safety measures
and training in response to this incident, there can be no assurance that such
measures will be effective in preventing other such events in the future.
15
The Company has one major operating facility located in Iron County, Utah.
The loss or shutdown of operations over an extended period of time at such
facility would have a material adverse effect on the Company. The Company's
operations are subject to the usual hazards associated with chemical
manufacturing and the related storage and transportation of products and wastes,
including explosions, fires, inclement weather and natural disasters, mechanical
failure, unscheduled downtime, transportation interruptions, chemical spills,
discharges or releases of toxic or hazardous substances or gases and other
environmental risks, such as required remediation of contamination. These
hazards can cause personal injury and loss of life, severe damage to or
destruction of property and equipment and environmental damage, and may result
in suspension of operations and the imposition of civil or criminal penalties.
The Company maintains property, business interruption and liability insurance at
levels which it believes are in accordance with customary industry practice, but
there can be no assurance that the Company will not incur losses beyond the
limits or outside the coverage of its insurance.
On May 4, 1988, the former manufacturing and office facilities of the
Company in Henderson, Nevada were destroyed by a series of massive explosions
and associated fires. Extensive property damage occurred both at the Company's
facilities and in immediately adjacent areas, the principal damage occurring
within a three-mile radius. Production of AP, the Company's principal business,
ceased for a 15-month period. Significant interruptions were also experienced in
the Company's other businesses, which occupied the same or adjacent sites.
Although the Company's current facility is designed to site particular
components of the manufacturing process in discrete areas of the facility and
incorporates modern equipment and materials handling systems designed,
constructed and operated in accordance with the operating and safety
requirements of the Company's customers, insurance carriers and governmental
authorities, there can be no assurance that another incident would not interrupt
some or all of the activities carried on at the Company's current manufacturing
site.
Sodium azide is a strong reducing agent and is classified by the DOT as a
poison. Its manufacture entails certain hazards with which Dynamit Nobel and the
Company have become familiar over the course of time. The Company's method of
production is intended to limit the quantity of sodium azide in process at any
one time and to utilize known safety measures in an effort to lessen attendant
risks. In late 1992, a fire occurred in a sodium azide reactor vessel at the
Company's facility during start-up and testing of the reactor vessel. In
addition, fires are reported to have affected production at a competitor's
facility in the past. There can be no assurance that a fire or other incident
will not occur at the Company's sodium azide production facility in the future.
The Company believes that exposure to sodium azide after an airbag is installed
in an automobile is highly unlikely due to the way in which sodium azide is used
and to the housing in which it is encased. However, the Company understands that
claims have been asserted by automobile drivers and passengers that they have
suffered hand burns from heated gas and facial abrasions from airbag fabric
after its deployment, although no such claims have been asserted against the
Company.
Employees
At September 30, 2001, the Company employed approximately 206 persons in
executive, administrative, sales and manufacturing capacities. Although efforts
have been made by union representatives to seek certification to represent
certain Company employees, no such certification has been granted and the
Company does not have collective bargaining agreements with any of its
employees. The Company considers its relationships with its employees to be
satisfactory.
16
Item 2. Properties
- -------------------
The following table sets forth certain information regarding the Company's
properties at September 30, 2001.
Approximate
Area or Approximate
Location Principal Use Floor Space Status Annual Rent
-------- ------------- ----------- ------ -----------
Iron County, UT Perchlorate Manufacturing Facility/(a)/ 217 acres Owned ___
Iron County, UT Sodium Azide Manufacturing Facility/(b)/ 41 acres Owned ___
Iron County, UT Halotron(TM) Manufacturing Facility/(c)/ 6,720 sq. ft. Owned ___
Las Vegas, NV Executive Offices 22,262 sq. ft. Leased/(d)/ $550,000
(a) This facility is used for the production of perchlorate products and
environmental protection equipment. It consists of approximately
112,000 sq. ft. of enclosed manufacturing space, a 12,000 sq. ft.
administration building and a 3,200 sq. ft. laboratory building.
Perchlorate capacity utilization rates for this production facility
were approximately 51%, 69% and 80% during the fiscal years ended
September 30, 2001, 2000 and 1999, respectively.
(b) This facility is used for the production of sodium azide and consists
of approximately 34,600 sq. ft. of enclosed manufacturing and
laboratory space. Capacity utilization rates for this production
facility were approximately 33%, 40% and 47% during the fiscal years
ended September 30, 2001, 2000 and 1999, respectively.
(c) Capacity utilization rates for the Halotron(TM) production facility
were approximately 11%, 7% and 4% during the fiscal years ended
September 30, 2001, 2000 and 1999, respectively.
(d) These facilities are leased from 3770 Howard Hughes Parkway
Associates-Limited Partnership for an initial term of 10 years, which
began on March 1, 1991, and was extended for an additional 5 years in
March 2001. Approximately 25% of this space is currently sublet at an
annual rent of approximately $130,000. See Note 4 to the Consolidated
Financial Statements of the Company.
The Company's facilities are considered by it to be adequate for its
present needs and suitable for their current use. See Item 1. Business-"Real
Estate Assets" for a description of the Company's development properties in Iron
County, Utah and Clark County, Nevada.
Item 3. Legal Proceedings
- --------------------------
In February 1992, following successful technical evaluations and field
tests, the Company exercised its option to acquire the rights provided for in
the Halotron(TM) Agreement.
In 1992, the Company sued the Inventors, claiming they had breached the
agreements and contracts in which they had sold the rights to Halotron(TM). This
initial litigation was settled when the Inventors promised to perform faithfully
their duties and to honor the terms of the contracts that, among other things,
gave the Company exclusive rights to the Halotron(TM) chemicals and delivery
systems. Following the settlement of the initial litigation, however, the
Inventors failed to perform the acts they had promised in order to secure
dismissal of that litigation. As a result, the Company brought an action in the
Utah state courts in March 1994, for the purpose of establishing the Company's
exclusive rights to the Halotron(TM) chemicals and delivery systems. On August
15, 1994, the court entered a default judgment against the Inventors granting
the injunctive relief
17
requested by the Company and awarding damages in the amount of $42.2 million.
The trial court further ordered the Inventors to execute documents required for
patent registration of Halotron(TM) in various countries. When the Inventors
ignored this court order, the Court directed the Clerk of the Court to execute
these documents on behalf of the Inventors. Finally, the Court ordered that the
Inventors' rights to any future royalties from sales of Halotron(TM) were
terminated.
In 1996, the Company initiated arbitration proceedings by filing a notice
of arbitration with the American Arbitration Association ("AAA") against the
Inventors to enforce, among other things, the Company's rights under the
Halotron(TM) Agreement. In June 2000, an AAA Panel (the "Tribunal") issued their
final award in this proceeding. The Tribunal awarded the Company monetary relief
consisting of $2.0 million in compensatory damages, $0.2 million in arbitration
costs, and $0.3 million in partial legal related costs, plus interest at an
annual non-compounded rate of 9%. The Tribunal also awarded the Company
injunctive relief essentially consisting of requirements that the Inventors stop
using the Halotron(TM) name, the invention, the know-how, and the proprietary
information, produce missing work product, disclose and transfer relevant patent
and trademark rights, and provide information on sales of "Halotron(TM)"
products. The award also specifies that the Inventors pay $1000 for each day,
beyond twenty days of award delivery, that they fail to satisfy the directives
within the injunctive relief. Any opportunity for royalties to the Inventors
would only occur after the payment of damages and compliance with the directives
within the award. In 2001, the Svea Hovratt Court in Sweden determined that the
final award was enforceable. However, the Inventors (both individually and
corporately) have declared bankruptcy in Sweden. The Company is pursuing
enforcement of the award through the bankruptcy proceedings.
In 1999, two lawsuits were filed in Utah State court against the Company
and certain unrelated equipment and product manufacturers claiming unspecified
monetary damages as a result of the fire and explosion on July 30, 1997 at the
Company's AP production facility (see Item 1. Business-"Safety Considerations").
In March 2001, the lawsuits were dismissed, without prejudice.
The information set forth in Notes 9 and 13 to the Consolidated Financial
Statements of the Company regarding litigation and contingencies is incorporated
herein by reference. Reference is also made to Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not Applicable.
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters
- -------------------------------------------------------------------------------
The Company's Common Stock trades on The Nasdaq Stock Market(R) under the
symbol "APFC." The table below sets forth the high and low sales prices of the
Common Stock for the periods indicated.
High Low
----------- -----------
Fiscal Year 2001
----------------
1st Quarter $ 6.938 $ 4.500
2nd Quarter 6.438 4.000
3rd Quarter 6.620 4.750
4th Quarter 8.430 4.810
High Low
----------- -----------
Fiscal Year 2000
----------------
1st Quarter $ 8.875 $ 6.813
2nd Quarter 10.688 7.000
3rd Quarter 7.313 5.250
4th Quarter 6.625 5.188
At October 31, 2001, there were approximately 1,186 shareholders of record
of the Company's Common Stock. The Company has not paid a dividend on the Common
Stock since the Company's incorporation and does not anticipate paying cash
dividends in the foreseeable future. In addition, covenants contained in the
Indenture associated with the Notes restrict the Company's ability to pay
dividends. (See Note 5 to the Consolidated Financial Statements of the Company.)
19
Item 6. Selected Financial Data
- --------------------------------
FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA FOR THE YEARS ENDED SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------------------------------
(in thousands except per share amounts)
STATEMENT OF OPERATIONS DATA:
Sales and operating revenues $ 63,089 $ 67,369 $ 72,834 $ 52,339 $ 44,050
Cost of sales 38,186 44,279 45,834 35,792 36,420
Gross profit 24,903 23,090 27,000 16,547 7,630
Operating expenses 10,050 10,236 10,024 9,246 9,509
Impairment charges 9,084 52,605
Employee separation and management
reorganization costs 3,616
Operating income (loss) 14,853 3,770 16,976 7,301 (58,100)
Equity in real estate venture 300 200
Interest and other income 1,877 1,987 1,588 1,294 1,115
Interest and other expense 4,467 5,568 6,951 5,734 2,001
Income (loss) before income taxes 12,263 189 11,613 3,161 (58,786)
Income taxes 4,537 (15,136) (10,101)
Net income (loss) before
extraordinary loss 7,726 15,325 11,613 3,161 (48,685)
Extraordinary loss-debt extinguishments 1,594 174 5,172
Net income (loss) 7,726 13,731 11,439 (2,011) (48,685)
Basic net income (loss) per share 1.10 1.88 1.41 (.24) (6.01)
Diluted net income (loss) per share $ 1.10 $ 1.86 $ 1.39 $ (.24) $ (6.01)
BALANCE SHEET DATA:
Cash and cash equivalents and
short-term investments $ 51,471 $ 30,128 $ 40,434 $ 20,389 $ 18,881
Restricted cash 1,195 1,176 3,580
Inventories and accounts and notes
receivable 19,736 20,813 18,883 23,193 17,304
Property, plant and equipment - net 7,107 7,064 17,254 19,529 19,314
Intangible assets-net 25,411 29,805 34,210 38,252 1,540
Deferred income taxes 11,103 15,406
Development property 4,780 5,482 6,440 7,036 7,362
Real estate equity investments 1,599 6,838 11,237 17,112 20,248
Total assets 123,042 117,590 132,882 130,759 90,081
Working capital 66,049 43,758 53,088 34,786 23,479
Notes payable and current portion
of long-term debt 1,195 1,176 6,166
Long-term debt 44,175 44,175 67,000 70,000 24,900
Shareholders' equity $ 66,955 $ 59,609 $ 52,204 $ 44,029 $ 45,551
20
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
- ---------------------
Overview
The Company is principally engaged in the production of AP for the
aerospace and national defense industries. In addition, the Company produces and
sells sodium azide, the primary component of a gas generant used in automotive
airbag safety systems, and Halotron(TM), a chemical used in fire extinguishing
systems ranging from portable fire extinguishers to airport firefighting
vehicles. The perchlorate, sodium azide and Halotron(TM) facilities are located
on the Company's property in Southern Utah and the chemicals produced and sold
at these facilities collectively represent the Company's specialty chemicals
operating segment. The Company's other lines of business include the development
of real estate in Nevada and the production of environmental protection
equipment, including waste water and seawater treatment systems.
Upon consummation of the Acquisition in 1998, the Company effectively
became the sole North American producer of AP.
Sales and Operating Revenues. Sales of the Company's perchlorate chemical
products, consisting almost entirely of AP sales, accounted for approximately
68%, 69% and 67% of revenues during the fiscal years ended September 30, 2001,
2000 and 1999, respectively. In general, demand for AP is driven by a relatively
small number of DOD and NASA contractors. As a result, any one individual AP
customer usually accounts for a significant portion of the revenues of the
Company. For example, Alliant accounted for approximately 60%, 51% and 49% of
the Company's revenues during the fiscal years ended September 30, 2001, 2000
and 1999, respectively.
Sodium azide sales accounted for approximately 15%, 18% and 19% of sales
during fiscal years ended September 30, 2001, 2000 and 1999, respectively.
Autoliv, the Company's principal sodium azide customer, accounted for
approximately 12%, 14% and 17% of the Company's revenues during fiscal 2001,
2000 and 1999, respectively.
Sales of Halotron(TM) amounted to approximately 6%, 4% and 2% of revenues
during the fiscal years ended September 30, 2001, 2000 and 1999, respectively.
In fiscal 2001, sales of Halotron(TM) increased approximately 49% as compared to
fiscal 2000, continuing its recent growth pattern. Halotron(TM) is designed to
replace halon-based fire extinguishing systems. Accordingly, demand for
Halotron(TM) depends upon a number of factors including the willingness of
consumers to switch from halon-based systems, as well as existing and potential
governmental regulations.
Real estate and related sales amounted to approximately 5%, 4% and 9% of
revenues during the fiscal years ended September 30, 2001, 2000 and 1999,
respectively. The nature of real estate development and sales is such that the
Company is unable reliably to predict any pattern of future real estate sales or
recognition of the equity in earnings of real estate ventures.
Environmental protection equipment sales accounted for approximately 6%, 5%
and 3% of revenues during the fiscal years ended September 30, 2001, 2000 and
1999, respectively.
Cost of Sales. The principal elements comprising the Company's cost of
sales are depreciation and amortization, raw materials, electric power, labor,
manufacturing overhead and the basis in real estate sold. The major raw
materials used by the Company in its production processes are graphite, sodium
chlorate, ammonia, hydrochloric acid, sodium metal, nitrous oxide and HCFC 123.
Significant increases in the cost of raw materials may have an adverse impact on
margins if the Company is unable to pass along such increases to its customers.
During the first six months of fiscal 2001, the Company purchased greater
quantities of certain raw materials because of excessive power costs (See Note 9
to the Consolidated Financial Statements of the
21
Company.) Prices paid by the Company for raw materials have historically been
relatively stable, although the Company has recently experienced cost increases
on certain raw materials, particularly on HCFC 123 and those requiring
substantial energy costs to produce. All the raw materials used in the Company's
manufacturing processes have been available in commercial quantities, and the
Company has had no difficulty obtaining necessary raw materials. A substantial
portion of the total cash costs of operating the Company's specialty chemical
plants, consisting mostly of labor and overhead, are largely fixed in nature.
Operating Expenses. Operating (selling, general and administrative)
expenses were $10.1 million, $10.2 million and $10.0 million during the fiscal
years ended September 30, 2001, 2000 and 1999, respectively. Operating expenses
in the fiscal years 2001, 2000 and 1999 include approximately $0.9 million, $1.0
million and $1.0 million, respectively, in costs related to the investigation
and evaluation of the trace amounts of perchlorate chemicals found in Lake Mead
(see Note 9 to the Consolidated Financial Statements of the Company). The
Company is unable to determine the extent to which similar costs will be
incurred in the future.
Income Taxes. The Company's effective income tax rates were approximately
37% and 0% during the fiscal years ended September 30, 2001 and 1999,
respectively. In fiscal 1997, the Company established a deferred tax valuation
allowance. In fiscal 2000, the Company released its deferred tax valuation
allowance and recognized approximately $15.4 million in net deferred tax assets
(see Note 7 to the Consolidated Financial Statements of the Company).
Net Income. Although the Company's net income and diluted net income per
common share have not been subject to seasonal fluctuations, they have been and
are expected to continue to be subject to variations from quarter to quarter and
year to year due to the following factors, among others: (i) as discussed in
Note 9 to the Consolidated Financial Statements of the Company, the Company may
incur material legal and other costs associated with certain litigation and
contingencies; (ii) the timing of real estate sales and equity in the earnings
of real estate ventures is not predictable; (iii) the recognition of revenues
from environmental protection equipment orders not accounted for as long-term
contracts depends upon orders generated and the timing of shipment of the
equipment; (iv) weighted average common and common equivalent shares for
purposes of calculating diluted net income (loss) per common share are subject
to significant fluctuations based upon changes in the market price of the
Company's Common Stock due to outstanding warrants and options; (v) the results
of periodic reviews of impairment issues; (vi) the ability to pass on increases
in raw material costs, including electric power costs, to customers; and (vii)
the magnitude, pricing and timing of AP, sodium azide, Halotron(TM), and
environmental protection equipment sales in the future is uncertain. (See
"Forward Looking Statements/Risk Factors" below.)
Results of Operations
Fiscal Year Ended September 30, 2001 Compared to Fiscal Year Ended September 30,
2000
Sales and Operating Revenues. Sales decreased $4.3 million, or 6%, to $63.1
million in fiscal 2001, from $67.4 million in fiscal 2000. This decrease was
principally attributable to lower specialty chemicals sales. Perchlorate
chemical and sodium azide sales decreased approximately $5.9 million due to
lower volumes. This decrease was partially offset by an increase in Halotron(TM)
sales of approximately $1.3 million. The increase in Halotron(TM) sales results
principally from the Company's increased penetration into the clean-gas fire
extinguishing markets both domestically and internationally.
In March 2000, the Company received notification from Thiokol of a change
in the fiscal 2000 purchase order for AP that resulted in a decrease of
approximately 3.23 million pounds of AP (from 10.48 million pounds of AP). The
Company submitted a price adjustment claim under the change order and, in
September 2000, negotiated and settled the claim which resulted in a $3.0
million payment from Thiokol. Sales volume levels for
22
AP declined from approximately 16.4 million pounds in fiscal 2000 to
approximately 12.6 million pounds in fiscal 2001. AP sales volumes in fiscal
1999 were approximately 20.2 million pounds. The recent weakness in sales
volumes is primarily attributable to lower requirements for applications in
certain commercial space launch vehicles used primarily in satellite launches,
particularly telecommunication satellites. In addition, purchases of AP for use
in the solid rocket motors for the Space Shuttle, as evidenced by the change
order referred to above, have declined as a result of existing excess inventory
levels. The Company believes that such excess should be reduced over the next
few years considering the number of shuttle flights planned for the construction
and servicing of the International Space Station. The Company also understands
that existing plans call for significant AP requirements over the next several
years for use in the Minuteman program. Although the Company has not yet
experienced a specific increase in defense related orders, the tragic events on
September 11, 2001, in New York City and Washington D.C. and the United States
of America's declared war on terrorism, may result in increased orders for AP
used in certain defense programs. Accordingly, the Company estimates that the
North American demand for AP could increase to an annual level of between 16.0
million and 20.0 million pounds over the next few years, although there can be
no assurance given with respect to these estimates. The Company has no ability
to influence North American demand for AP.
The Company experienced a 17% decrease in sodium azide sales volumes in
fiscal 2001 as compared to fiscal 2000. Although the Company expects the
worldwide demand for airbag systems to increase, the level of demand for sodium
azide will depend upon the penetration of competing inflator technologies that
are not based upon the use of sodium azide. Based principally upon market
information received from inflator manufacturers, the Company expects sodium
azide use to continue to decline and that inflators using sodium azide will be
phased out over some period of time.
Real estate sales increased $0.1 million , or 4%, to $2.6 million in fiscal
2001, from $2.5 million in fiscal 2000, due to an increase in land sales in
fiscal 2001 compared to fiscal 2000.
Environmental protection equipment sales increased $0.2 million, or 6%, to
$3.7 million in fiscal 2001, from $3.5 million in fiscal 2000. As of October 31,
2001, this segment had no significant backlog, although the Company is actively
bidding on a number of projects.
Cost of Sales. Cost of sales decreased $6.1 million, or 14%, to $38.2
million in fiscal 2001, from $44.3 million in fiscal 2000. As a percentage of
sales, cost of sales was 61% in fiscal 2001, compared to 66% in fiscal 2000. The
decrease in the percentage of cost of sales to sales was principally
attributable to decreased depreciation expense associated with the Company's
sodium azide operations, as a result of the impairment charge in fiscal 2000
discussed below. In addition, because of the settlement and curtailment
arrangement discussed in Note 9 to the Consolidated Financial Statements, net
power costs were approximately $1.0 million less in fiscal 2001 as compared to
normalized historical annual amounts.
Operating Expenses. Operating (selling, general and administrative)
expenses decreased $0.1 million, or 1%, in fiscal 2001 to $10.1 million, from
$10.2 million in fiscal 2000. Operating expenses during the fiscal years ended
2001 and 2000 include approximately $0.9 million and $1.0 million, respectively,
in costs associated with the investigation and evaluation of trace amounts of
perchlorate chemicals found in Lake Mead. (See Note 9 to the Consolidated
Financial Statements of the Company.)
Segment Operating Income. Operating income of the Company's operating
segments during the fiscal years ended September 30, 2001 and 2000 was as
follows:
------------------------------------------------------------
2001 2000
------------------------------------------------------------
Specialty chemicals $ 13,479,000 $ 2,446,000
Environmental protection equipment 140,000 453,000
Real estate 1,234,000 871,000
------------------------------------------------------------
Total $ 14,853,000 $ 3,770,000
============================================================
23
The increases in operating income in the Company's specialty chemicals industry
segment was primarily attributable to an impairment charge of $9.1 million
recognized in fiscal 2000. The increase in operating income of the Company's
real estate segment was principally due to better margins on land sales.
Interest and Other Income. Interest and other income decreased to $1.9
million in fiscal 2001 from $2.0 million in fiscal 2000. The decrease was
principally due to lower average interest rates earned on cash and cash
equivalent balances.
Interest and Other Expense. Interest and other expense decreased to $4.5
million in fiscal 2001 from $5.6 million in fiscal 2000 principally as a result
of lower average debt balances.
Fiscal Year Ended September 30, 2000 Compared to Fiscal Year Ended
September 30, 1999
Sales and Operating Revenues. Sales decreased $5.4 million, or 7%, to $67.4
million in fiscal 2000, from $72.8 million in fiscal 1999. This decrease was
attributable to decreased specialty chemicals and real estate sales. The
decrease was partially offset by an increase in environmental protection
equipment sales.
Specialty chemicals sales decreased $3.1 million, or 5%, to $61.4 million
in fiscal 2000, from $64.5 million in fiscal 1999. This decrease was principally
attributable to a decrease in perchlorate sales of $1.8 million and a decrease
in sodium azide sales of $2.5 million. The decrease in perchlorate sales was
attributable to the reduced sales volumes discussed above. These decreases were
offset in part by an increase in Halotron(TM) sales. Halotron sales increased
$1.2 million, or 80%, to $2.7 million in fiscal 2000 compared to $1.5 million in
fiscal 1999. The increase in Halotron(TM) sales results principally from the
Company's increased penetration into the clean-gas fire extinguishing agent
market.
The Company experienced a 17% decrease in sodium azide sales volume in
fiscal 2000 as compared to fiscal 1999, due principally to the declining market
usage referred to above. As a result of these market conditions, in fiscal 2000
the Company recognized an impairment charge of approximately $9.1 million
relating to fixed assets used in the production of sodium azide. See Note 12 to
the Consolidated Financial Statements of the Company.
Real estate sales decreased $3.7 million, or 60%, to $2.5 million in fiscal
2000, from $6.2 million in fiscal 1999 due to a decrease in land sales in fiscal
2000 compared to fiscal 1999.
Environmental protection equipment sales increased $1.4 million, or 67%, to
$3.5 million in fiscal 2000, from $2.1 million in fiscal 1999.
Cost of Sales. Cost of sales decreased $1.5 million, or 3%, in fiscal 2000
to $44.3 million from $45.8 million in fiscal 1999. Cost of sales as a
percentage of sales increased to 66% in fiscal 2000 as compared to 63% in fiscal
1999. The increase in cost of sales as a percentage of sales was primarily
attributable to lower specialty chemical sales volumes (perchlorates and sodium
azide).
Operating Expenses. Operating (selling, general and administrative)
expenses increased $0.1 million, or 1%, in fiscal 2000 to $10.2 million from
$10.0 million in fiscal 1999.
Segment Operating Income (Loss). Operating income (loss) of the Company's
operating segments during the fiscal years ended September 30, 2000 and 1999 was
as follows:
24
------------------------------------------------------------
2000 1999
------------------------------------------------------------
Specialty chemicals $ 2,446,000 $ 14,379,000
Environmental protection equipment 453,000 (888,000)
Real estate 871,000 3,485,000
------------------------------------------------------------
Total $ 3,770,000 $ 16,976,000
============================================================
The decrease in operating income of the specialty chemicals segment was
attributable to the decrease in perchlorate and sodium azide sales and the
impairment charge of $9.1 million discussed above. The increase in operating
income of the environmental protection equipment segment was primarily due to an
increase in sales and an unusual charge recognized in fiscal 1999 in the amount
of approximately $0.7 million associated with certain warranty items. The
decrease in operating income of the real estate segment was attributable to a
decrease in revenues from $6.2 million in fiscal 1999 to $2.5 million in fiscal
2000.
Interest and Other Income. Interest and other income increased to $2.0
million in fiscal 2000 from $1.6 million in 1999. The increase was principally
due to higher average interest rates earned on cash and cash equivalent
balances.
Interest and Other Expense. Interest and other expense decreased to $5.6
million in fiscal 2000 from $7.0 million in fiscal 1999. The decrease was
primarily due to the Company's repurchase of approximately $22.8 million in
principal amount of Notes during fiscal 2000.
Inflation
Inflation did not have a significant effect on the Company's sales and
operating revenues or costs during the three-year period ended September 30,
2001. General inflation may have an effect on gross profit in the future as
certain of the Company's agreements with AP and sodium azide customers require
fixed prices, although certain of such agreements contain escalation features
that should somewhat insulate the Company from increases in costs associated
with inflation. As discussed above, the Company recently experienced significant
increases in certain raw material costs and power costs, although the Company
believes that such increases are not specifically related to the effects of
general inflation.
Liquidity and Capital Resources
As discussed in Notes 5 and 6 to the Consolidated Financial Statements of
the Company, in March 1998, the Company sold Notes in the principal amount of
$75.0 million, acquired certain assets from Kerr-McGee for a cash purchase price
of $39.0 million and paid $28.2 million to repurchase the remaining $25.0
million principal amount outstanding of the Azide Notes. Since the original
issuance of the Notes, the Company has repurchased and retired approximately
$30.8 million in principal amount of Notes and incurred extraordinary losses on
these debt extinguishments of approximately $1.8 million. No Notes were
repurchased in fiscal 2001.
Cash flows provided by operating activities were $18.2 million, $19.0
million and $22.6 million during the fiscal years ended September 30, 2001, 2000
and 1999, respectively. The Company believes that its cash flows from operations
and existing cash balances will be adequate for the foreseeable future to
satisfy the needs of its operations, including debt related payments. However,
the resolution of litigation and contingencies, and the timing, pricing and
magnitude of orders for AP, sodium azide and Halotron(TM), may have an effect on
the use and availability of cash.
Capital expenditures were $1.6 million, $2.5 million and $2.1 million
during the fiscal years ended September 30, 2001, 2000 and 1999, respectively.
Capital expenditures relate principally to specialty
25
chemicals segment capital improvement projects. Capital expenditures are
expected to be funded from existing cash balances and operating cash flow.
During the three-year period ended September 30, 2001, the Company made
debt related payments of approximately $27.9 million, repurchased $10.7 million
in common stock and issued $0.6 million in common stock as a result of the
exercise of outstanding stock options. The Company may (but it is not obligated
to) continue to repurchase its Common Stock but is limited in its ability to use
cash to repurchase stock by certain covenants contained in the Indenture
governing the Notes. Under the terms of the Indenture, in December 2001, the
Company expects to make an offer to purchase approximately $3.6 million in
principal amount of Notes at 102%, or at a cost of approximately $3.7 million.
The offer will remain open for twenty business days.
During the three-year period ended September 30, 2001, the Company received
cash of approximately $15.5 million from its Ventana Canyon joint venture. The
Company currently anticipates that cash returns of invested capital and equity
in earnings will continue through the conclusion of the project, currently
projected to be near the end of calendar 2001.
As a result of the litigation and contingencies discussed in Note 9 to the
Consolidated Financial Statements of the Company, the Company has incurred legal
and other costs, and it may incur material legal and other costs associated with
the resolution of litigation and contingencies in future periods. Any such
costs, to the extent borne by the Company and not recovered through insurance,
would adversely affect the Company's liquidity. The Company is currently unable
to predict or quantify the amount or range of such costs or the period of time
over which such costs will be incurred.
Forward-Looking Statements/Risk Factors
Certain matters discussed in this Report may be forward-looking statements
that are subject to risks and uncertainties that could cause actual results to
differ materially from those projected. Such risks and uncertainties include,
but are not limited to, the risk factors set forth below.
The following risk factors, among others, may cause the Company's operating
results and/or financial position to be adversely affected from time to time:
1. (a) Declining demand (including excess customer inventories) or
downward pricing pressure for the Company's products as a result of
general or specific economic conditions, (b) governmental budget
decreases affecting the DOD or NASA that would cause a decrease in
demand for AP, (c) the results achieved by the Suspension Agreement
resulting from the Company's anti-dumping petition against foreign
sodium azide producers and the possible termination of such agreement,
(d) technological advances and improvements with respect to existing
or new competitive products causing a reduction or elimination of
demand for AP, sodium azide or Halotron(TM), (e) the ability and
desire of purchasers to change existing products or substitute other
products for the Company's products based upon perceived quality,
environmental effects and pricing, (f) future power costs, and (g) the
fact that perchlorate chemicals, sodium azide, Halotron(TM)and the
Company's environmental products have limited applications and highly
concentrated customer bases.
2. Competitive factors including, but not limited to, the Company's
limitations respecting financial resources and its ability to compete
against companies with substantially greater resources, significant
excess market supply in the sodium azide market and recently in the
perchlorate market, potential patent coverage issues, and the
development or penetration of competing new products, particularly in
the propulsion, airbag inflation and fire extinguishing businesses.
26
3. Underutilization of the Company's manufacturing facilities resulting
in production inefficiencies and increased costs, the inability to
recover facility costs and reductions in margins.
4. Risks associated with the Company's real estate activities, including,
but not limited to, dependence upon the Las Vegas commercial,
industrial and residential real estate markets, changes in general or
local economic conditions, interest rate fluctuations affecting the
availability and cost of financing, the performance of the managing
partner of its residential real estate joint venture (GRLLC) and
regulatory and environmental matters that may have a negative impact
on sales or costs.
5. The effects of, and changes in, trade, monetary and fiscal policies,
laws and regulations and other activities of governments, agencies or
similar organizations, including, but not limited to, environmental,
safety and transportation issues.
6. The cost and effects of legal and administrative proceedings,
settlements and investigations, particularly those described in Note 9
to the Consolidated Financial Statements of the Company and claims
made by or against the Company relative to patents or property rights.
7. The results of the Company's periodic review of impairment issues
under the provisions of SFAS No. 121.
8. The dependence upon a single facility for the production of most of
the Company's products.
9. Provisions of the Company's Certificate of Incorporation and By-laws,
and Series D Preferred Stock, the potential dividend of preference
stock purchase rights and related Rights Agreement could have the
effect of making it more difficult for potential acquirors to obtain a
control position in the Company.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- -------------------------------------------------------------------
The Company has certain fixed-rate debt (the Notes) which it believes to
have a fair value that approximates reported amounts. The Company believes that
any market risk arising from these financial instruments is not material.
Item 8. Financial Statements and Supplementary Data
Financial statements called for hereunder are included herein on the
following pages:
Page(s)
-------
Independent Auditors' Report 36
Consolidated Balance Sheets 37
Consolidated Statements of Income 38
Consolidated Statements of Cash Flows 39
Consolidated Statements of Changes in Shareholders' Equity 40
Notes to Consolidated Financial Statements 41-56
27
SUMMARIZED QUARTERLY FINANCIAL DATA
(unaudited)
(amounts in thousands except per share amounts)
-------------------------------------------------------------------------------
Quarters For Fiscal Year 2001
1st 2nd 3rd 4th Total
- ---------------------------------------------------------------------------------------------------------------------
Sales and Operating Revenues $ 11,879 $ 14,830 $ 15,353 $ 21,027 $ 63,089
Gross Profit 2,714 5,074 6,211 10,904 24,903
Net Income (Loss) (45) 1,130 1,940 4,701 7,726
Diluted Net Income (Loss) Per Share $ (.01) $ .16 $ .28 $ .67 $ 1.10
-------------------------------------------------------------------------------
Quarters For Fiscal Year 2000
1st 2nd 3rd 4th Total
- ---------------------------------------------------------------------------------------------------------------------
(1)
(1) (1) (2) (2)
Sales and Operating Revenues $ 20,976 $ 16,319 $ 17,021 $ 13,053 $ 67,369
Gross Profit 8,573 5,025 6,155 3,337 23,090
Net Income Before
Extraordinary Loss 5,024 1,226 2,827 6,248 15,325
Net Income 5,024 612 1,847 6,248 13,731
Diluted Net Income Before
Extraordinary Loss Per Share $ .64 $ .16 $ .40 $ .88 $ 2.08
Diluted Net Income Per Share $ .64 $ .08 $ .26 $ .88 $ 1.86
(1) Net income includes extraordinary losses on debt extinguishments of
approximately $0.6 million in the second quarter and $1.0 million in the
third quarter.
(2) Net income in the fourth quarter includes an impairment charge of
approximately $9.1 million and the recognition of the benefit of net
deferred tax assets of approximately $15.1 million.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not Applicable.
28
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The required information regarding directors and executive officers is
incorporated herein by reference from the Company's definitive proxy statement
for its 2002 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission not later than January 28, 2002.
Item 11. Executive Compensation
- --------------------------------
The required information regarding executive compensation is incorporated
herein by reference from the Company's definitive proxy statement for its 2002
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission not later than January 28, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The required information regarding security ownership of certain beneficial
owners and management is incorporated herein by reference from the Company's
definitive proxy statement for its 2002 Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission not later than January 28,
2002.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The required information regarding certain relationships and related
transactions is incorporated by reference from the Company's definitive proxy
statement for its 2002 Annual Meeting of Stockholders, to be filed with the
Securities and Exchange Commission not later than January 28, 2002.
29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) (1) Financial Statements
--------------------
See Part II, Item 8 for an index to the Registrant's financial
statements and supplementary data.
(2) Financial Statement Schedules
-----------------------------
None applicable.
(3) Exhibits
--------
The following Exhibits are filed as part of this Report (references
are to Regulation S-K Exhibit Numbers):
2.1 Asset Purchase Agreement dated as of October 10, 1997, between
AMPAC, Inc. and Kerr-McGee Chemical Corporation, incorporated
herein by reference to Exhibit 99.1 to the Registrant's Current
Report on Form 8-K dated February 19, 1998.
3.1 Registrant's Restated Certificate of Incorporation,
incorporated by reference to Exhibit 3A to Registrant's
Registration Statement on Form S-14 (File No. 2-70830), (the
"S-14").
3.2 Registrant's By-Laws, incorporated by reference to Exhibit 3B
to the S-14.
3.3 Amendments to Registrant's By-Laws, incorporated by Reference
to the Registrant's Current Report on Form 8-K dated November
9, 1999.
3.4 Articles of Amendment to the Restated Certificate of
Incorporation, as filed with the Secretary of State, State of
Delaware, on October 7, 1991, incorporated by reference to
Exhibit 4.3 to Registrant's Registration Statement on Form S-3
(File No. 33-52196) (the "S-3").
3.5 Articles of Amendment to the Restated Certificate of
Incorporation as filed with the Secretary of State, State of
Delaware, on April 21, 1992, incorporated by reference to
Exhibit 4.4 to the S-3.
3.6 Form of Indemnification Agreement between the Registrant and
all Directors of the Registrant, incorporated by reference to
Exhibit 3.6 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended September 30, 2000 (the "2000 10-K").
4.1 American Pacific Corporation 1991 Nonqualified Stock Option
Plan, incorporated by reference to Exhibit 10.26 to the
Registrant's Registration Statement on Form S-2 (File No.
33-36664) (the "1990 S-2").
30
4.2 Stock Option Agreement between Registrant and General Technical
Services, Inc. dated July 11, 1995, incorporated by reference
to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995 (the "1995 10-K").
4.3 Stock Option Agreement between Registrant and John R. Gibson
dated July 8, 1997, incorporated by reference to Exhibit 10.18
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 (the "1997 10-K").
4.4 Stock Option Agreement between Registrant and David N. Keys
dated July 8, 1997, incorporated by reference to Exhibit 10.19
to the 1997 10-K.
4.5 Form of Stock Option Agreement between Registrant and certain
Directors dated May 21, 1997, incorporated by reference to
Exhibit 10.21 to the 1997 10-K.
4.6 American Pacific Corporation 1997 Stock Option Plan (the "1997
Plan"), incorporated by reference to Exhibit 4.1 to
Registrant's Form S-8 (File No. 333-53449) (the "1998 S-8").
4.7 Form of Option Agreement under the 1997 Plan, incorporated by
reference to Exhibit 4.2 to the 1998 S-8.
4.8 American Pacific Corporation 2001 Stock Option Plan (the "2001
Plan"), incorporated by reference to Exhibit 4.1 to
Registrant's Form S-8 (File No. 333-62566) (the "2001 S-8").
4.9 Form of Option Agreement under the 2001 Plan, incorporated by
reference to Exhibit 4.2 to the 2001 S-8.
4.10 Form of Note and Warrants Purchase Agreement dated February 21,
1992, relating to the Registrant's previously outstanding
Subordinated Secured Term Notes, incorporated by reference to
Exhibit 10.3 to the Registrant's Current Report on Form 8-K
dated February 28, 1992 (the "1992 8-K").
4.11 Form of Warrant to purchase Common Stock of the Registrant
dated February 21, 1992, incorporated by reference to Exhibit
10.4 to the 1992 8-K.
4.12 Form of Warrant to purchase Common Stock of American Azide
Corporation dated February 21, 1992, incorporated by reference
to Exhibit 10.5 to the 1992 8-K.
4.13 Indenture dated as of March 1, 1998, by and between the
Registrant and United States Trust Company of New York,
incorporated by reference to Exhibit 4.1 to Form S-4 (File No.
333-49883) (the "1998 S-4").
4.14 Form of Tender for outstanding 9 1/4% Senior Notes Due 2005 in
exchange for 9 1/4% Senior Notes due 2005 of the Registrant,
incorporated by reference to Exhibit 99.3 to the 1998 S-4.
4.15 Form of Rights Agreement, dated as of August 3, 1999, between
Registrant and American Stock Transfer & Trust Company,
incorporated by reference to the Registrant's Registration
Statement on Form 8-A dated August 6, 1999 (the "Form 8-A").
31
4.16 Form of Letter to Stockholders with copies of Summary of Rights
to Purchase Preference Shares, incorporated by reference to the
Form 8-A.
10.1 Employment agreement dated November 7, 1994, between the
Registrant and David N. Keys, incorporated by reference to
Exhibit 10.22 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994.
10.2 Employment agreement dated May 11, 1999, between the Registrant
and John R. Gibson, incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1999.
10.3 Consulting Agreement between the Registrant and Fred D. Gibson,
Jr. dated October 1, 1999, incorporated by reference to Exhibit
10.3 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1999 (the "1999 Form 10-K").
10.4 Amended and Restated American Pacific Corporation Defined
Benefit Pension Plan, incorporated by reference to Exhibit 10.4
to the 1999 10-K.
10.5 Amended and Restated American Pacific Corporation Supplemental
Executive Retirement Plan effective January 1, 1999,
incorporated by reference to Exhibit 10.5 to the 1999 10-K.
10.6 Trust Agreement for the Amended and Restated American Pacific
Corporation Supplemental Executive Retirement Plan,
incorporated by reference to Exhibit 10.6 to the 1999 10-K.
10.7 Lease Agreement between 3770 Hughes Parkway Associates Limited
Partnership and the Registrant, dated July 31, 1990,
incorporated by reference to Exhibit 10.22 to the 1990 S-2.
10.8 Limited Partnership Agreement of 3770 Hughes Parkway
Associates, Limited Partnership, incorporated by reference to
Exhibit 10.23 to the 1990 S-2.
10.9 Cooperation and Stock Option Agreement dated as of July 4,
1990, by and between Dynamit Nobel AG and the Registrant,
including exhibits thereto, incorporated by reference to
Exhibit 10.24 to the 1990 S-2.
10.10 Articles of organization of Gibson Ranch Limited - Liability
Company dated August 25, 1993, incorporated by reference to
Exhibit 10.33 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993 (the "1993 10-K").
10.11 Operating agreement of Gibson Ranch Limited - Liability
Company, a Nevada Limited - Liability Company, incorporated by
reference to Exhibit 10.34 to the 1993 10-K.
10.12 Settlement Agreement between Registrant and C. Keith Rooker
dated July 17, 1997, incorporated by reference to Exhibit 10.20
to the 1997 10-K.
10.13 Long-Term Pricing Agreement dated as of December 12, 1997,
between Thiokol Corporation-Propulsion and the Registrant,
incorporated by reference to Exhibit 10.1
32
to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1998 (the "1998 March 10-Q").
10.14 Modification No. 1 dated September 13, 2000, to Long-Term
Pricing Agreement between Thiokol Propulsion and the
Registrant, incorporated by reference to Exhibit 10.14 to the
2000 10-K.
10.15 Partnershipping Agreement between Alliant Techsystems
Incorporated ("Alliant") and Western Electrochemical Company
and letter dated November 24, 1997, from the Registrant to
Alliant and revised Exhibit B with respect thereto,
incorporated by reference to Exhibit 10.2 to the 1998 March
10-Q.
*21 Subsidiaries of the Registrant.
*23 Consent of Deloitte & Touche LLP.
*24 Power of Attorney, included on Page 34.
* Filed herewith.
(b) Reports on Form 8-K
-------------------
None applicable.
(c) See (3) above.
(d) None applicable.
33
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: December 4, 2001 AMERICAN PACIFIC CORPORATION
(Registrant)
By: /s/ John R. Gibson
-------------------------------------------
John R. Gibson
President & Chief Executive Officer
By: /s/ David N. Keys
-------------------------------------------
David N. Keys
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer, Principal
Financial and Accounting Officer
POWER OF ATTORNEY
-----------------
American Pacific Corporation and each of the undersigned do hereby appoint
John R. Gibson and David N. Keys and each of them severally, its or his true and
lawful attorneys, with full power of substitution and resubstitution, to execute
on behalf of American Pacific Corporation and the undersigned any and all
amendments to this Report and to file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission. Each of such attorneys shall have the power to act hereunder with or
without the others.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on behalf of the Registrant by the following
persons in the capacities and on the dates indicated.
/s/ John R. Gibson Date: December 4, 2001
- --------------------------------------------
John R. Gibson
Chief Executive Officer, President,
and Director
/s/ David N. Keys Date: December 4, 2001
- --------------------------------------------
David N. Keys
Executive Vice President, Chief
Financial Officer, Secretary and Treasurer;
Principal Financial and Accounting Officer
and Director
34
/s/ Fred D. Gibson, Jr. Date: December 4, 2001
- --------------------------------------------
Fred D. Gibson, Jr.
Director
/s/ C. Keith Rooker Date: December 4, 2001
- --------------------------------------------
C. Keith Rooker
Director
/s/ Norval F. Pohl Date: December 4, 2001
- --------------------------------------------
Norval F. Pohl, Ph.D.
Director
/s/ Berlyn D. Miller Date: December 4, 2001
- --------------------------------------------
Berlyn D. Miller
Director
/s/ Jane L. Williams Date: December 4, 2001
- --------------------------------------------
Jane L. Williams
Director
/s/ Victor M. Rosenzweig Date: December 4, 2001
- --------------------------------------------
Victor M. Rosenzweig
Director
/s/ Dean M. Willard Date: December 4, 2001
- --------------------------------------------
Dean M. Willard
Director
/s/ Jan H. Loeb Date: December 4, 2001
- --------------------------------------------
Jan H. Loeb
Director
35
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
American Pacific Corporation:
We have audited the accompanying consolidated balance sheets of American Pacific
Corporation and its Subsidiaries (the "Company") as of September 30, 2001 and
2000, and the related consolidated statements of income, cash flows and changes
in shareholders' equity for each of the three years in the period ended
September 30, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 2001
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 2001 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
November 13, 2001
36
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
-----------------------------------
2001 2000
-----------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 51,471,000 $ 30,128,000
Accounts and notes receivable 5,401,000 9,461,000
Related party notes and accrued interest receivable 427,000 477,000
Inventories 13,908,000 10,875,000
Prepaid expenses and other assets 770,000 661,000
Deferred income taxes 443,000 650,000
-----------------------------------
Total Current Assets 72,420,000 52,252,000
PROPERTY, PLANT AND EQUIPMENT, NET 7,107,000 7,064,000
INTANGIBLE ASSETS, NET 25,411,000 29,805,000
REAL ESTATE EQUITY INVESTMENTS 1,599,000 6,838,000
DEVELOPMENT PROPERTY 4,780,000 5,482,000
DEFERRED INCOME TAXES 10,660,000 14,756,000
OTHER ASSETS, NET 1,065,000 1,393,000
-----------------------------------
TOTAL ASSETS $ 123,042,000 $ 117,590,000
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 6,371,000 $ 8,494,000
-----------------------------------
Total Current Liabilities 6,371,000 8,494,000
LONG-TERM DEBT 44,175,000 44,175,000
SERP OBLIGATION 1,972,000 1,743,000
-----------------------------------
TOTAL LIABILITIES 52,518,000 54,412,000
-----------------------------------
COMMITMENTS AND CONTINGENCIES
WARRANTS TO PURCHASE COMMON STOCK 3,569,000 3,569,000
SHAREHOLDERS' EQUITY:
Common stock - $.10 par value, 20,000,000 authorized,
issued - 8,515,791 in 2001 and 8,513,291 in 2000 852,000 852,000
Capital in excess of par value 80,106,000 80,094,000
Accumulated deficit (1,822,000) (9,548,000)
Treasury stock (1,518,587 shares in 2001,and 1,434,654 shares in 2000) (12,170,000) (11,722,000)
Note receivable from the sale of stock (11,000) (67,000)
-----------------------------------
Total Shareholders' Equity 66,955,000 59,609,000
-----------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 123,042,000 $ 117,590,000
===================================
See Notes to Consolidated Financial Statements
37
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------
SALES AND OPERATING REVENUES $ 63,089,000 $ 67,369,000 $ 72,834,000
COST OF SALES 38,186,000 44,279,000 45,834,000
------------------------------------------------------------
GROSS PROFIT 24,903,000 23,090,000 27,000,000
OPERATING EXPENSES 10,050,000 10,236,000 10,024,000
IMPAIRMENT CHARGE 9,084,000
------------------------------------------------------------
OPERATING INCOME 14,853,000 3,770,000 16,976,000
INTEREST AND OTHER INCOME 1,877,000 1,987,000 1,588,000
INTEREST AND OTHER EXPENSE 4,467,000 5,568,000 6,951,000
------------------------------------------------------------
INCOME BEFORE INCOME TAXES 12,263,000 189,000 11,613,000
INCOME TAXES 4,537,000 (15,136,000)
------------------------------------------------------------
NET INCOME BEFORE EXTRAORDINARY LOSS 7,726,000 15,325,000 11,613,000
EXTRAORDINARY LOSS-DEBT EXTINGUISHMENTS 1,594,000 174,000
------------------------------------------------------------
NET INCOME $ 7,726,000 $ 13,731,000 $ 11,439,000
============================================================
BASIC NET INCOME PER SHARE:
INCOME BEFORE EXTRAORDINARY LOSS $ 1.10 $ 2.09 $ 1.43
EXTRAORDINARY LOSS (.22) (.02)
------------------------------------------------------------
NET INCOME $ 1.10 $ 1.88 $ 1.41
============================================================
AVERAGE SHARES OUTSTANDING 7,034,000 7,319,000 8,111,000
------------------------------------------------------------
DILUTED NET INCOME PER SHARE:
INCOME BEFORE EXTRAORDINARY LOSS $ 1.10 $ 2.08 $ 1.41
EXTRAORDINARY LOSS (.21) (.02)
------------------------------------------------------------
NET INCOME $ 1.10 $ 1.86 $ 1.39
============================================================
DILUTED SHARES 7,052,000 7,385,000 8,236,000
------------------------------------------------------------
See Notes to Consolidated Financial Statements.
38
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
--------------------------------------------
2001 2000 1999
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,726,000 $ 13,731,000 $ 11,439,000
--------------------------------------------
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 6,303,000 8,931,000 7,684,000
Basis in development property sold 769,000 1,018,000 1,913,000
Impairment Charge 9,084,000
Development property additions (67,000) (60,000) (96,000)
Extraordinary debt charges 1,594,000 174,000
Changes in assets and liabilities:
Accounts and notes receivable 4,166,000 (612,000) 167,000
Inventories (3,033,000) (1,831,000) 4,153,000
Restricted cash 1,195,000
Prepaid expenses and other (109,000) 21,000 234,000
Deferred income taxes 4,303,000 (15,406,000)
Accounts payable and accrued liabilities (1,894,000) 1,323,000 (3,071,000)
--------------------------------------------
Total adjustments 10,438,000 5,257,000 11,158,000
--------------------------------------------
Net cash from operating activities 18,164,000 18,988,000 22,597,000
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,624,000) (2,458,000) (2,100,000)
Real Estate Equity Investment Capital Activity 5,239,000 4,399,000 5,875,000
--------------------------------------------
Net cash from investing activities 3,615,000 1,941,000 3,775,000
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt related payments (24,889,000) (3,053,000)
Issuance of common stock 12,000 342,000 274,000
Treasury stock acquired (448,000) (6,688,000) (3,548,000)
--------------------------------------------
Net cash from financing activities (436,000) (31,235,000) (6,327,000)
--------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 21,343,000 (10,306,000) 20,045,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 30,128,000 40,434,000 20,389,000
--------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 51,471,000 $ 30,128,000 $ 40,434,000
============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for interest $ 4,086,000 $ 5,023,000 $ 6,463,000
============================================
See Notes to Consolidated Financial Statements.
39
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
Note
Net Outstanding Par Value Capital in Receivable
Number of of Shares excess of Accumulated Treasury from the
Common Shares Issued Par Value Deficit Stock Sale of Stock
----------------------------------------------------------------------------------------------
BALANCES, 8,217,137 $ 842,000 $ 79,488,000 $(34,718,000) $ (1,486,000) $ (97,000)
OCTOBER 1, 1998
Net income 11,439,000
Issuance of common stock 44,000 5,000 269,000
Treasury stock acquired (428,700) (3,548,000)
Note payments 10,000
----------------------------------------------------------------------------------------------
BALANCES,
SEPTEMBER 30, 1999 7,832,437 847,000 79,757,000 (23,279,000) (5,034,000) (87,000)
Net income 13,731,000
Issuance of common stock 45,500 5,000 337,000
Treasury stock acquired (799,300) (6,688,000)
Note payments 20,000
----------------------------------------------------------------------------------------------
BALANCES,
SEPTEMBER 30, 2000 7,078,637 852,000 80,094,000 (9,548,000) (11,722,000) (67,000)
Net income 7,726,000
Issuance of common stock 2,500 12,000
Treasury stock acquired (83,933) (448,000)
Note payments 56,000
----------------------------------------------------------------------------------------------
BALANCES,
SEPTEMBER 30, 2001 6,997,204 $ 852,000 $ 80,106,000 $ (1,822,000) $(12,170,000) $ (11,000)
==============================================================================================
See Notes to Consolidated Financial Statements.
40
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
---------------------------
include the accounts of American Pacific Corporation and Subsidiaries
(the "Company"). All significant intercompany accounts and transactions
have been eliminated.
Cash and Cash Equivalents - All highly liquid investment securities with
-------------------------
a maturity of three months or less when acquired are considered to be
cash equivalents.
The Company's investment securities, along with certain cash and cash
equivalents that are not deemed securities under Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," are carried on the
consolidated balance sheets in the cash and cash equivalents category.
SFAS No. 115 requires all securities to be classified as either
held-to-maturity, trading or available-for-sale. Management determines
the appropriate classification of its investment securities at the time
of purchase and re-evaluates such determination at each balance sheet
date. Pursuant to the criteria that are prescribed by SFAS No. 115, the
Company has classified its investment securities as available-for-sale.
Available-for-sale securities are required to be carried at fair value,
with material unrealized gains and losses, net of tax, reported in a
separate component of shareholders' equity. Realized gains and losses
are taken into income in the period of realization. The estimated fair
value of the Company's portfolio of investment securities at September
30, 2001 and 2000 closely approximated amortized cost. There were no
material unrealized gains or losses on investment securities and no
recorded adjustments to amortized cost at September 30, 2001 or 2000.
Related Party Notes and Accrued Interest Receivable - Related party
---------------------------------------------------
notes and accrued interest receivable represent demand notes bearing
interest at a bank's prime rate from the former Chairman and a current
officer of the Company.
Inventories - Inventories are stated at the lower of cost or market.
-----------
Cost of the specialty chemicals segment inventories is determined
principally on a moving average basis and cost of the environmental
protection equipment segment inventories is determined principally on
the specific identification basis.
Property, Plant and Equipment - Property, plant and equipment are
-----------------------------
carried at cost less accumulated depreciation. The Company periodically
assesses the recoverability of property, plant and equipment and
evaluates such assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In accordance with the requirements of SFAS No. 121, asset
impairment (including intangible assets) is determined to exist if
estimated future cash flows, undiscounted and without interest charges,
are less than the carrying amount. An impairment charge of $9.1 million
relating to certain specialty chemical assets was recognized in fiscal
2000. (See Note 12.) Depreciation is computed on the straight line
method over the estimated productive lives of the assets (3 to 12 years
for machinery and equipment and 15 to 31 years for buildings and
improvements).
Development Property - Development property consists of commercial and
--------------------
industrial land (principally improved land). During fiscal 1993,
approximately 240 acres of development property was contributed to a
real estate limited-liability company. (See Note 4.) Development
property is carried at cost not in excess of estimated net realizable
value. Estimated net realizable value is based upon the net sales
proceeds anticipated in the normal course of business, less estimated
costs to complete or improve the property to the condition used in
determining the estimated selling price, including future interest and
property taxes through the point of substantial completion. Cost
includes the cost of land, initial planning, development costs and
carrying costs. Carrying costs include interest and property taxes until
41
projects are substantially complete. No interest was capitalized on
development property during the three-year period ended September 30,
2001.
Debt Issue Costs - Debt issue costs (included in other assets) are
----------------
amortized on the effective interest method over the terms of the related
indebtedness.
Intangible Assets - See Note 6 for a discussion of intangible assets and
-----------------
amortization periods.
Fair Value Disclosure as of September 30, 2001:
----------------------------------------------
Cash and cash equivalents, accounts and notes receivable, and accounts
payable and accrued liabilities - The carrying value of these items is a
reasonable estimate of their fair value due to their short-term nature.
Long-term debt and warrants - Market quotations are not available for
the Company's Warrants. However, the $14 strike price of the Warrants
(see Note 5) is substantially in excess of the recent trading prices of
the Company's common stock. Although the Company's unsecured senior
notes are thinly traded, the Company believes that par or 100% of the
principal amount represents a reasonable estimate of the fair value of
the notes. The Company is obligated to make an offer to purchase
approximately $3.6 million in Notes at 102% in December 2001. (See Note
5.)
Sales and Revenue Recognition - Sales of the specialty chemicals segment
-----------------------------
are recognized as the product is shipped and billed pursuant to
outstanding purchase orders. Sales of the environmental protection
equipment segment are recognized when the product is shipped. Profit
from sales of development property and the Company's equity in real
estate equity investments is recognized when and to the extent permitted
by SFAS No. 66, "Accounting for Sales of Real Estate".
Research and Development - Research and development costs are charged to
------------------------
operations as incurred. These costs are for proprietary research and
development activities that are expected to contribute to the future
profitability of the Company.
Net Income Per Common Share - Basic per share amounts are computed by
---------------------------
dividing net income by average shares outstanding during the period.
Diluted net income per share amounts are computed by dividing net income
by average shares outstanding plus the dilutive effect of common share
equivalents. The effect of stock options and warrants outstanding to
purchase approximately 3.2 million shares, 3.3 million shares and 2.9
million shares during the fiscal years 2001, 2000 and 1999,
respectively, were not included in diluted per share calculations as the
average exercise price of such options and warrants was greater than the
average price of the Company's common stock.
Income Taxes - The Company accounts for income taxes under the
------------
provisions of SFAS No. 109, "Accounting for Income Taxes". (See Note 7.)
Estimates and Assumptions - The preparation of financial statements in
-------------------------
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates made by the Company
include estimated useful lives for depreciable and amortizable assets,
the estimated valuation allowance for deferred tax assets, and estimated
cash flows in assessing the recoverability of long-lived assets. Actual
results may differ from estimates.
Recently Issued Accounting Standards - In July 2001, the Financial
------------------------------------
Accounting Standards Board ("FASB") issued SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and other Intangible Assets".
SFAS No. 141 prohibits the use of the pooling-of-interests method for
business combinations initiated after June 30, 2001 and also applies to
all business combinations accounted for by the purchase
42
method that are completed after June 30, 2001. There are also transition
provisions that apply to business combinations completed before July 1,
2001, that were accounted for by the purchase method. SFAS No. 142 is
effective for fiscal years beginning after December 14, 2001 to all
goodwill and other intangible assets recognized in an entity's balance
sheet at that date, regardless of when those assets were initially
recognized. Under SFAS No. 142, goodwill and indefinite-lived intangible
assets are no longer amortized but are reviewed at least annually for
impairment. Separate intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives.
The Company is currently evaluating the provisions of SFAS No. 141 and
SFAS No. 142 and has not adopted such provisions in its September 30,
2001 financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires one
accounting model be used for long-lived assets to be disposed of by sale
and broadens the presentation of discontinued operations to include more
disposal transactions. The requirements of SFAS No. 144 are effective
for fiscal years beginning after December 15, 2001. The adoption of SFAS
No. 144 is not expected to have a material effect on the Company's
financial position or results of operations.
Reclassifications - Certain reclassifications have been made in the 2000
-----------------
and 1999 consolidated financial statements in order to conform to the
presentation used in 2001.
2. INVENTORIES
Inventories at September 30, 2001 and 2000 consist of the following:
-----------------------------------------
2001 2000
-----------------------------------------
Work-in-process $ 8,239,000 $ 8,429,000
Raw material and supplies 5,669,000 2,446,000
-----------------------------------------
Total $ 13,908,000 $ 10,875,000
=========================================
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 2001 and 2000 are
summarized as follows:
--------------------------------------------------
2001 2000
--------------------------------------------------
Land $ 117,000 $ 117,000
Buildings, machinery and equipment 14,761,000 13,077,000
Construction in progress 425,000 1,264,000
--------------------------------------------------
Total 15,303,000 14,458,000
Less: accumulated depreciation 8,196,000 7,394,000
--------------------------------------------------
Property, plant and equipment, net $ 7,107,000 $ 7,064,000
==================================================
A fixed asset impairment charge of $9.1 million was recognized in fiscal
2000. See Note 12.
4. REAL ESTATE EQUITY INVESTMENTS
During fiscal 1993, the Company contributed approximately 240 acres of
development property to Gibson Ranch Limited Liability Company
("GRLLC"). A local real estate development group ("Developer")
contributed an adjacent 80-acre parcel to GRLLC. GRLLC is developing the
320-acre parcel principally as a residential real estate development.
Each of the Company and Developer is obligated to loan to GRLLC, under a
revolving line of credit, up to $2.4 million at an annual interest rate
of 10 percent. However, Developer will not be required to advance funds
under its revolving line of credit until the Company's line is
exhausted. In November 1995, the Company committed to advance an
additional $1.7 million to Developer. Developer is required to advance
any funds received to GRLLC. Funds advanced under this additional
commitment
43
bear annual interest of 12 percent. There were no advances outstanding
under these lines at September 30, 2001.
Developer is the managing member of GRLLC and is managing the business
conducted by GRLLC. Certain major decisions, such as incurring debt and
changes in the development plan or budget may be made only by a
management committee on which the Company is equally represented. The
profits and losses of GRLLC will be split equally between the Company
and Developer after the return of advances and agreed upon values for
initial contributions.
GRLLC operates on a calendar year. The Company recognizes its share of
the equity in GRLLC on a current quarterly basis. Summarized financial
information for GRLLC as of and for the nine months ended September 30,
2001 and as of and for the years ended December 31, 2000 and 1999 was as
follows:
-----------------------------------------------------------------------
September 30, December 31, December 31,
2001 2000 1999
-----------------------------------------------------------------------
Income Statement:
Revenues $ 27,100,000 $ 45,809,000 $ 38,139,000
Gross Profit 4,099,000 4,766,000 6,467,000
Operating expenses 909,000 1,366,000 1,507,000
Net Income $ 3,152,000 $ 3,456,000 $ 5,067,000
Balance Sheet:
Assets $ 6,341,000 $ 15,468,000 $ 22,341,000
Liabilities 2,388,000 9,307,000 11,685,000
Equity $ 3,953,000 $ 6,161,000 $ 10,656,000
-----------------------------------------------------------------------------------------------------------
The Company has applied the provisions of SFAS No. 58 "Capitalization of
Interest Cost of Financial Statements that Include Investments Accounted
for by the Equity Method" to its investment in GRLLC. As of September
30, 2001, the Company has capitalized approximately $6.2 million of
interest since the joint venture began undergoing activities to start
its planned principal operations of real estate development and sale of
such real estate. Capitalization of interest on the joint venture ceased
in September 1997. At September 30, 2001, the Company's recorded
investment in GRLLC approximates the amount of remaining cash flow that
is estimated to be generated from the project.
The Company amortizes the difference resulting from the application of
SFAS No. 58 on a current quarterly basis based upon the ratio of acres
sold to total saleable acres in the joint venture. Such difference will
be completely amortized upon the build-out and sale of the joint
venture's real estate project which is estimated to occur in late
calendar year 2001. As of September 30, 2001, approximately $6.0 million
in capitalized interest resulting from the application of SFAS No. 58
had been amortized against the equity in earnings of GRLLC.
GRLLC's balance sheet is not classified. Assets consist principally of
inventories and liabilities consist principally of notes and accounts
payable. Inventories were $3.1 million at September 30, 2001, $13.8
million at December 31, 2000 and $19.8 million at December 31, 1999.
In July 1990, the Company contributed $0.7 million to Gibson Business
Park Associates 1986-I, a real estate development limited partnership
(the "Partnership"), in return for a 70% interest as a general and
limited partner, and other limited partners contributed $0.3 million in
return for a 30% interest as limited partners. Such other limited
partners include certain current and former members of the Company's
Board of Directors. The Partnership, in turn, contributed $1.0 million
to 3770 Hughes Parkway Associates Limited Partnership, a Nevada limited
partnership ("Hughes Parkway"), in return for a 33% interest as a
limited partner in Hughes Parkway. The Company entered into an agreement
with Hughes Parkway pursuant to which the Company leases office space in
a building in Las Vegas, Nevada. (See Note 9.)
44
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt at September 30, 2001 and 2000 are
summarized as follows:
---------------------------------------------
2001 2000
---------------------------------------------
9 1/4% Senior unsecured notes $ 44,175,000 $ 44,175,000
Less current portion
---------------------------------------------
Total $ 44,175,000 $ 44,175,000
=============================================
On March 12, 1998, the Company sold $75.0 million principal amount of
unsecured senior notes (the "Notes"), consummated an acquisition (the
"Acquisition") of certain assets from Kerr-McGee Chemical Corporation
("Kerr-McGee") described in Note 6 and repurchased the remaining $25.0
million principal amount outstanding of subordinated secured notes (the
"Azide Notes").
The Notes mature on March 1, 2005. Interest on the Notes is payable in
cash at a rate of 9-1/4% per annum on each March 1 and September 1,
commencing September 1, 1998. The indebtedness evidenced by the Notes
represents a senior unsecured obligation of the Company, ranks pari
passu in right of payment with all existing and future senior
indebtedness of the Company and is senior in right of payment to all
future subordinated indebtedness of the Company. The Indenture under
which the Notes were issued contains various limitations and
restrictions including (i) change in control provisions, (ii)
limitations on indebtedness and (iii) limitations on restricted payments
such as dividends, stock repurchases and investments. Management
believes the Company has complied with these limitations and
restrictions. In April 1998, the Company filed a Form S-4 registration
statement with the Securities and Exchange Commission for the purpose of
effecting the exchange of the Notes for identical Notes registered for
resale under the federal securities laws. The exchange was consummated
on August 28, 1998.
Since the original issuance of the Notes, the Company has repurchased
and retired approximately $30.8 million in principal amount of Notes at
a weighted average cost of approximately 102.7% of par value. The
Company incurred total extraordinary losses on debt extinguishment on
these transactions of approximately $1.8 million.
Within ninety days following the end of each fiscal year, the Indenture
requires the Company to make an offer to all holders of the Notes to
purchase Notes at an offer price equal to 102% of the principal amount
of the Notes to be purchased, in an amount equal to 50% of the excess
cash flow (a defined term in the Indenture) for the applicable fiscal
year. In December 2001, the Company expects to make an offer to purchase
approximately $3.6 million in Notes at 102%, or at a cost of
approximately $3.7 million. Under the provisions of the Indenture, the
offer will remain open for twenty business days.
The Company issued to the purchasers of the Azide Notes warrants (the
"Warrants"), exercisable for a ten-year period commencing on December
31, 1993, to purchase shares of Common Stock at an exercise price of
$14.00 per share. The maximum number of shares purchasable upon exercise
of the Warrants is 2,857,000 shares. The Warrants are exercisable, at
the option of their holders, to purchase up to 20 percent of the common
stock of American Azide Corporation ("AAC"), a wholly-owned subsidiary
of the Company, rather than the Company's Common Stock. In the event of
such an election, the exercise price of the Warrants will be based upon
a pro rata share of AAC's capital, adjusted for earnings and losses,
plus interest from the date of contribution. The Warrants contain
certain provisions for a reduction in exercise price in the event the
Company issues or is deemed to issue stock, rights to purchase stock or
convertible debt at a price less than the exercise price in effect, or
in the event of certain stock dividends, stock splits, mergers or
similar transactions.
The Company may call up to 50% of the Warrants at prices that would
provide a 30% internal rate of return to the holders thereof through the
date of call (inclusive of the 11% Azide Notes' yield). The
45
holders of the Warrants were also granted the right to require that the
Common Stock underlying the Warrants be registered on one occasion, as
well as certain incidental registration rights.
The Company has accounted for the proceeds of the financing applicable
to the Warrants as temporary capital. Any adjustment of the value
assigned at the date of issuance will be reported as an adjustment to
retained earnings. The value assigned to the Warrants was determined in
accordance with Accounting Principle Board Opinion No. 14 "Accounting
for Convertible Debt and Debt Issued with Stock Purchase Warrants" and
was based upon the relative fair value of the Warrants and indebtedness
at the time of issuance.
6. ACQUISITION
On March 12, 1998 (the "Closing Date"), the Company acquired, pursuant
to a purchase agreement (the "Purchase Agreement") with Kerr-McGee,
certain intangible assets related to Kerr-McGee's production of AP (the
"Rights") for a purchase price of $39.0 million. The Acquisition did not
include Kerr-McGee's production facilities (the "Production Facilities")
and certain water and power supply agreements used by Kerr-McGee in the
production of AP. Under the Purchase Agreement, Kerr-McGee ceased the
production and sale of AP although the Production Facilities may
continue to be used by Kerr-McGee for production of AP under certain
limited circumstances described below. Under the Purchase Agreement,
Kerr-McGee reserved a perpetual, royalty-free, nonexclusive license to
use any of the technology forming part of the Rights as may be necessary
or useful to use, repair or sell the Production Facilities (the
"Reserved License").
Under the Purchase Agreement, Kerr-McGee reserved the right to process
and sell certain reclaimed AP that is not suitable for use in solid fuel
rocket motors (the "Reclaimed Product"), and to produce and sell AP (i)
to fulfill orders scheduled for delivery after the closing, subject to
making payments to the Company with respect to such orders, as provided
in the Purchase Agreement and (ii) in the event of the Company's
inability to meet customer demand or requirements, breach of the
Purchase Agreement or termination of the Company's AP business.
The Purchase Agreement provides that, together with the Reserved
License, Kerr-McGee is permitted in its discretion to (i) lease, sell,
dismantle, demolish and/or scrap all or any portion of the Production
Facilities, (ii) retain the Production Facilities for manufacture of
Reclaimed Product and (iii) maintain the Production Facilities in a
"standby" or "mothballed" condition so they will be capable of being
used to produce AP under the limited circumstances referred to above.
Under the Purchase Agreement, Kerr-McGee has agreed to indemnify the
Company against loss or liability from claims associated with the
ownership and use of the Rights prior to consummation of the Acquisition
or resulting from any breach of its warranties, representations and
covenants. The Company has agreed to indemnify Kerr-McGee against loss
and liability from claims associated with the ownership and use of the
Rights after consummation of the Acquisition or resulting from any
breach of its warranties, representations and covenants. In addition,
Kerr-McGee has agreed that it will, at the Company's request, introduce
the Company to AP customers that were not customers of the Company, and
consult with the Company regarding the production and marketing of AP.
The Company has determined that a business was not acquired in the
Acquisition and that the Rights acquired have no independent value to
the Company apart from the overall benefit of the transaction and that,
as a result thereof, Kerr-McGee has ceased production of AP (except in
the limited circumstances referred to above), thereby leaving the
Company as the sole North American supplier of AP. The Company is
amortizing the purchase price of $39.0 million for the intangible asset
over ten years, the duration of pricing contracts with customers
referred to below.
In connection with the Acquisition, the Company entered into an
agreement with Thiokol Propulsion ("Thiokol") with respect to the supply
of AP through the year 2008. The agreement, as amended,
46
provides that during its term Thiokol will make all of its AP purchases
from the Company. In addition to the AP purchased from the Company,
Thiokol may use AP inventoried by it in prior years. The agreement also
establishes a pricing matrix under which AP unit prices vary inversely
with the quantity of AP sold by the Company to all of its customers. AP
unit prices in the matrix at all quantity levels escalate each year
through fiscal 2003 and, in fiscal 2004, are adjusted downward by
approximately 20%. After the adjustment, AP unit prices continue to
escalate each year through fiscal 2008.
In connection with the Acquisition, the Company also entered into an
agreement with Alliant Techsystems, Inc. ("Alliant") to extend an
existing agreement through the year 2008. The agreement establishes
prices for any AP purchased by Alliant from the Company during the term
of the agreement as extended. Under this agreement, Alliant agrees to
use its efforts to cause the Company's AP to be qualified on all new and
current programs served by Alliant's Bacchus Works.
During 2001, Alliant acquired Thiokol. Alliant and the Company have
agreed that the individual agreements in place prior to Alliant's
acquisition of Thiokol will remain in place. All Thiokol programs
existing at the time of the Alliant acquisition (principally the Space
Shuttle and Minuteman) will continue to be priced under the Thiokol
Agreement. All Alliant programs (principally the Delta, Pegasus and
Titan) will be priced under the Alliant Agreement.
7. INCOME TAXES
The Company accounts for income taxes using the asset and liability
approach required by SFAS No. 109. The asset and liability approach
requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of the Company's assets and
liabilities. Future tax benefits attributable to temporary differences
are recognized to the extent that realization of such benefits are more
likely than not. These future tax benefits are measured by applying
currently enacted tax rates.
The following table provides an analysis of the Company's income taxes
for the years ended September 30:
--------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------
Current $ 234,000 $ 270,000 $
Deferred (federal and state) 4,303,000 (15,406,000)
--------------------------------------------------------------------
Income taxes $ 4,537,000 $ (15,136,000) $
====================================================================
A valuation allowance for net deferred tax assets was established in
1997. In accordance with the provisions of SFAS No. 109, in fiscal 2000
the Company released its deferred tax valuation allowance and recognized
the benefits of its net deferred tax assets. Deferred tax assets are
composed, for the most part, of depreciation, alternative minimum tax
credits and net operating losses. The alternative minimum tax credit
carryforward, valued at approximately $1.6 million, may be carried
forward indefinitely as a credit against regular tax. The net operating
loss carryforwards, valued at approximately $1.3 million, will begin to
expire for tax purposes in 2012 as follows:
------------------------------------------------------------------
NOL Deduction Tax Rate NOL Asset
------------------------------------------------------------------
Expiration of net operating losses
2012 $ 3,460,000 34.0% $ 1,176,000
2013 and thereafter 406,000 34.0% 138,000
------------------------------------------------------------------
TOTAL $ 3,866,000 $ 1,314,000
==================================================================
Income taxes for the years ended September 30, 2001, 2000 and 1999
differ from the amount computed at the federal and state income tax
statutory rates as a result of the following:
47
--------------------------------------------------------------------------
2001 % 2000 % 1999 %
--------------------------------------------------------------------------
Expected provision (credit) for
Income taxes $ 4,169,000 34.0% $ (435,000) (34.0)% $ 3,890,000 34.0%
Adjustment:
Nondeductible expenses 43,000 0.3% 30,000 2.4% 29,000 0.3%
Other 325,000 2.7% (14,731,000) (1150.9)% (3,919,000) (34.3)%
--------------------------------------------------------------------------
Credit for income taxes $ 4,537,000 37.0% $(15,136,000) (1182.5)% $
==========================================================================
The components of net deferred taxes at September 30, 2001, 2000 and
1999 consisted of the following:
-----------------------------------------------------------
2001 2000 1999
-----------------------------------------------------------
Deferred tax assets:
Amortization $ 2,003,000 $ 1,228,000 $ 920,000
Property 6,860,000 5,428,000 3,049,000
Net operating losses 1,314,000 7,485,000 12,067,000
Alternative minimum tax credits 1,643,000 1,460,000 1,191,000
Reorganization costs 219,000 129,000 534,000
Inventory capitalization 259,000 375,000 375,000
Accruals 1,988,000 1,313,000 447,000
Other 1,119,000 677,000 444,000
------------------------------------------------------------
Total deferred tax assets $ 15,405,000 $ 18,095,000 $ 19,027,000
------------------------------------------------------------
Deferred tax liabilities:
Accrued income and expenses $ (1,740,000) $ (1,689,000) $ (1,932,000)
Other (2,563,000) (400,000) (1,764,000)
------------------------------------------------------------
Total deferred tax liabilities (4,302,000) (2,689,000) (4,296,000)
------------------------------------------------------------
Preliminary net deferred tax assets 11,103,000 15,406,000 14,731,000
Valuation allowance for deferred tax assets (14,731,000)
------------------------------------------------------------
Net deferred tax assets $ 11,103,000 $ 15,406,000 $
============================================================
8. EMPLOYEE BENEFIT PLANS
The Company maintains a group health and life benefit plan, an employee
stock ownership plan ("ESOP") that includes a Section 401(k) feature,
and a defined benefit pension plan (the "Plan"). The ESOP permits
employees to make contributions. The Company does not presently match
any portion of employee ESOP contributions.
All full-time employees age 21 and over with one year of service are
eligible to participate in the Plan. Benefits are paid based on an
average of earnings, retirement age, and length of service, among other
factors.
The tables below provide relevant financial information about the Plan
as of and for the fiscal years ended September 30:
48
-----------------------------------------------------
2001 2000
-----------------------------------------------------
Change in Benefit Obligation:
Benefit obligation, beginning of year $ 15,693,000 $ 13,922,000
Service cost 713,000 702,000
Interest cost 1,192,000 1,098,000
Actuarial (gains)/losses 1,341,000 554,000
Benefits paid (708,000) (583,000)
-----------------------------------------------------
Benefit obligation, end of year $ 18,231,000 $ 15,693,000
-----------------------------------------------------
Change in Plan Assets:
Fair value of plan assets, beginning of year $ 13,568,000 $ 11,453,000
Actual return (loss) on plan assets (1,320,000) 2,010,000
Employer contribution 584,000 688,000
Benefits paid (708,000) (583,000)
-----------------------------------------------------
Fair value of plan assets, end of year $ 12,124,000 $ 13,568,000
-----------------------------------------------------
Reconciliation of Funded Status:
Funded status $ (6,107,000) $ (2,125,000)
Unrecognized net actuarial (gains)/losses 3,086,000 (649,000)
Unrecognized transition obligation 153,000 305,000
Unrecognized prior service costs 315,000 351,000
-----------------------------------------------------
Accrued benefit liability recognized $ 2,553,000 $ 2,118,000
=====================================================
-----------------------------------------------------
2001 2000 1999
-----------------------------------------------------
Net Periodic Pension Cost:
Service cost $ 713,000 $ 702,000 $ 994,000
Interest cost 1,192,000 1,098,000 992,000
Expected return on assets (1,075,000) (925,000) (819,000)
Net total of other components 189,000 189,000 277,000
-----------------------------------------------------
Net periodic pension cost $ 1,019,000 $ 1,064,000 $ 1,444,000
-----------------------------------------------------
Actuarial Assumptions:
Discount rate 7.25% 7.75% 7.75%
Rate of compensation increase 5.00% 5.00% 5.00%
Expected return on plan assets 8.00% 8.00% 8.00%
=====================================================
The Company also maintains a Supplemental Executive Retirement Plan
("SERP") for the benefit of the Company's Chief Executive Officer,
Chief Financial Officer and the former Chief Executive Officer.
Benefits paid under the plan were approximately $0.1 million in each
of the fiscal years 2001, 2000 and 1999. Net periodic pension cost was
approximately $0.3 million for each of the years ended September 30,
2001, 2000 and 1999. At September 30, 2001 and 2000, the accrued
pension liabilities recognized were approximately $2.0 million and
$1.7 million, respectively. During fiscal 2002, the Company expects to
establish and fund a trust for the SERP.
9. COMMITMENTS AND CONTINGENCIES
Trace amounts of perchlorate chemicals have been found in Lake Mead.
Clark County, Nevada, where Lake Mead is situated, is the location of
Kerr-McGee's AP operations, and was the location of the Company's AP
operations until May 1988. The Company is cooperating with State and
local agencies, and with Kerr-McGee and other interested firms, in the
investigation and evaluation of the source or sources of these trace
amounts, possible environmental impacts, and potential remediation
methods. The Company expended approximately $0.9 million, $1.0 million
and $1.0 million in the fiscal years 2001, 2000 and 1999,
respectively, on the investigation and evaluation of this matter.
Until these investigations and evaluations have reached definitive
conclusions, it will not be possible for the
49
Company to determine the extent to which, if at all, the Company may be
called upon to contribute to or assist with future remediation efforts, or
the financial impacts, if any, of such contributions or assistance.
Accordingly, no accrual for potential losses has been made in the
accompanying Consolidated Financial Statements of the Company.
In 1999, two lawsuits were filed in Utah state court against the Company
and certain unrelated equipment and product manufacturers claiming
unspecified monetary damages as a result of a fire and explosion on July
30, 1997 at the Company's AP production facility that resulted in the death
of one employee and the injury of three employees. In March 2001, the
Company was dismissed without prejudice from these lawsuits.
Electric energy is one of the Company's primary raw material costs for the
production of AP. The Company is a party to an agreement with Utah Power
("UP") for its electrical requirements. The agreement provided for the
supply of power for a minimum of a ten-year period, which began in 1989.
This agreement had a three-year notice of termination provision and, on
April 7, 1999, UP provided written notice of termination, effective April
7, 2002.
During the fiscal years 2001 and 2000, the Company experienced unusual
increases in its monthly power bills at its Utah production facilities as
compared to average historical monthly amounts. For the months of November
and December 2000, and January 2001, the Company received power bills from
UP totaling approximately $1.9 million, which were approximately $1.5
million in excess of average historical monthly amounts. The Company
claimed that UP had improperly calculated replacement energy costs and
breached the agreement by failing to comply with the advance notice
provisions of the agreement. Accordingly, the Company disputed all power
bills received from UP since January 1999, claiming it had been overcharged
by approximately $2.9 million through January 2001.
A partial settlement of this dispute was reached in which the Company and
UP entered into an amendment of the electric supply agreement dated
February 21, 2001. Under the terms of the amendment, the Company has been
placed on the equivalent of Utah's Electric Service Schedule No. 9. Under
this rate schedule, the Company's estimated monthly power bills may be
approximately 20% to 30% higher than historical monthly amounts prior to
the dispute. As a result, the Company may experience an estimated annual
increase in power costs that could be as much as $0.6 million. This
amendment has been approved by the Utah Public Service Commission.
In May 2001, the Company and UP reached a settlement on the remaining
disputed matters. The settlement included both a cash payment from UP to
the Company and a demand curtailment arrangement under Utah's Electric
Service Schedule No. 71. Under the curtailment, the Company accepted UP's
offer to curtail demand during the months of June, July and August 2001. As
a result of the Company's lower perchlorate sales volumes in fiscal 2001,
the Company operated at lower total and peak electric energy consumption
levels during these months and, at the same time, met customers' product
delivery requirements. The settlement and curtailment arrangement resulted
in approximately an additional $2.2 million in cash flow (over the amount
which would otherwise be expended on monthly power bills under the February
21, 2001 amendment described above) to the Company. The Company recognized
(initially as an adjustment to inventories) the entire $2.2 million
resulting from the settlement and curtailment arrangement in fiscal 2001.
As a result, the Company's net power bills during fiscal 2001 were
approximately $1.0 million less than normalized annual historical amounts.
See Note 13 for a discussion of certain litigation involving Halotron(TM).
The Company and its subsidiaries have been and are also involved in other
lawsuits. The Company believes that these other lawsuits, individually or
in the aggregate, will not have a material adverse effect on the Company or
any of its subsidiaries.
50
As discussed in Note 4, the Company entered into an agreement with
Hughes Parkway pursuant to which the Company leases office space. The
lease which had an initial term of 10 years expiring in March 2001,
was renewed for an additional five year term (the "Amended Lease").
The Amended Lease is subject to escalation every three years based on
changes in the consumer price index, and provides for the Company to
occupy 22,262 square feet of office space. Rental payments were
approximately $0.6 million during the fiscal years ended September 30,
2001, 2000 and 1999. Future minimum rental payments under this lease
for the years ending September 30, are as follows:
2002 $ 550,000
2003 550,000
2004 550,000
2005 550,000
2006 275,000
-----------------------------
Total $ 2,475,000
=============================
10. SHAREHOLDERS' EQUITY
Preferred Stock and Purchase Rights
-----------------------------------
The Company has authorized the issuance of 3,000,000 shares of
preferred stock, of which 125,000 shares have been designated as
Series A, 125,000 shares have been designated as Series B and 15,340
shares have been designated as Series C redeemable convertible
preferred stock. No Series A or Series B preferred stock is issued or
outstanding. The Series C redeemable convertible preferred stock was
redeemed in December 1989, and is no longer authorized for issuance.
On August 3, 1999, the Board of Directors of the Company adopted a
Shareholder Rights Plan and declared a dividend of one preference
share purchase right (a "Right") for each outstanding share of Common
Stock, par value $.10 per share (the "Common Shares"), of the Company.
The dividend was paid to stockholders of record on August 16, 1999.
Each Right entitles the registered holder to purchase from the Company
one one-hundredth of a share of Series D Participating Preference
Stock, par value $1.00 per share of the Company at a price of $24.00
per one one-hundredth of a Preference Share subject to adjustment
under certain circumstances. The description and terms of the Rights
are set forth in a Rights Agreement dated as of August 3, 1999,
between the Company and American Stock Transfer & Trust Company, as
Rights Agent. The Rights may also, under certain conditions, entitle
the holders (other than any Acquiring Person, as defined), to receive
Common Stock of the Company, Common Stock of an entity acquiring the
Company, or other consideration, each having a market value of two
times the exercise price of each Right.
Three hundred and fifty-thousand Preference Shares have been
designated as Series D Preference Shares and are reserved for issuance
under the Plan. The Rights are redeemable by the Company at a price of
$.001 per Right under the conditions provided in the Plan. If not
exercised or redeemed (or exchanged by the Company), the Rights expire
on August 2, 2009.
Stock Options and Warrants
--------------------------
The Company has granted options and issued warrants to purchase shares
of the Company's Common Stock at prices at or in excess of market
value at the date of grant or issuance. The options were granted under
various plans or by specific grants approved by the Company's Board of
Directors.
Option and warrant transactions are summarized as follows:
51
-----------------------------------------------
Shares Under Options
and Warrants Option Price
-----------------------------------------------
October 1, 1998 3,754,000 $ 4.88 - $ 21.50
Granted 209,000 7.90 - 8.00
Exercised (44,000) 5.63 - 7.50
Expired (31,000) 7.00 - 21.50
-----------------------------------------------
September 30, 1999 3,888,000 4.88 - 14.00
Exercised (45,500) 7.00 - 7.50
Expired (45,500) 4.88 - 7.50
-----------------------------------------------
September 30, 2000 3,797,000 4.88 - 14.00
Granted 206,000 4.88
Exercised (2,500) 4.88
Expired (102,500) 7.00 - 7.50
-----------------------------------------------
September 30, 2001 3,898,000 $ 4.88 - $ 14.00
===============================================
In February 1992, the Company issued $40,000,000 in Azide Notes with
Warrants. See Note 5 for a description of the Warrants. Shares under
options and warrants at September 30, 2001 include approximately 2,857,000
Warrants at a price of $14 per Warrant.
The following table summarizes information about stock options and warrants
outstanding at September 30, 2001:
---------------------------------------------------------------------------------------------------------
Options and Warrants Outstanding Options Exercisable
---------------------------------------------------------------------------------------
Average Remaining
Range of Number Contractual Life Weighted Average Number Weighted Average
Exercise Price Outstanding (Years) Exercise Price Exercisable Exercise Price
---------------------------------------------------------------------------------------------------------
$ 4.88 224,000 8.7 $ 4.88 122,000 $ 4.88
6.38 - 8.00 817,000 1.32 7.12 817,000 7.12
14.00 2,857,000 2.25 14.00 2,857,000 14.00
---------------------------------------------------------------------------------------
3,898,000 2.52 $ 12.94 3,796,000 $ 13.02
=======================================================================================
The Company has adopted the disclosures-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company applies Accounting
Principles Board ("APB") Opinion No. 25 and related interpretations in
accounting for its stock options. Under APB No. 25, no compensation cost
has been recognized in the financial statements for stock options granted.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. Had compensation cost for the stock
option grants been determined based on the fair value at the date of grant
for awards consistent with the provision of SFAS No. 123, the Company's
diluted net income (loss) per common share would have changed to the pro
forma amounts indicated below for the years ended September 30:
-----------------------------------------------------
2001 2000 1999
-----------------------------------------------------
Net income - as reported $ 7,726,000 $ 13,731,000 $ 11,439,000
Net income - pro forma $ 7,353,000 $ 13,429,000 $ 10,941,000
Diluted net income per share - as reported $ 1.10 $ 1.86 $ 1.39
Diluted net income per share - pro forma $ 1.04 $ 1.82 $ 1.33
-----------------------------------------------------
Stock options for 206,000 shares of Common Stock were granted in fiscal
2001. There were no options granted in fiscal 2000. The weighted average
fair value of each option granted in the fiscal years 2001 and 1999 was
estimated using the following assumptions for the Black-Scholes options
pricing model: (i) no dividends; (ii) expected volatility ranging from
50% to 60%, (iii) risk free interest rates averaging 4.6% in 2001 and
5.8% in 1999, and (iv) the expected average life of 4.5 years in 2001
and 3.3 years in 1999. The weighted average fair values of the options
granted were $2.57 and $3.26 in the fiscal years
52
2001 and 1999, respectively. Because the SFAS No. 123 method of
accounting has not been applied to options granted prior to October 1,
1996, the resulting pro forma net income may not be representative of
that to be expected in future years.
11. SEGMENT INFORMATION
The Company's three reportable operating segments are specialty
chemicals, environmental protection equipment and real estate sales and
development. These segments are based upon business units that offer
distinct products and services, are operationally managed separately and
produce products using different production methods.
The Company evaluates the performance of each operating segment and
allocates resources based upon operating income or loss before an
allocation of interest expense and income taxes. The accounting policies
of each reportable operating segment are the same as those of the
Company.
The Company's specialty chemicals segment manufactures and sells
perchlorate chemicals used principally in solid rocket propellants for
the space shuttle and defense programs, sodium azide used principally in
the inflation of certain automotive airbag systems and Halotron(TM) I, a
clean gas fire extinguishing agent designed to replace Halon 1211. The
specialty chemicals segment's production facilities are located in Iron
County, Utah. Perchlorate chemical sales comprised approximately 76%,
76% and 75% of specialty chemicals segment sales during the fiscal years
ended September 30, 2001, 2000 and 1999, respectively. The Company had
two customers that accounted for 10% or more of both the Company's and
the specialty chemicals segment's sales during the last three fiscal
years. Sales to these customers during the fiscal years ended September
30 were as follows:
-----------------------------------------------------------------
Customer Chemical 2001 2000 1999
------------------------------------------------------------------------------------------------------------
A Perchlorates $ 37,567,000 $ 33,858,000 $ 36,011,000
B Sodium Azide 7,436,000 9,556,000 12,406,000
------------------------------------------------------------------------------------------------------------
In fiscal 1998, the Company acquired certain intangible assets related
to the production and sale of AP from Kerr-McGee and entered into
long-term agreements with respect to the supply of AP to certain
domestic users. (See Note 6). In fiscal 2000, the Company recognized a
fixed asset impairment charge of $9.1 million relating to certain fixed
assets in its specialty chemicals segment. (See Note 12.)
The specialty chemicals operating segment is subject to various federal,
state and local environmental and safety regulations. The Company has
designed and implemented policies and procedures to minimize the risk of
potential violations of these regulations, although such risks will
likely always be present in the production and sale of the Company's
specialty chemicals. (See Note 9).
The Company's environmental protection equipment operating segment
designs, manufactures and markets systems for the control of noxious
odors, the disinfection of waste water streams and the treatment of
seawater. These operations are also located in Iron County, Utah.
At September 30, 2001, the Company's real estate operating segment had
approximately 58 remaining acres of improved land in the Gibson Business
Park near Las Vegas, Nevada, that is held for development and sale.
Activity during the last three fiscal years has consisted of sales of
land parcels.
Additional information about the Company's operations in different
segments for each of the last three fiscal years ended September 30, is
provided below.
53
-----------------------------------------------
2001 2000 1999
-----------------------------------------------
Revenues:
Specialty chemicals $ 56,803,000 $ 61,423,000 $ 64,497,000
Environmental protection 3,660,000 3,464,000 2,121,000
Real estate 2,626,000 2,482,000 6,216,000
-----------------------------------------------
Total revenues $ 63,089,000 $ 67,369,000 $ 72,834,000
===============================================
Gross profit:
Specialty chemicals $ 22,131,000 $ 20,621,000 $ 23,151,000
Environmental protection 915,000 999,000 (247,000)
Real estate 1,857,000 1,470,000 4,096,000
-----------------------------------------------
Total segment gross profit $ 24,903,000 $ 23,090,000 $ 27,000,000
===============================================
Operating income (loss):
Specialty chemicals $ 13,479,000 $ 2,446,000 $ 14,379,000
Environmental protection 140,000 453,000 (888,000)
Real estate 1,234,000 871,000 3,485,000
-----------------------------------------------
Total operating income 14,853,000 3,770,000 16,976,000
Net interest (2,590,000) (3,581,000) (5,363,000)
-----------------------------------------------
Income before income taxes
and extraordinary losses $ 12,263,000 $ 189,000 $ 11,613,000
===============================================
Depreciation and amortization:
Specialty chemicals $ 5,852,000 $ 8,155,000 6,905,000
All other segments and corporate 123,000 348,000 291,000
-----------------------------------------------
Total depreciation and amortization $ 5,975,000 $ 8,503,000 $ 7,196,000
===============================================
Capital Expenditures:
Specialty chemicals $ 1,453,000 $ 2,332,000 $ 1,820,000
All other segments and corporate 171,000 126,000 280,000
-----------------------------------------------
Total capital expenditures $ 1,624,000 $ 2,458,000 $ 2,100,000
===============================================
Assets:
Specialty chemicals $ 50,859,000 $ 55,739,000 $ 67,750,000
Environmental protection 932,000 1,126,000 1,954,000
Real estate 6,752,000 12,698,000 18,347,000
Corporate 64,499,000 48,027,000 44,831,000
-----------------------------------------------
Total assets $ 123,042,000 $ 117,590,000 $ 132,882,000
===============================================
The Company's operations are located in the United States. Export sales,
consisting mostly of AP sales to Europe and environmental protection
equipment sales to the Far and Middle East, have represented less than
5% of the Company's revenues during each of the last three fiscal years.
12. SODIUM AZIDE
In July 1990, the Company entered into agreements (the "Azide
Agreements") pursuant to which Dynamit Nobel A.G. ("Dynamit Nobel")
licensed to the Company on an exclusive basis for the North American
market its technology and know-how for the production of sodium azide,
the principal component of the gas generant used in certain automotive
airbag inflation systems. In addition, Dynamit Nobel provided technical
support for the design, construction and start-up of the facility.
Under the Azide Agreements, Dynamit Nobel was to receive, for the use of
its technology and know-how relating to its batch production process of
manufacturing sodium azide, quarterly royalty payments of 5% of the
quarterly net sales of sodium azide by AAC for a period of 15 years from
the date the Company begins to produce sodium azide in commercial
quantities. In July 1996, the Company and Dynamit Nobel agreed to
suspend the royalty payment effective as of July 1, 1995.
In May 1997, the Company entered into a three-year agreement with
Autoliv ASP, Inc. ("Autoliv") (formerly Morton International Automotive
Safety Products). The agreement provides for the Company to supply
sodium azide used by Autoliv in the manufacture of automotive airbag
inflators. Deliveries
54
under the agreement commenced in July 1997. The agreement has been
extended through December 31, 2002.
The Company initially believed that demand for sodium azide in North
America and the world would substantially exceed existing manufacturing
capacity and announced expansions or new facilities (including the
Company's plant) by the 1994 model year (which for sodium azide sales
purposes is the period June 1993 through May 1994). Currently, demand
for sodium azide is substantially less than supply on a worldwide basis.
By reason of this industry capacity underutilization, and other factors
discussed below, there exists considerable pressure on the price of
sodium azide.
The Company believes that the price erosion of sodium azide has been
due, in part, to unlawful pricing procedures of Japanese sodium azide
producers. In response to such practices, in January 1996, the Company
filed an antidumping petition with the International Trade Commission
("ITC") and the Department of Commerce ("Commerce"). In August 1996,
Commerce issued a preliminary determination that Japanese imports of
sodium azide have been sold in the United States at prices that are
significantly below fair value. Commerce's preliminary dumping
determination applied to all Japanese imports of sodium azide,
regardless of end-use. Commerce's preliminary determination followed a
March 1996 preliminary determination by the ITC that dumped Japanese
imports have caused material injury to the U.S. sodium azide industry.
On January 7, 1997, the anti-dumping investigation initiated by
Commerce, based upon the Company's petition, against the three Japanese
producers of sodium azide was suspended by agreement. It is the
Company's understanding that, by reason of the Suspension Agreement, two
of the three Japanese sodium azide producers have ceased their exports
of sodium azide to the United States for the time being. As to the third
and largest Japanese sodium azide producer, which has not admitted any
prior unlawful conduct, the Suspension Agreement requires that it make
all necessary price revisions to eliminate all United States sales at
below "Normal Value," and that it conform to the requirements of
sections 732 and 733 of the Tariff Act of 1930, as amended, in
connection with its future sales of sodium azide in the United States.
The Suspension Agreement contemplates a cost-based determination of
"Normal Value" and establishes reporting and verification procedures to
assure compliance. Accordingly, the minimum pricing for sodium azide
sold in the United States by the remaining Japanese producer will be
based primarily on its actual costs, and may be affected by changes in
the relevant exchange rates.
Finally, the Suspension Agreement provides that it may be terminated by
any party on 60 days' notice, in which event the anti-dumping proceeding
would be re-instituted at the stage to which it had advanced at the time
the Suspension Agreement became effective.
Worldwide sodium azide demand declined significantly during fiscal 2001
and 2000. The Company's sodium azide sales volumes declined
approximately 17% in fiscal 2001 and fiscal 2000. As noted above,
worldwide demand for sodium azide is substantially less than worldwide
supply. Based principally upon market information received from airbag
inflator manufacturers, the Company expects sodium azide use to continue
to decline and that inflators using sodium azide will be phased out over
some period of time. As a result of these market conditions and in
accordance with the requirements of SFAS No. 121, the Company recognized
an impairment charge of $9.1 million in fiscal 2000 relating to the
fixed assets (property, plant and equipment) used in the production of
sodium azide. The present value of estimated future cash flows was used
to determine the amount of impaired fixed assets. The impairment charge
was recorded as a reduction of building and equipment and accumulated
depreciation of $14.7 million and $5.6 million, respectively.
55
13. HALOTRON(TM)
In 1991 and thereafter, the Company entered into a number of agreements
(collectively the "Halotron(TM) Agreement") granting the Company the
option to acquire the exclusive worldwide rights to manufacture and sell
Halotron(TM) (a replacement for certain halons). Halotron(TM) products
are fire extinguishing systems, including a series of chemical compounds
and application technologies, designed to replace halons, chemicals that
were in wide use as a fire extinguishing agent in military, industrial,
commercial and residential applications. The Halotron(TM) Agreement
provides for disclosure to the Company of all confidential and
proprietary information concerning Halotron(TM) I.
In February 1992, the Company determined to acquire the rights provided
for in the Halotron(TM) Agreement, gave notice to that effect to the
inventors (the "Inventors"), and exercised its option. In addition to
the exclusive license to manufacture and sell Halotron(TM) I, the rights
acquired by the Company include rights under all present and future
patents relating to Halotron(TM) I throughout the world, rights to
related and follow-on products and technologies and product and
technology improvements. Upon exercise of the option, the Company paid
the sum of $0.7 million (the exercise price of $1.0 million, less
advance payments previously made) and subsequently paid the further
total sum of $1.5 million in monthly installments commencing in March
1992. A license agreement entered into between the Company and the
Inventors provided for a royalty to the Inventors of 5% of the Company's
net sales of Halotron(TM) I over a period of 15 years.
In 1992, the Company sued the Inventors, claiming they had breached the
agreements and contracts in which they had sold the rights to
Halotron(TM). This initial litigation was settled when the Inventors
promised to perform faithfully their duties and to honor the terms of
the contracts that, among other things, gave the Company exclusive
rights to the Halotron(TM) chemicals and delivery systems. Following the
settlement of the initial litigation, however, the Inventors failed to
perform the acts they had promised in order to secure dismissal of that
litigation. As a result, the Company brought an action in the Utah state
courts in March 1994, for the purpose of establishing the Company's
exclusive rights to the Halotron(TM) chemicals and delivery systems. On
August 15, 1994, the court entered a default judgment against the
Inventors granting the injunctive relief requested by the Company and
awarding damages in the amount of $42.2 million. The trial court further
ordered the Inventors to execute documents required for patent
registration of Halotron(TM) in various countries. When the Inventors
ignored this court order, the Court directed the Clerk of the Court to
execute these documents on behalf of the Inventors. Finally, the Court
ordered that the Inventors' rights to any future royalties from sales of
Halotron(TM) I were terminated.
In 1996, the Company initiated arbitration proceedings by filing a
notice of Arbitration with the American Arbitration Association ("AAA")
against the Inventors to enforce, among other things, the Company's
rights under the Halotron(TM) Agreement. In June 2000, an AAA Panel (the
"Tribunal") issued their final award in this proceeding. The Tribunal
awarded the Company monetary relief consisting of $2.0 million in
compensatory damages, $0.2 million in arbitration costs, and $0.3
million in partial legal related costs, plus interest at an annual
non-compounded rate of 9%. The Tribunal also awarded the Company
injunctive relief essentially consisting of requirements that the
Inventors stop using the Halotron(TM) name, the invention, the know-how,
and the proprietary information, produce missing work product, disclose
and transfer relevant patent and trademark rights, and provide
information on sales of "Halotron(TM)" products. The award also
specifies that the Inventors pay $1000 for each day, beyond twenty days
of award delivery, that they fail to satisfy the directives within the
injunctive relief. Any opportunity for royalties to the Inventors would
only occur after the payment of damages and compliance with the
directives within the award. In 2001, the Svea Hovratt Court in Sweden
determined that the final award was enforceable. However, the Inventors
have declared bankruptcy in Sweden. The Company is pursuing enforcement
of the award through the bankruptcy proceedings.
56