EXHIBIT 99.3
Business
GENERAL
We are a diversified manufacturer of advanced technology and industrial products
that are used in the automotive, defense, aerospace, environmental testing,
medical implant devices, pharmaceutical services, nuclear energy and food and
beverage industries, in addition to other industrial arenas. Our long history of
innovation in technology and engineering has helped us become a leader in
certain markets in which we compete. Headquartered in Phoenix, Arizona, we have
domestic operations throughout the United States and international operations in
Mexico, Germany, Canada and Asia.
Our business consists of three operating segments: the Automotive Segment, the
Technologies Segment and the Filtration and Minerals Segment.
- - Our Automotive Segment is operated under two separate business units, the
Hillsdale division and the Wolverine division. The Hillsdale division
produces NVH dampers for engine crankshafts and drivelines, driveline
yokes, flanges, transmission and engine pumps, automatic transmission
filtration products, chassis corners and knuckle assemblies and other
precision machined components. The Wolverine division produces
rubber-coated materials and gaskets for automotive and non-automotive
applications.
- - Our Technologies Segment develops and commercializes advanced power
systems for defense, aerospace and commercial applications; produces boron
isotopes for nuclear radiation containment; supplies ultra-clean
scientific containers for pharmaceutical and environmental testing; and
provides contract pharmaceutical services.
- - Our Filtration and Minerals Segment mines, processes and markets
diatomaceous earth for use as a filtration aid, absorbent, performance
additive and soil amendment.
For the twelve months ended May 31, 2003, we generated $687.9 million of net
sales and $97.5 million of Adjusted EBITDA. The following chart sets forth the
percentage of our net sales generated by each of our operating segments for the
twelve months ended May 31, 2003.
$687.9 MILLION
REVENUE BY BUSINESS SEGMENT(1)
(PIE CHART)
(1) Our Automotive Segment consists of the Hillsdale and Wolverine divisions.
The following table sets forth the primary product groups that each of our
business segments develops and manufactures, the current markets for each of
these product groups and major customers for each product group:
BUSINESS SEGMENT PRODUCTS CURRENT MARKET(S) MAJOR CUSTOMERS
---------------- -------- ----------------- ---------------
AUTOMOTIVE
SEGMENT
Hillsdale Division NVH dampers, driveline Automotive OEMs and Allison, American
yokes, flanges, Tier 1 automotive Axle, DaimlerChrysler,
transmission and parts suppliers Delphi, Ford, GM,
engine pumps, Honda, Mitsubishi,
automatic transmission Nissan, Toyota,
filtration products, Visteon
chassis corners and
knuckles and other
precision machined
components
Wolverine Division Rubber-coated Automotive OEMs and Automotive
materials and gaskets Tier 1 and Tier 2 aftermarket,
automotive parts industrial and
suppliers consumer market, Tier
1 and Tier 2
automotive parts
suppliers
TECHNOLOGIES
SEGMENT
Power Group Batteries and power Defense, aerospace, Boeing, CECom
systems medical, (US Army), Guidant,
telecommunications, Lockheed Martin,
and other commercial Loral, Raytheon, TRW
industries
Specialty Materials Specialty materials Nuclear energy, Dow Chemical,
Group such as boron isotopes environmental testing Fisher Scientific,
and ultra-clean and pharmaceutical Gemeinschaft,
scientific containers testing Transnuclear,
VWR International,
Westinghouse
Pharmaceutical Drugs and drug active Pharmaceutical Celegene, Elkins-Sinn,
Services Group ingredients for Immunogen, Phoenix
clinical trials, low Scientific, Wyeth
volume drugs and
radioisotopic tagging
FILTRATION AND FILTER AID PRODUCTS, FOOD AND BEVERAGE AND ADM, BAYSHORE,
MINERALS SEGMENT fine mineral other miscellaneous Canandaigua Wine,
additives, and industries Cargill, Chevron,
chemical and moisture Roquette, Valspar
absorbents
COMPETITIVE STRENGTHS
We believe that we have the following competitive strengths:
Strong market positions in niche markets. We have a strong supply position
across a number of product lines, including NVH dampers, brake shims and
advanced power systems, allowing us to compete effectively in each of the
markets that we serve.
Strong management team. Substantially all of the senior management team at both
the corporate and divisional levels began working for us within the past two
years. Our senior management team, led by our chief executive officer, John
Weber, has an average of 20 years of experience in the automotive and other
diversified industries and has experience in running a global business. Over the
past 18 months, coinciding with the recent introduction of our newly revamped
senior management team we have achieved the following milestones:
- - Introduced a high performance culture;
- - Reorganized and refocused our business lines;
- - Implemented lean manufacturing and six sigma programs;
- - Introduced low cost sourcing;
- - Implemented successful cost-cutting initiatives such as pension plan and
health care restructurings;
- - Improved capital utilization;
- - Reduced headcount while increasing productivity;
- - Improved relations with our unions; and
- - Divested marginal businesses.
Strong financial performance. Under our new management team, we have increased
our last twelve months Adjusted EBITDA over each of the last five quarters,
despite overall cyclical weakness in the automotive sector and the economy.
Strong prospects for future business. Due to its primarily Tier 1 status as a
direct supplier to OEMs and the long-term nature of typical automotive
platforms, our Hillsdale division enjoys strong visibility of its future
revenues. The typical duration for these programs averages four to eight years.
As a result of its recent success at winning new business, our Hillsdale
division has already identified a significant portion of its planned business
for the next five years. For example, based on internal and external estimates
of North American automotive production, almost 100% of Hillsdale's projected
fiscal year 2004 sales and approximately 75% of its projected fiscal year 2008
sales have already been identified. However, these programs are not
contractually guaranteed and generally customers have the right to re-source
products at any time. Our Wolverine division also maintains a strong backlog of
business. In addition, as a result of our recent program awards, our
Technologies Segment's backlog has increased significantly.
Stable, diversified revenue base/business mix. Our products are highly
diversified with applications in the automotive, defense, aerospace,
environmental testing, medical implant devices, pharmaceutical services, nuclear
energy and food and beverage industries, in addition to other industrial arenas.
Our product diversification has helped us to offset the cyclicality of the
automotive market with revenues from our Technologies Segment and Filtration and
Minerals Segment, and also limited our dependence upon any individual raw
material source for a substantial part of our business. Additionally, we have
built a stable customer base that includes industry-leading companies who seek
superior products and world-class execution. Except for Honda, which accounted
for approximately 12% of our net sales for our fiscal year ended November 30,
2002, no customer represents more than 10% of our net sales.
Proven history of technological innovation and product development. We have been
in business for 160 years and have been at the forefront of technological
innovation and product development in many of the markets in which we compete.
Our history includes such achievements as the following:
- - We pioneered and perfected the technology to produce rubber-coated paper
and metal using the line coating process;
- - We developed the first advanced chemistry special purpose battery in 1945;
- - Our batteries powered the return of the Apollo 13 spaceship; and
- - We were the first supplier in North America to offer secondary micro fluid
filtration components for automatic transmissions.
In addition, our Technologies Segment averages approximately $8 million per year
of customer-funded research and development activities and recently an
increasing percentage has been for commercial products, such as medical implant
devices.
BUSINESS STRATEGY
A key component of implementing our business strategy involves recruiting highly
qualified leadership to operate our business segments autonomously. Each of our
business segments has developed its own business strategy for capitalizing on
growth opportunities for its existing markets as well as penetrating new
markets. Our overall business strategy involves:
Expanding our strong technological capabilities and customer relationships
We plan to leverage our strong positions in certain markets, our long
established customer relationships and our strong technology capabilities as a
means of further penetrating existing markets that we serve and penetrating new
markets for our technologies. We believe there are growth opportunities in each
of our business segments.
- Automotive Segment. Our Hillsdale division plans to rely on its
strong proprietary damper technology and new design and predictive
software to identify and resolve customer NVH problems. This
initiative has already led to significant new business for its
damper products. In addition, our Hillsdale division has introduced
new micro bypass filtration technology for transmission, engine and
power steering filtration applications that will improve filtration
performance, which we expect to significantly reduce warranty issues
for customers. Our Hillsdale division seeks to implement these new
problem-solving technologies and improved cost structure as a means
of generating additional business from existing customers.
Our Wolverine division has a strong market position in rubber-coated metal
technology in the automotive OEM market and in certain non-automotive
applications. It has recently penetrated the brake aftermarket and the small
engines market (e.g. motorcycles). We believe there are significant additional
opportunities for further penetration of these new markets, as well as expansion
into other high performance applications in non-automotive markets, such as
compressor applications.
- Technologies Segment. The Power Group, within our Technologies
Segment, has a long history of successfully implementing
leading-edge technology for demanding battery and power
applications. The Power Group often licenses this technology from
government entities. The Power Group's strategy involves leveraging
its reputation in this field into increased penetration of existing
defense and aerospace markets. The Power Group also plans to develop
new commercial applications through joint ventures, licenses,
alliances and other technology initiatives. The Power Group has
entered into or agreed in principle to enter into, new joint
ventures or licenses for technology in high performance, low weight
specialty lead acid batteries, fast battery recharging technology
and nano-material medical battery technology. We believe the
potential for high sales growth in these markets will be one of the
main growth drivers for this segment.
- Filtration and Minerals Segment. Our Filtration and Minerals
Segment's core strategy involves moving into certain higher margin
segments of its current markets. We also believe there are
significant opportunities to penetrate new markets where our
filtration technologies can add significant value, including potable
drinking water, industrial and pharmaceutical filtration
applications, as well as to increase sales of diatomaceous earth for
soil amendments and paper industry processing.
Focusing on operating efficiency and optimal capital utilization
Another key element of our business strategy involves improving our cost
structure. We believe our continual focus on improving our profit margins and
cost effectiveness will provide a competitive advantage in all aspects of our
business. Our gross margin improved from 18.9% in fiscal year 2001 to 21.7% in
fiscal year 2002, and is expected to improve in fiscal year 2003.
Examples of our commitment to improving our cost structure include:
- - Applying lean manufacturing and six sigma programs across our business
segments. Productivity improvements from applying these programs in our
Hillsdale division and in our Technologies Segment are ahead of our
expectations and we believe provide a basis for substantial future
savings;
- - Implementing low cost production in Mexico and sourcing from China and
Southeast Asia. In order to improve
productivity, our Hillsdale division is increasing production in Mexico,
where we believe available plant infrastructure capacity exists. The
Technologies Segment has also begun sourcing commercial batteries from
China and Southwest Asia, including a new enhanced lead acid battery from
China; and
- - Improving factory automation to reduce costs and improve quality. Specific
projects underway include automated defense battery production lines for
which government funding is being negotiated, automated vision quality and
coating line inspection systems at our Wolverine facilities, and automated
packaging lines for our filtration and minerals products.
Divesting non-core business divisions
We continually evaluate the profitability and competitive strength, market
trends and conditions and future prospects for our various businesses. An
outcome of this process is that we have sold or exited marginal businesses that
we did not believe would appropriately contribute to our goal of sustained
financial performance improvement.
We anticipate selling substantially all of our germanium business within our
Technologies Segment for a purchase price of approximately $15 million. This
business contributed $6.6 million in net sales and $0.7 million of Adjusted
EBITDA during the six months ended May 31, 2003 and $15.0 million in net sales
and $1.7 million of Adjusted EBITDA for fiscal year ended November 30, 2002. We
cannot assure you that this transaction will be completed.
We sold our Hillsdale UK automotive operation in June 2003. In 2002, we sold our
Precision Products business and exited our gallium-based business due to
continued soft demand from customers in the telecommunications and semiconductor
markets. In 2001, we sold our Construction Equipment division. In 2000, we sold
five automotive and industrial businesses.
BUSINESS SEGMENTS
AUTOMOTIVE SEGMENT
General
Our Automotive Segment, consisting of the Hillsdale and Wolverine divisions,
supplies the global automotive market with a diverse range of products. Together
these two divisions produce systems, components and materials for sport utility
vehicles, trucks, vans and passenger cars. We sell these products to major
automotive manufacturers and Tier 1 and Tier 2 suppliers in North America,
Europe and Asia.
Hillsdale division
The Hillsdale division provides NVH dampening solutions to the worldwide
automotive market. The Hillsdale division also supplies complex machined
components for engine, transmission, axle/driveline and chassis/suspension
applications. The Hillsdale division has a diverse customer base with over 60%
of its sales made directly to automotive vehicle manufacturers. The Hillsdale
division utilizes its nine manufacturing facilities located throughout the
United States and Mexico to produce its diverse product line. It employs complex
manufacturing and quality control systems such as robotic material handling and
assembly, lean manufacturing and six sigma methodologies to produce high quality
and often custom automotive components and systems. The Hillsdale division will
expand the use of low cost production in Mexico and sourcing from China and
Southeast Asia to remain competitive across its product lines.
For the twelve months ended May 31, 2003, approximately 35% of the Hillsdale
division's sales were to Japanese operators in North America and 18% to General
Motors for use in large engine truck and SUV platforms. Sales to Honda represent
approximately 25% of the Hillsdale division's net sales and approximately 12% of
our consolidated net sales in fiscal year 2002. We believe the Hillsdale
division is North America's leading torsional vibration damper manufacturer.
Although competitive conditions are intense in the automotive parts industry,
the Hillsdale division's primary product groups are incorporated into automotive
products that typically run for four to eight years. However, these programs are
not contractually guaranteed, and generally customers have the right to
re-source products at any time.
Major products
- - Dampers. Dampers are vibration control devices which reduce the torsional
stress vibrations caused by internal combustion engine systems, thereby
alleviating the stress on shafts and relaxing the flex points. Dampers
reduce fatigue and prevent cracking thereby enhancing the durability of
engines and their components. We believe the Hillsdale division is widely
recognized as North American's leading manufacturer of torsional vibration
damper devices for use in engine and drivetrain applications, with custom
rubber compounding and manufacturing capabilities.
- - Precision Machined Components. The Hillsdale division also manufactures a
wide array of precision machined metal components. These parts, made of
iron, aluminum, steel and magnesium, include flanges, connecting rods,
yokes, driveshaft support brackets, front engine covers and pump housings.
- - Chassis Corners and Knuckles. Corners and knuckles are structural
components of vehicle chassis and suspension systems. The Hillsdale
division's corner and knuckle products include front and rear steering
knuckles and damper forks.
- - Pumps. The Hillsdale division also designs and manufactures both fixed and
variable pressure style pumps for engines and transmissions. Its products
includes complete pump components and complete oil pump assemblies.
Although one of its major pump programs with Ford is being phased out, the
Hillsdale division believes that certain market trends present new
business opportunities for its pump products. We believe that increased
fuel efficiency requirements for motor vehicles will drive the market
towards a larger demand for variable displacement pumps. To achieve
improved fuel efficiency, vehicle manufacturers are developing vehicles
that idle at lower revolutions per minute (RPMs) requiring either a larger
and more burdensome pump or a variable displacement pump. The Hillsdale
division currently is exploring new technologies to address this market
trend.
Business strategy. Key elements of the Hillsdale division's business strategy
include:
- - Improving efficiency, cost structure and quality through lean
manufacturing, six sigma and value added engineering design;
- - Expanding production at its Mexico operation and expanding the use of low
cost sourcing from China, India and Southeast Asia;
- - Optimizing capital deployment by focusing on higher margin and lower
capital intensive areas such as dampers, filtration and driveline
components;
- - Continuing to invest in new high value technologies in damper design and
predictive testing, and in micro bypass filtration for transmissions,
engines and power steering, to solve customer problems and strengthen
customer relationships, and leverage these technologies to drive
additional penetration of other existing products to customers; and
- - Exploring promising concepts to develop new pump technologies that offer a
unique competitive technical and value added advantage.
Wolverine division
We believe our Wolverine division is among the world's largest and most
diversified suppliers of rubber-coated metal and gasket material, designed for
superior performance under extreme conditions, for sealing, sound dampening and
other applications in the automotive, industrial and consumer markets. The
Wolverine division pioneered and perfected the technology to produce
rubber-coated paper and metal using the line coating process. Typical
applications include sealing systems (i.e., gaskets) for engines, transmissions
and compressors. These materials are also used as an NVH suppressant for brakes,
a product in which we believe Wolverine is the global market leader. The
Wolverine division manufactures the rubber-coated materials in the United
States. Certain
sealing and insulating products, such as compressor gaskets for air conditioning
units and brake noise insulators, are stamped out of the rubber-coated materials
both in the United States and in Germany. Wolverine has installed additional
manufacturing capacity and is focused on several growth initiatives, including
new market opportunities in the brake aftermarket and small engines markets, as
well as increased penetration of the global market.
The Wolverine division sells primarily to Tier 1 and Tier 2 suppliers, with
nearly 85% of its sales to the automotive end-market (OEM and OEM replacement
parts). The Wolverine division has a diverse customer base with over 250
customers.
Major products
- Brake products. The Wolverine division's brake product segment
focuses on the design, manufacture and sale of shims and sound
damping materials for disc brakes and replacement part markets. The
Wolverine division combines substrates, elastomer coatings,
attachment options and adhesive layers in different formulations to
arrive at economical products to meet a wide range of application
demands. The Wolverine division's aftermarket products now account
for nearly 10% of its brake product sales and it plans to continue
to penetrate this market to mitigate the impact of vehicle
production cycles.
- Gasket and gasket materials. The Wolverine division supplies a wide
range of rubber-coated metals for sealing and sound damping and
other applications in the automotive OEM and aftermarket, and
industrial and consumer markets. The Wolverine division's gaskets
and gaskets materials are used in many automotive applications
including cylinder head and various other engine gaskets, fuel
system gaskets and transmission gaskets. The increased demand for
more fuel efficient vehicles and reduced warranty expense has led to
an increased demand for more sophisticated sealing applications.
Aftermarket applications now account for nearly 10% of all of the
Wolverine division's gasket related sales.
- Compressor gaskets. The Wolverine division's compressor gaskets
focus on the design, manufacture and sale of gaskets and gasket
materials for industrial and consumer product applications including
small engines, industrial air compressor systems, air power tools,
commercial and residential air conditioning systems and fluid pumps
and pneumatic applications. The Wolverine division plans to further
penetrate these higher margin applications by leveraging its
reputation and market leading position as a premier supplier of
gasket products and materials.
Business strategy. Key elements of the Wolverine division's business strategy
include:
- Penetrating the brake aftermarket market to mitigate the impact of
OEM production cycles;
- Leveraging its strong technology position into new applications such
as small engines, acoustic panels, and industrial gasket
applications;
- Expanding globally by replicating its success in developing Japan
and Korea businesses into other emerging markets such as China,
India and Southeast Asia; and
- Leveraging existing availability capacity to realize the above
opportunities.
TECHNOLOGIES SEGMENT
General
Our Technologies Segment consists of a diverse group of businesses with a broad
spectrum of technologies and capabilities and operates these businesses through
the following three divisions: the Power Group, the Specialty Materials Group,
and the Pharmaceutical Services Group. These divisions provide innovative
advanced technology products for aerospace, defense, and commercial power,
nuclear energy, environmental and pharmaceutical applications.
Power group
The Power Group supplies batteries and power systems for aerospace, defense,
medical implant and other specialty commercial applications. It has been
providing the aerospace and defense industries with high quality, reliable
batteries for more than 50 years. Nickel hydrogen and other types of batteries
manufactured by the Power Group provide power for commercial and government
satellites and spacecraft, serve as launch batteries in booster rockets and
support a variety of military applications, including missiles, "smart weapon"
munitions and mobile radio communications.
Our batteries power a significant number of the United States' most advanced
communications and surveillance satellites. Our batteries have been on every
United States manned space flight, and our silver zinc batteries provided the
power for the safe return to earth of the famed Apollo 13 flight crew.
The Power Group also manufactures a line of batteries sold commercially for use
in items such as medical implants, industrial fire and burglary alarm systems,
telecommunications backup systems and remote global positioning units.
Defense and space power products. Over 90% of the Power Group's revenue
comes from military or space applications. Major customers include
Raytheon, Lockheed Martin, Boeing and the United States Army. The Power
Group is looking to expand its presence in the commercial market through
joint ventures, licensing, and other technology development initiatives.
These new market opportunities presently include high performance
lead-acid batteries, implantable medical device batteries, fast battery
chargers, and long life batteries for remote applications, such as coastal
buoys and remote monitoring stations.
Commercial power products. The Power Group, through its Commercial Power
division, produces batteries for commercial applications in various high
growth market segments. Its commercial line of batteries include
Carefree(R) batteries and Keeper(TM) II batteries. Carefree(R) cells and
batteries, based upon lead acid, nickel cadmium, nickel metal hydride and
lithium-ion chemistries, are long-life rechargeable batteries. Common
applications for these batteries include emergency lighting, fire and
security systems, handheld power tools, telecommunications back-up systems
and wheelchairs and scooters. Keeper(TM) II cells and batteries, based
upon lithium thionyl chloride, lithium manganese dioxide and lithium
sulfur dioxide chemistries, are non-rechargeable batteries. Common
applications include automotive toll tags, memory back-up for computer
servers and radio frequency transponders.
Specialty materials group
The Specialty Materials Group manufactures and markets high purity specialty
material compounds for a wide range of services and products. The Specialty
Materials Group supplies isotopically enriched boron and isotopically purified
zinc, which are used in nuclear power plants for radioactive absorption and
containment. The Specialty Materials Group also supplies ultra-clean containers
for use in pharmaceutical and environmental testing.
Boron and related products. The Specialty Materials Group uses
sophisticated manufacturing processes to produce isotopically pure boron,
which involves the separation of boron into its isotopes, and to produce
high purity enriched boron compounds. The Specialty Materials Group
maintains a strong commitment to delivering innovative products such as
BondAids(TM), a ceramic concrete product based on technology licensed from
the Argonne National Laboratory with radiation absorption qualities that
is used in containers for radioactive and hazardous waste. This product is
in the initial commercialization phase and the Specialty Materials Group
has recently received a $3.0 million initial order from the United States
Government. The Specialty Materials Group also produces depleted zinc and
lithium products for nuclear containment applications.
Environmental Sciences & Technology. Our Environmental Sciences &
Technology (ESAT) division is the leading resource for glassware and
plasticware cleaning and treating services. This division supports the
pharmaceutical/biotech, semiconductor and environmental industries
globally with off-the-shelf and customized solutions.
ESAT offers the following products and services:
- Ultra-high purity chemical filtration and packaging;
- Low-particle/low-metals certified containers;
- EPA certified products;
- Chemical preservation and preservatives; and
- Certificates of analysis -- products & services.
Pharmaceutical services group
The Pharmaceutical Services Group manufactures drug active ingredients for
pharmaceutical companies principally in small batches for clinical trials and
low volume prescription drugs. Our primary customers for these products are
Wyeth, Immunogen and Celgene. The Pharmaceutical Services Group has manufactured
hundreds of new drug candidates for use in pre-clinical studies, toxicology
studies, clinical trials and commercial use. The manufacturing of these drugs
requires specially designed facilities and operating systems to ensure safe
handling and to prevent cross-contamination with other drugs. Our high level
facility in Harrisonville, Missouri provides the rigorous controls necessary to
develop and manufacture both new and existing anticancer drugs and other high
potency compounds. We believe this facility is one of only a few facilities
worldwide specifically designed to manufacture this class of drugs.
Business strategy
Key elements of the Technologies Segment's business strategy include:
- - Improving its efficiency and cost structure through six sigma, low cost
sourcing, factory automation and consolidation of its supply base;
- - Leveraging strengthened customer relationships with key defense customers,
and their increased desire for a reliable United States based supplier,
into an additional share of existing business;
- - Leveraging its strong reputation and technology development and
commercialization capability to exploit significant commercial business
development opportunities, including penetrating the following specialty
markets:
- Implantable medical devices;
- Specialty transportation (forklifts, golf carts, trucking); and
- Remote applications (coastal buoys, monitoring stations and telecom
back-up).
- - Leveraging the Specialty Materials Group's newly developed BondAids(TM)
product in helping to decommission aging nuclear reactors and storing
spent fuel on a global basis.
FILTRATION AND MINERALS SEGMENT
General
Our Filtration and Minerals Segment mines, processes and markets diatomaceous
earth and perlite products. The primary uses of its products are as a filtration
aid for removing solids and impurities, as a fine mineral additive for enhancing
the surface of products, and as a liquid absorbent. Filtration aids are used in
processing food sweeteners (sugar and corn syrup), filtration of beer, wine and
fruit juices, and in swimming pool filtration systems. Fine mineral additives
are sold to the paint and plastics industries. Diatomaceous earth absorbents are
used as chemical and moisture absorbents in industrial and chemical plants and
as a soil enhancement in golf courses, sports fields and horticultural
applications. The Filtration and Minerals Segment serves over 35 markets and
more than 2,000 customers around the globe with its various products.
Major products
Diatomaceous earth, or diatomite, is a silica material that is odorless,
tasteless and highly stable. With its natural honeycomb structure, strength and
low bulk density, diatomite is an ideal medium for filtration applications.
Perlite is a mineral of volcanic origin, also with natural qualities that make
it valuable as a filter aid. These products are used in a variety of industrial
and commercial applications, including liquid solid separation in food and
beverage, chemical, pharmaceutical and wastewater industries and as catalyst
carriers and for liquid waste solidification. The Filtration and Minerals
Segment sells its filter aid products under the trademark CELATOM(R) both
directly and through distributors to many customers. The Filtration and Minerals
Segment also sells absorbent products known as FLOOR DRY(TM), as well as
AXIS(TM) and PLAY BALL!(TM) soil amendments and conditioners.
Business strategy
Key elements of the Filtration and Minerals Segment's business strategy include:
- - Improving its efficiency and cost structure through six sigma and
packaging line automation;
- - Using its existing technology and customer demand for a second source of
supply to increase penetration of brewing and additives markets; and
- - Exploiting its technology position to expand into new markets, including
potable drinking water filtration to meet new federally mandated water
standards effective 2006, industrial and pharmaceutical filtration, soil
amendments and paper industry processing aids.
COMPETITION
Our three business segments collectively manufacture hundreds of products for
customers worldwide. The economic and competitive conditions at any given time
in the markets we serve are likely to vary significantly from market to market.
Our competitive position for our products varies substantially across product
lines.
Automotive Segment. Our Automotive Segment competes with other automotive parts
suppliers as well as OEMs themselves. Competition in the automotive parts
industry is intense on a global basis but varies along product lines. Generally,
competitive conditions in the automotive parts industry are characterized by the
decrease in the number of competitors, increased foreign competition,
particularly from Asia, increased emphasis on quality and intense pricing
pressures from automotive manufacturers.
Technologies Segment. Our Technologies Segment competes in several industries
and industry sub-segments. The Power Group's battery and power products serve
several industries including defense, aerospace and specialty commercial
industries and competes with many different companies. The Power Group supplies
batteries and power components for use in defense and aerospace applications in
North America. SAFT, a subsidiary of Alcatel, is the Power Group's leading
competitor with respect to these products. The Specialty Materials Group
supplies enriched boron, which is used in nuclear power plants for radioactive
absorption and containment. Its enriched boron products compete primarily on the
basis of cost versus natural boron, although there are a few smaller competitors
in the enriched boron market. The Pharmaceutical Services Group has numerous
small competitors in a highly fragmented, high margin market.
Filtration and Minerals Segment. Our Filtration and Minerals Segment competes
primarily on the basis of price in a market with relatively few competitors, one
of which is significantly larger than us.
RAW MATERIALS
The prices of our raw materials are subject to volatility. Our principal raw
materials consist of rubber, steel, zinc, nickel, boron, and aluminum. In
addition, due to their manufacturing processes, our Filtration and Minerals
Segment and our Wolverine division consume large amounts of natural gas.
Generally, these raw materials are commodities
that are widely available. Although we have alternate sources for these
commodities, our policy is to establish arrangements with select vendors based
upon price, quality and delivery terms. We also are looking to further diversify
our supplier base and increase the percentage of our materials purchased in
lower cost regions, such as Asia, Mexico, and Eastern Europe.
INTELLECTUAL PROPERTY
We own or license a number of patents, primarily in the United States. Many of
our products incorporate a wide variety of technological innovations, some of
which are protected by individual patents. Many of these innovations are treated
as trade secrets with programs in place to protect these trade secrets. No one
patent or group of related patents is material to our business. We also have
numerous trademarks, including the EaglePicher name.
GOVERNMENT CONTRACTS
Our Technologies Segment has contracts, directly or indirectly, with the United
States government that have standard termination provisions permitting the
United States government to terminate the contracts at its convenience. However,
if contracts are terminated, we are entitled to be reimbursed for allowable
costs and profits through the date of the contract termination. The United
States government contracts are also subject to reduction or modification in the
event of changes in Government requirements or budgetary constraints. During
fiscal year 2002, a majority of our Technologies Segment's sales were directly
with the United States government or with other companies where the United
States government was the end customer.
RESEARCH AND DEVELOPMENT
We spent approximately $11.7 million in fiscal year 2000, $10.4 million in
fiscal year 2001 and $9.8 million in fiscal year 2002 on research and
development activities, primarily for the development of new products or the
improvement of existing products. Included in these amounts are costs reimbursed
by customers for customer sponsored research activities of $7.5 million in
fiscal year 2000, $9.3 million in fiscal year 2001 and $8.8 million in fiscal
year 2002.
EMPLOYEES
As of May 31, 2003, we employed approximately 4,100 persons. Approximately 30%
of our employees are represented by labor organizations. We believe that our
relations with our employees are generally good.
ENVIRONMENTAL MATTERS
We are subject to extensive and evolving Federal, state, local and international
environmental laws and regulations. Compliance with such laws and regulations
can be costly. Governmental authorities may enforce these laws and regulations
with a variety of enforcement measures, including monetary penalties and
remediation requirements. We have policies and procedures in place to ensure
that our operations are conducted in compliance with such laws and regulations
and with a commitment to the protection of the environment.
We are involved in various stages of investigation and remediation of soil and
groundwater at approximately 15 sites as a result of past and present
operations, including currently owned and formerly owned plants. Also, we have
received notice that we may have liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, as a potentially
responsible party at approximately 20 additional sites, but we believe that any
potential liability would not be material.
The ultimate cost of site remediation is difficult to predict given the
uncertainties regarding the extent of the required remediation, the
interpretation of applicable laws and regulations and alternative remediation
methods. Based on our available information and experience with environmental
remediation matters, we have accrued reserves for our best estimate of
remediation costs, and we do not believe that remediation activities will have a
material adverse impact on our financial condition, results of operations or
cash flows. In addition, in the course of our bankruptcy described below, we
obtained an agreement with the United States Environmental Protection Agency and
Department of Interior and the states of Arizona, Michigan and Oklahoma whereby
we have limited
responsibility to them for response costs and natural resource damages for
environmental contamination of sites not owned by us that is attributable to
pre-bankruptcy activities. We retain all of our defenses, legal or factual, at
such sites. However, if we are found liable for such contamination at any of
these sites, our liability is capped at approximately 37%.
We had total expenditures for environmental compliance and remediation of $11.3
million in 2000, $9.1 million in 2001, and $10.0 million in 2002. We estimate
that we will spend $12.8 million during 2003 on environmental compliance and
remediation and that such expenditures will be in an approximately similar
amount in fiscal year 2004.
As of November 30, 2002, we had $17.7 million accrued, and as of May 31, 2003,
we had $13.6 million accrued, primarily for sold divisions or businesses related
to legal and environmental remediation matters. In addition, we had $2.4 million
recorded at November 30, 2002, and $1.6 million recorded at May 31, 2003 in
other accrued liabilities related to environmental remediation liabilities for
our on-going businesses. While we believe these reserves are adequate based on
current circumstances, we cannot guarantee that our actual losses will not
exceed our reserves or be material.
PROPERTIES
Our principal fixed assets consist of our manufacturing, processing and storage
facilities, and our transportation and plant vehicles. We have pledged
substantially all of our owned properties and assets as collateral under our
existing senior secured credit agreement. The following table sets forth
selected information regarding our manufacturing and processing facilities:
BUSINESS SEGMENT LOCATION DESCRIPTION OF PROPERTY INTEREST
---------------- -------- --------------------------------
AUTOMOTIVE
Domestic Blacksburg, Virginia (2 plant owned
locations)
Hillsdale, Michigan (4 plant owned
locations)
Hamilton, Indiana owned
Inkster, Michigan owned
Jonesville, Michigan owned
Leesburg, Florida owned
Manchester, Tennessee leased
Mount Pleasant, Michigan owned
Traverse City, Michigan owned
Vassar, Michigan leased
International Ohringen, Germany owned
San Luis Potosi, Mexico owned
Tamworth, England owned
TECHNOLOGIES
Domestic Colorado Springs, Colorado owned
Galena, Kansas owned
Grove, Oklahoma owned
Harrisonville, Missouri owned
Joplin, Missouri (6 plant locations) owned & leased
Lenexa, Kansas owned
Miami, Oklahoma (3 plant locations) owned & leased
Quawpaw, Oklahoma (2 plant locations) owned
Seneca, Missouri owned
Stella, Missouri owned
International Vancouver, Canada leased
FILTRATION AND
MINERALS(1)
Domestic Clark Station, Nevada owned
Lovelock, Nevada owned
Vale, Oregon owned
OTHER
Domestic Lubbock, Texas owned
(1) In addition to the facilities listed, the Filtration and Minerals Segment
has office space in Reno, Nevada, and mining locations in Nevada and
Oregon.
We own or lease additional office space, including our corporate headquarters in
Phoenix, Arizona as well as our former corporate headquarters in Cincinnati,
Ohio. We also have sales offices in Europe and Asia, and warehouse space for
certain of our operations.
We believe our properties are adequate and suitable for our business and
generally have capacity for expansion of existing buildings on owned real
estate. Plants range in size of floor space and generally are located away from
large urban centers. Substantially all of our buildings have been well
maintained, and are in sound operating condition.
Mining
The Filtration and Minerals Segment owns and leases diatomaceous earth and
perlite mining locations as well as numerous claims in Nevada and Oregon. Our
owned and leased mining properties, including those not currently being mined,
comprise a total of approximately 10,500 acres in Storey, Lyon, Pershing and
Churchill Counties in Nevada and 5,000 acres in Malhuer and Harney Counties in
Oregon, as well as rights on 2,500 acres not currently being mined in Siskiyou
County in California. We continually evaluate potential mining properties, and
additional mining properties may be acquired in the future. The Filtration and
Minerals Segment extracts diatomaceous earth and perlite through open-pit mining
using a combination of bulldozers, wheel type tractor scrapers, excavators and
articulated trucks. We transport the extracted materials by truck to separate
processing facilities. A total of approximately 374,000 tons of diatomaceous
earth and perlite were extracted by our mining properties in Nevada and Oregon
in 2002. On average, we have extracted a total of approximately 423,000 tons of
diatomaceous earth and perlite from our Nevada and Oregon properties each year
for the past six years. As ore deposits are depleted, we reclaim the land in
accordance with plans approved by the relevant Federal, state and local
regulators.
The following mining properties are of major significance to our mining
operations.
Nevada. Our diatomaceous earth mining operations in Nevada commenced in 1945 in
Storey County. We commenced perlite-mining operations in Churchill County in
1993. We extracted a total of approximately 223,000 tons of diatomaceous earth
and perlite from our Nevada mining properties in 2002 and, on average, extracted
a total of approximately 266,000 tons of diatomaceous earth and perlite from our
Nevada mining properties each year for the past six years, or approximately 60%
of our total diatomaceous earth and perlite production (and including 100% of
our perlite production). Approximately 265 acres in Storey County, where mining
activities commenced 57 years ago, and approximately 62 acres in the Counties of
Lyon and Churchill are actively being mined by us for diatomaceous earth.
Diatomaceous earth from Storey, Churchill and Lyon mining properties is
processed at the Clark Station, Nevada facility. We believe our diatomaceous
earth reserves in the Counties of Storey, Churchill and Lyon, including mining
properties not actively being mined, are in excess of 30 years at current levels
of extraction based upon estimates prepared by our mining and exploration
personnel. Diatomaceous earth extractions from the Pershing mining properties,
which commenced more than 42 years ago, are processed at the Lovelock, Nevada
facility. Approximately 975 acres are actively being mined for diatomaceous
earth in Pershing. We believe our diatomaceous earth reserves in Pershing,
including mining properties not actively being mined, to be in excess of 15
years at the current level of extraction based on estimates prepared by our
mining and exploration personnel. Beginning in 1993, we have actively mined
approximately 25 acres in Churchill County for perlite, which is processed at
the Lovelock, Nevada facility. We believe our perlite reserves in Churchill
County, including mining properties not actively mined, are in excess of 30
years at the current level of extraction based upon estimates prepared by our
mining and exploration personnel.
Oregon. We commenced mining diatomaceous earth in Oregon in 1985 at our mining
properties in Harney and Malhuer Counties. Approximately 88 acres in Harney
County and 80 acres in Malhuer County are actively being mined. Diatomaceous
earth extracted from these mines is processed at our Vale, Oregon facility. We
extracted
approximately 151,000 tons of diatomaceous earth from the Harney County and
Malhuer County mining properties during 2002 and on average, have extracted
approximately 158,000 tons of diatomaceous earth each year for the past six
years from these mining properties, or approximately 40% of our total
diatomaceous earth and perlite production. We believe our diatomaceous earth
reserves in Harney County and Malhuer County, including mining properties not
actively being mined, are in excess of 30 years at the current level of
extraction based on estimates prepared by our mining and exploration personnel.
LEGAL PROCEEDINGS
As a result of sales prior to 1971 of asbestos-containing insulation materials,
EaglePicher Incorporated became the target of numerous lawsuits seeking damages
for illness resulting from exposure to asbestos. By the end of 1990, we had paid
hundreds of millions of dollars to asbestos litigation plaintiffs and their
lawyers. In January 1991, we filed for protection under Chapter 11 of the United
States Bankruptcy Code as a direct consequence of cash shortfalls attributable
to pending asbestos litigation liabilities. On November 29, 1996, we emerged
from bankruptcy as a reorganized company. Pursuant to Section 524 of the United
States Bankruptcy Code, the bankruptcy court issued a permanent injunction that
precludes holders of present and future asbestos-related personal injury claims
from pursuing their claims against us. Although not expressly authorized by
Section 524, the bankruptcy court's permanent injunction also precludes holders
of present and future lead-related personal injury claims from pursuing their
claims against us. Consequently, we have no further liability in connection with
such asbestos-related or lead-related personal injury claims. Instead, those
claims will be channeled to the Eagle-Picher Industries Personal Injury
Settlement Trust (the "PI Trust"), which is an independently administered
qualified settlement trust established to resolve and satisfy those claims.
Under the terms of our bankruptcy reorganization, all of our outstanding common
stock was cancelled and our newly issued common stock, as a reorganized entity,
was contributed to the PI Trust, together with certain notes and cash. On
February 24, 1998, our parent acquired from the PI Trust for $702.5 million. A
final distribution of approximately $10.9 million was made by us to the PI Trust
and all other eligible unsecured claimants in June 2001.
On January 25, 1996, Richard Darrell Peoples, a former employee, filed a lawsuit
in the United States District Court for the Western District of Missouri
claiming that we violated the federal False Claims Act based on alleged
irregularities in testing procedures in connection with certain United States
Government contracts. Mr. Peoples filed this lawsuit under a procedure which
gives a private individual the right to file a lawsuit for a violation of a
Federal statute and be awarded up to 30% of any recovery. The government has the
right to intervene and take control of such a lawsuit. Following an extensive
investigation, the United States Government declined the opportunity to
intervene or take control of this suit. The allegations in the lawsuit are
similar to allegations made by Mr. Peoples, and investigated by our outside
counsel, prior to the filing of the lawsuit. Our outside counsel's investigation
found no evidence to support any of Mr. Peoples' allegations, except for some
inconsequential expense account matters. The case is in a discovery phase.
Recently the court disqualified Mr. Peoples' lawyer from the case after he read
some of our attorney-client privileged documents that Mr. Peoples took from our
lawyers' offices without authorization. We intend to contest this suit
vigorously and do not believe that the resolution of this lawsuit will have a
material adverse effect on our financial condition, results of operations or
cash flows.
On May 8, 1997, Caradon Doors and Windows, Inc. ("Caradon") filed a suit against
us in the United States District Court for the Northern District of Georgia
alleging breach of contract, negligent misrepresentation, and contributory
infringement and seeking contribution and indemnification in the amount of
approximately $20.0 million. This suit arose out of patent infringement
litigation between Caradon and Therma-Tru Corporation extending over the
1989-1996 time period, the result of which was for Caradon to be held liable for
patent infringement. In June 1997, we filed a motion with the United States
Bankruptcy Court for the Southern District of Ohio, Western Division, seeking an
order that Caradon's claims had been discharged by our bankruptcy and enjoining
Caradon from pursuing its lawsuit. On December 24, 1997, the Bankruptcy Court
held that Caradon's claims had been discharged and enjoined Caradon from
pursuing its lawsuit. Caradon appealed the Bankruptcy Court's decision to the
United States District Court for the Southern District of Ohio, and on February
3, 1999, the District Court reversed on the grounds that the Bankruptcy Court
had not done the proper factual analysis and remanded the matter back to the
Bankruptcy Court. The Bankruptcy Court held a hearing on this matter on
September 24 and 25, 2001, and on May 9, 2002 again held that Caradon's claims
had been discharged and enjoined Caradon from pursuing the Caradon Suit. Caradon
has again appealed this decision to the District Court. We intend to contest
this suit vigorously and do not believe that the resolution of this suit will
have a material adverse effect on our financial condition, results of operations
or cash flows.
In March 2002, a purported class action on behalf of approximately 3,000
homeowners was filed in state court in Colorado against us and a company with a
facility adjacent to our facility in Colorado Springs, Colorado seeking property
damages, testing and remediation costs and punitive damages arising out of
chlorinated solvents and nitrates in the groundwater alleged to arise out of
activities at our facility and the adjacent facility. The case has been removed
to federal court and there has been no decision whether to certify a class. In
September 2002, as amended in May 2003, a trust purportedly the assignee of
approximately 200 property owners filed suit against us and the same
co-defendant in Colorado state court, which was subsequently removed to Federal
District Court in Colorado. This lawsuit seeks unspecified damages to provide
for remediation of the groundwater contamination as well as unspecified punitive
damages. The owner of the adjacent facility, which is upgradient from our
facility, is operating a remediation system aimed at chlorinated solvents in the
groundwater originating from its facility under a compliance order on consent
with the Colorado Department of Public Health and Environment ("CDPHE"). We are
operating a remediation system for nitrates in the groundwater originating from
our facility, also under a compliance order on consent with CDPHE. We do not
believe that nitrates in groundwater materially affect any of the properties
related to the plaintiffs in these lawsuits. Neither the United States
Environmental Protection Agency nor the CDPHE has ever required us to undertake
a cleanup for chlorinated solvents. We intend to contest these lawsuits
vigorously and do not believe that these lawsuits will result in a material
adverse effect on our financial position, results of operation or cash flows.
In addition, we are involved in routine litigation, environmental proceedings
and claims pending with respect to matters arising out of the normal course of
our business. In our opinion, the ultimate liability resulting from all claims,
individually or in the aggregate, will not materially affect our financial
position, results of operations or cash flows.