SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K\A
(AMENDMENT NO. 5)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 1-8137
AMERICAN PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 59-6490478
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
3770 HOWARD HUGHES PARKWAY, SUITE 300,
LAS VEGAS, NEVADA 89109
(Address of principal executive office) (Zip Code)
(702) 735-2200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.10 par value)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 1, 1997, was approximately $57,600,000. Solely for the
purposes of this calculation, shares held by directors and officers of the
Registrant have been excluded. Such exclusion should not be deemed a
determination by the Registrant that such individuals are, in fact, affiliates
of the Registrant.
The number of shares of Common Stock, $.10 par value, outstanding as of December
1, 1997 was 8,137,537.
<PAGE>
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements called for hereunder are included herein on the
following pages:
Page(s)
Independent Auditors' Report 37
Consolidated Balance Sheets 38
Consolidated Statements of Operations 39
Consolidated Statements of Cash Flows 40
Consolidated Statements of Changes in Shareholders' Equity 41
Notes to Consolidated Financial Statements 42-60
28-A
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
(a) See Part II, Item 8 for index to the Registrant's
financial statements and supplementary data.
(b) Separate audited financial statements of Gibson Ranch
Limited Liability Company as of and for the years ended
December 31 1997 and 1996, as required under Regulation
S-X 210. 3-09. See pages 61-69 herein.
(2) FINANCIAL STATEMENT SCHEDULES
None applicable.
(3) EXHIBITS
(a) The following Exhibits are filed as part of this Report
(references are to Regulation S-K Exhibit Numbers):
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
"Form S-14").
3.2 Registrant's By-Laws, incorporated by reference to Exhibit 3B
to the Form S-14.
3.3 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 "Form S-3").
3.4 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 Form S-3.
10.1 Employment agreement dated November 7, 1994 between the
Registrant and David N. Keys, incorporated by reference to
Exhibit 10.22 of the 1994 10-K.
10.2 Form of American Pacific Corporation Defined Benefit Pension
Plan, incorporated by reference to Exhibit 10.21 to the
Registrant's Registration Statement on Form S-2 (File No.
33-36664) (the "1990 S-2").
10.3 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.
10.4 Limited Partnership Agreement of 3770 Hughes Parkway
Associates, Limited Partnership, incorporated by reference to
Exhibit 10.23 to the 1990 S-2.
31
<PAGE>
10.5 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.
10.6 Stock Option Agreement between the Registrant and David N.
Keys dated November 12, 1990 incorporated by reference to
Exhibit 19 to the Registrant's quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1990.
10.7 American Pacific Corporation 1991 Nonqualified Stock Option
Plan, incorporated by reference to Exhibit 10.26 to the 1990
S-2.
10.8 Indenture dated February 21, 1992, between the Registrant and
American Azide Corporation, a Nevada corporation, and Security
Pacific National Bank, Trustee, relating to the Registrant's
outstanding 11% Subordinated Secured Term Notes, incorporated
by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated February 28, 1992 (the "Form 8-K").
10.9 Form of Subordinated Secured Term Note dated February 21,
1992, made by Registrant Incorporated by reference to Exhibit
10.2 to the Form 8-K.
10.10 Form of Note and Warrants Purchase Agreement dated February
21, 1992, relating to the Registrant's Subordinated Secured
Term Notes, incorporated by reference to Exhibit 10.3 to the
Form 8-K.
10.11 Form of Warrant to purchase Common Stock of the Registrant
dated February 21, 1992, incorporated by reference to Exhibit
10.4 to the Form 8-K.
10.12 Form of Warrant to purchase Common Stock of American Azide
Corporation dated February 21, 1992, incorporated by reference
to Exhibit 10.5 to the Form 8-K.
10.13 Stock Option Agreement between Registrant and Joseph W.
Cuzzupoli dated January 30, 1992, incorporated by reference to
Exhibit 4.6 of Registrant's Registration Statement on Form S-8
(File No. 33-52898).
10.14 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").
10.15 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.
10.16 American Pacific Corporation 1994 Directors' Stock Option Plan
incorporated by reference to Exhibit 10.34 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September
30, 1995 (the "1995 10-K").
10.17 Stock Option Agreement between Registrant and General
Technical Services, Inc. dated July 11, 1995 incorporated by
reference to Exhibit 10.35 to the 1995 10-K.
32
<PAGE>
10.18 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").
10.19 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.
10.20 Settlement Agreement between Registrant and C. Keith Rooker
dated July 17, 1997 incorporated by reference to Exhibit 10.20
to the 1997 10-K.
10.21 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.
22 Subsidiaries of the Registrant incorporated by reference to
Exhibit 22 to the 1997 10-K.
*23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule (previously filed electronically with
the 1997 10-K)
* FILED HEREWITH.
(b) REPORTS ON FORM 8-K.
None.
33
<PAGE>
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: July 27, 1998 AMERICAN PACIFIC CORPORATION
(Registrant)
By:/s/ John R. Gibson
-------------------------------------------
John R. Gibson
President & Chief Executive Officer
By:/s/ *
-------------------------------------------
David N. Keys
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer, Principal
Financial and Accounting Officer
* By: /s/ John R. Gibson
-----------------------
John R. Gibson
Attorney-in-fact
34
<PAGE>
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, 1997 and
1996, and the related consolidated statements of operations, cash flows and
changes in shareholders' equity for each of the three years in the period ended
September 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1997 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
November 14, 1997
37
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Notes 1997 1996
-----------------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents 1 $18,881,000 $ 18,501,000
Short-term investments 1 2,000,000
Accounts and notes receivable 5,551,000 4,165,000
Related party notes receivable 1 637,000 737,000
Inventories 1,2 11,116,000 11,297,000
Prepaid expenses and other assets 979,000 946,000
------------------------------------
Total current assets 37,164,000 37,646,000
PROPERTY, PLANT AND EQUIPMENT, NET 1,4,6,13,15 19,314,000 77,217,000
DEVELOPMENT PROPERTY 1,5,6 7,362,000 8,631,000
RESTRICTED CASH 3,6 3,580,000 4,969,000
REAL ESTATE EQUITY INVESTMENTS 5,6 20,248,000 18,698,000
DEBT ISSUE COSTS 1 785,000 965,000
INTANGIBLE ASSETS 14 1,540,000 1,760,000
OTHER ASSETS 88,000 133,000
------------------------------------
TOTAL ASSETS $90,081,000 $150,019,000
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 7,519,000 $ 5,407,000
Notes payable and current portion of
long-term debt 3,6,9 6,166,000 7,334,000
------------------------------------
Total current liabilities 13,685,000 12,741,000
LONG-TERM PAYABLES 16 2,376,000
LONG-TERM DEBT 3,6,9 24,900,000 29,452,000
DEFERRED INCOME TAXES 1,7 10,101,000
------------------------------------
TOTAL LIABILITIES 40,961,000 52,294,000
------------------------------------
COMMITMENTS AND CONTINGENCIES 5,10,15
WARRANTS TO PURCHASE COMMON STOCK 6,11 3,569,000 3,569,000
SHAREHOLDERS' EQUITY: 6,11
Common stock - $.10 par value, 20,000,000 authorized:
issued - 8,289,791 in 1997 and 8,228,791 in 1996 829,000 823,000
Capital in excess of par value 1 78,561,000 78,331,000
Retained earnings (accumulated deficit) 1 (32,707,000) 15,978,000
Treasury stock (152,254 shares in 1997 and 130,170 shares in 1996) 1 (1,035,000) (879,000)
Note receivable from the sale of stock 1,11 (97,000) (97,000)
------------------------------------
Total shareholders' equity 45,551,000 94,156,000
------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $90,081,000 $150,019,000
====================================
</TABLE>
See Notes to Consolidated Financial Statements.
38
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Notes 1997 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES AND OPERATING REVENUES 1,9,12,13,15 $44,050,000 $42,381,000 $ 39,250,000
COST OF SALES 1,9,13,14 36,420,000 32,579,000 29,861,000
------------------------------------------------------
GROSS PROFIT 7,630,000 9,802,000 9,389,000
OPERATING EXPENSES 1,8,10,12,13,14,16 9,509,000 9,367,000 11,210,000
FIXED ASSET IMPAIRMENT CHARGE 13 52,605,000
EMPLOYEE SEPARATION AND MANAGEMENT
REORGANIZATION COSTS 16 3,616,000 226,000
------------------------------------------------------
OPERATING INCOME (LOSS) (58,100,000) 435,000 (2,047,000)
EQUITY IN EARNINGS OF REAL ESTATE VENTURE 5 200,000 700,000
INTEREST AND OTHER INCOME 1,3,5,11 1,115,000 1,381,000 1,429,000
INTEREST AND OTHER EXPENSE 1,5,6 2,001,000 2,836,000 1,709,000
------------------------------------------------------
LOSS BEFORE CREDIT FOR INCOME TAXES (58,786,000) (320,000) (2,327,000)
CREDIT FOR INCOME TAXES 1,7 (10,101,000) (109,000) (791,000)
------------------------------------------------------
NET LOSS $ (48,685,000) $ (211,000) $ (1,536,000)
======================================================
NET LOSS PER COMMON SHARE $ (6.01) $ (.03) $ (.19)
======================================================
</TABLE>
See Notes to Consolidated Financial Statements.
39
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(48,685,000) $ (211,000) $ (1,536,000)
--------------------------------------------------------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 7,685,000 7,810,000 5,883,000
Fixed asset impairment charge 52,605,000
Employee separation and management reorganization costs 3,616,000
Basis in development property sold 1,498,000 2,449,000 1,614,000
Development property additions (229,000) (784,000) (384,000)
Equity in real estate venture (200,000) (700,000)
Cash received on equity interest estate venture 200,000 700,000
Changes in assets and liabilities:
Decrease in short-term investments 2,000,000
(Increase) decrease in accounts and notes receivable (1,286,000) (1,480,000) 5,525,000
(Increase) decrease in income tax receivable 2,570,000 (2,570,000)
(Increase) decrease in inventories 181,000 (4,203,000) (1,411,000)
(Increase) decrease in restricted cash 1,389,000 (1,226,000) (2,159,000)
(Increase) decrease in prepaid expenses and other 32,000 198,000 (133,000)
Increase (decrease) in accounts payable and accrued liabilities 870,000 (265,000) (17,000)
Increase (decrease) in deferred income taxes (10,101,000) (467,000) 5,170,000
----------------------------------------------------
Total adjustments 58,260,000 4,602,000 11,518,000
----------------------------------------------------
Net cash provided by operating activities 9,575,000 4,391,000 9,982,000
----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,557,000) (3,248,000) (4,462,000)
Real estate equity advances (2,680,000) (2,946,000) (3,199,000)
----------------------------------------------------
Return of capital on real estate equity advances 1,130,000 1,973,000
Net cash used for investing activities (3,107,000) (4,221,000) (7,661,000)
----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (6,168,000) (6,166,000)
Issuance of common stock 236,000 47,000 82,000
Treasury stock acquired (156,000) (90,000) (747,000)
----------------------------------------------------
Net cash used for financing activities (6,088,000) (6,209,000) (665,000)
----------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 380,000 (6,039,000) 1,656,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,501,000 24,540,000 22,884,000
----------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $18,881,000 $18,501,000 $ 24,540,000
====================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during period for interest (net of amounts capitalized) $ 1,427,000 $ 2,197,000 $ 1,700,000
==========================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Excess additional pension liability $ 1,175,000 $ 606,000
==============================================================
</TABLE>
See Notes to Consolidated Financial Statements.
40
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Retained Note Excess
Number of Par Value of Capital in Earnings Receivable Additional
Common Shares excess of (Accumulated Treasury from the Sale Pension
Notes Shares Issued Par Value Deficit) Stock of Stock Liability
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, 8,190,691 $820,000 $78,205,000 $17,725,000 $(42,000) $(97,000) (765,000)
OCTOBER 1, 1994 (1,536,000)
Net loss
Issuance of common
stock 11 21,400 2,000 80,000
Treasury stock acquired (111,300) (747,000)
Excess additional
pension liability 8 606,000
----------------------------------------------------------------------------------------------------
BALANCES, 8,100,791 822,000 78,285,000 16,189,000 (789,000) (97,000) (159,000)
SEPTEMBER 30, 1995 (211,000)
Net loss
Issuance of common stock 11 12,000 1,000 46,000
Treasury stock acquired (14,170) (90,000)
Excess additional
pension liability 8 159,000
---------------------------------------------------------------------------------------------------
BALANCES,
SEPTEMBER 30, 1996 8,098,621 823,000 78,331,000 15,978,000 (879,000) (97,000)
---------------------------------------------------------------------------------------------------
Net loss (48,685,000)
Issuance of common stock
11 61,000 6,000 230,000
Treasury stock acquired (22,084) (156,000)
----------------------------------------------------------------------------------------------------
BALANCES,
SEPTEMBER 30, 1997 8,137,537 $829,000 $78,561,000 $(32,707,000) $(1,035,000) $(97,000)
====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE>
AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
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 AND SHORT-TERM INVESTMENTS - All highly liquid
investment securities with a maturity of three months or less when
acquired are considered to be cash equivalents. Short-term investments
consist of investment securities with maturities, when acquired, greater
than three months but less than one year. The Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," during fiscal 1995.
In accordance with SFAS No. 115, prior year's financial statements have
not been restated to reflect the change in accounting method. There was
no cumulative effect as a result of adopting SFAS No. 115 in 1995.
The Company's investment securities, along with certain cash and cash
equivalents that are not deemed securities under SFAS No. 115, are
carried on the consolidated balance sheets in the cash and cash
equivalents and short-term investments categories. 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, 1997
and 1996 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, 1997 or 1996.
RELATED PARTY NOTES RECEIVABLE - Related party notes receivable
represent demand notes bearing interest at a bank's prime rate from the
Chairman and two officers of the Company.
INVENTORIES - Inventories are stated at the lower of cost or market.
Cost of the specialty chemicals segment inventories is determined
principally on a moving average basis and cost of the environmental
protection equipment segment inventories is determined principally on
the specific identification basis.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
carried at cost less accumulated depreciation. The Company periodically
assesses the recoverability of property, plant and equipment and
evaluates such assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Asset impairment is determined to exist if estimated future
cash
42
<PAGE>
flows, undiscounted and without interest charges, are less than the
carrying amount. 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
42-A
<PAGE>
improvements). An impairment charge of $52,605,000 relating to certain
specialty chemical assets was recognized in fiscal 1997. (See Note 13.)
DEVELOPMENT PROPERTY - Development property consists of commercial and
industrial land (principally improved land). During fiscal 1993,
approximately 240 acres, representing $12,300,000 in carrying value of
development property, was contributed to a real estate limited-liability
company (see Note 5). Development property is carried at cost not in
excess of estimated net realizable value. Estimated net realizable value
is based upon the net sales proceeds anticipated in the normal course of
business, less estimated costs to complete or improve the property to
the condition used in determining the estimated selling price, including
future interest and property taxes through the point of substantial
completion. Cost includes the cost of land, initial planning,
development costs and carrying costs. Carrying costs include interest
and property taxes until projects are substantially complete. Interest
capitalized is the amount of interest on the Company's net investment in
property under development limited to total interest expense incurred in
a period. No interest was capitalized on development property during the
three-year period ended September 30, 1997. Certain development property
in Nevada is pledged to secure debt. (See Note 6.)
DEBT ISSUE COSTS - Debt issue costs represent costs associated with debt
and are amortized on the effective interest method over the terms of the
related indebtedness.
FAIR VALUE DISCLOSURE AS OF SEPTEMBER 30, 1997:
Cash and cash equivalents, accounts and notes receivable, restricted
cash, and accounts payable and accrued liabilities - The carrying value
of these items is a reasonable estimate of their fair value.
Notes payable, current portion of long-term debt and warrants - Market
quotations are not available for any of the Company's notes payable,
long-term debt or warrants. See Note 6 for a description of these
instruments. Approximately $40 million of notes and related warrants
were issued in February 1992. The Company believes that similar terms
would be available at September 30, 1997.
SALES AND REVENUE RECOGNITION - Sales of the specialty chemicals segment
are recognized as the product is shipped and billed pursuant to
outstanding purchase orders. Sales of the environmental protection
equipment segment are recognized on the percentage of completion method
for long-term contracts and when the product is shipped for other
contracts. Profit from sales of development property and the Company's
equity in real estate equity investments is recognized when and to the
extent permitted by SFAS No. 66, "Accounting for Sales of Real Estate".
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
operations as incurred. These costs are for proprietary research and
development activities that are expected to contribute to the future
profitability of the Company.
NET LOSS PER COMMON SHARE - Net loss per common share is determined
based on the weighted average number of common shares outstanding
(8,105,000, 8,104,000 and 8,177,000 for the years ended September 30,
1997, 1996 and 1995). Common share equivalents, although not considered
during net loss years, consist of outstanding stock
43
<PAGE>
options and warrants. See Note 6 for a description of the potential
effects on net income per common share of warrants issued in connection
with the issuance of certain notes.
The Company has adopted the disclosures-only provision of SFAS 123,
"Accounting for Stock-Based Compensation". The Company applies APB
Opinion No. 25 and related interpretations in accounting for its stock
options. Under APB 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 123, the Company's net loss per
common share would have been decreased to the pro forma amounts
indicated below for the year ended September 30:
1997
Net loss-as reported $ (48,685,000)
Net loss-pro forma (49,791,000)
Net loss per common share-as reported $ (6.01)
Net loss per common share-pro forma (6.14)
The fair value of each option granted in fiscal year 1997 was estimated
using the following assumptions for the Black-Scholes options pricing
model: (i) no dividends; (ii) expected volatility of 55%, (iii) risk
free interest rates averaging 6.1% and (iv) the expected average life of
3.3 years. The weighted average fair value of the options granted in
1997 was $2.97. Because the SFAS 123 method of accounting has not been
applied to options granted prior to October 1, 1995, the resulting pro
forma net income may not be representative of that to be expected in
future years.
INCOME TAXES - The Company accounts for income taxes under the
provisions of SFAS No. 109, "Accounting for Income Taxes".
ESTIMATES AND ASSUMPTIONS - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Significant estimates used by the Company include estimated useful lives
for depreciable and 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 - The Financial Accounting
Standards Board ("FASB") recently issued SFAS No. 128 "Earnings per
Share." This statement establishes standards for computing and
presenting earnings per share and is effective for financial statements
issued for periods ending after December 15, 1997. Earlier application
of this statement is not permitted. Upon adoption, the Company will be
required to restate (as applicable) all prior-period earnings per share
data presented. Management believes that the implementation of this
statement will not have a significant impact on earnings per share.
44
<PAGE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires companies to classify items of other
comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity
section of a balance sheet, and is effective for financial statements
issued for fiscal years beginning after December 15, 1997. Management
does not believe this statement will have material impact on the
Company's financial statements.
The FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement redefines how
operating segments are determined and requires qualitative disclosure of
certain financial and descriptive information about a company's
operating segments. The Company will adopt SFAS No. 131 in the year
ending September 30, 1999. Management has not yet completed its analysis
of which operating segments it will report on to comply with SFAS No.
131.
In November 1996, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued Statement
of Position ("SOP") 96-1, "Environmental Remediation Liabilities." This
SOP provides guidance on accounting for environmental remediation
liabilities. This SOP discusses when an environmental liability should
be recognized in the financial statements and provides guidance in
measuring the liability by discussing the types of costs to be included
in the liability. This SOP is effective for fiscal years beginning after
December 15, 1996. Management does not believe that the implementation
of this SOP in fiscal 1998 will have a material impact on the Company's
financial statements.
RECLASSIFICATION - Certain reclassifications have been made in the 1996
and 1995 consolidated financial statements in order to conform to the
presentation used in 1997.
2. INVENTORIES
Inventories consist of the following:
-------------------------------
September 30,
-------------------------------
1997 1996
---- ----
Work-in-process $ 3,349,000 $ 5,011,000
Raw material and supplies 7,767,000 6,286,000
-------------------------------
Total $11,116,000 $ 11,297,000
===============================
3. RESTRICTED CASH
At September 30, 1997, restricted cash consists, in part, of $1,160,000
held in a cash collateral account by Seafirst Bank, the lender which
provided a term loan (the "AP Facility Loan") as the principal financing
for an ammonium perchlorate ("AP") manufacturing facility erected and
operated by the Company. Funds in the cash collateral account are
restricted for future indemnity payments (if any) relating to the AP
Facility Loan. The AP Facility Loan was repaid in 1994. The $1,160,000
will be retained in the cash collateral account until May 11, 1999, at
which time the balance remaining after indemnity payments (if any) will
be returned to Thiokol Corporation ("Thiokol"). The
45
<PAGE>
Company's obligation to return such funds is included in long-term debt
at September 30, 1997. Any indemnity payments made will serve to reduce
the cash collateral account and the Company's obligation to Thiokol.
Restricted cash at September 30, 1997 also includes $2,420,000 held in a
trust account by the Trustee under the indenture relating to $40,000,000
of notes (the "Azide Notes") sold in a financing concluded in February
1992. (See Note 6.)
45-A
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
--------------------------------------
September 30,
--------------------------------------
1997 1996
---- ----
Land $ 309,000 $ 305,000
Buildings and improvements 1,753,000 13,865,000
Machinery and equipment 20,759,000 76,935,000
Construction in progress 380,000 139,000
----------------------------------------
Total 23,201,000 91,244,000
Less: accumulated depreciation 3,887,000 14,027,000
----------------------------------------
Property, plant and equipment, net $19,314,000 $77,217,000
========================================
In 1995, approximately $1,800,000 in interest costs were capitalized on
assets constructed for the Company's own use. Certain of the Company's
property, plant and equipment is pledged as collateral to secure debt.
(See Note 6.) A fixed asset impairment charge was recognized in 1997.
(See Note 13.)
5. REAL ESTATE EQUITY INVESTMENTS
During fiscal 1993, the Company contributed approximately 240 acres of
development property to Gibson Ranch Limited Liability Company
("GRLLC"). The development property contributed had a carrying value of
approximately $12,300,000 at the date of contribution, which was
transferred to Real Estate Equity Investments on the accompanying
consolidated balance sheets. The Company's interest in GRLLC is assigned
to secure the Azide Notes. 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 $2,400,000 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. At September 30, 1996, the Company had advanced all of its
committed amount under this line. In November, 1995, the Company
committed to advance an additional $1,700,000 to Developer. Developer is
required to advance any funds received to GRLLC. Funds advanced under
this additional commitment bear annual interest of 12 percent. Total
advances under these commitments were $3,171,000 and $2,828,000 at
September 30, 1997 and 1996.
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.
46
<PAGE>
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 years ended December 31, 1996
and 1995 and as of and for the nine-month period ended September 30,
1997 was as follows:
September 30, December 31, December 31,
1997 1996 1995
------------- ----------- -------------
Income Statement:
Revenues $13,776,000 $18,602,000 $ 2,712,000
Gross Profit 1,557,000 3,182,000 560,000
Operating Expenses 829,000 984,000 875,000
Net Income $ 733,000 $ 2,098,000 $ (315,000)
Balance Sheet:
Assets $26,840,000 $24,895,000 $22,554,000
Liabilities 12,273,000 9,758,000 9,205,000
Equity $14,568,000 $15,136,000 $13,349,000
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, 1997, the Company has capitalized approximately $6.2
million of interest since the joint venture began undergoing activities
to start its planned principal operations of real estate development
and sale of such real estate. Capitalization of interest on the joint
venture ceased in September 1997 since the Company's recorded
investment in GRLLC approximates the amount of cash flow that is
estimated to be generated from the project
The Company amortizes the difference resulting from the application of
SFAS No. 58 on a current quarterly basis based upon the ratio of acres
sold to total salable acres in the joint venture. Such difference will
be completely amortized upon the build-out and sale of the joint
venture's real estate project which is estimated to occur in calendar
2001. As of September 30, 1997, approximately $1.0 million of the $6.2
million in capitalized interest resulting from the application of SFAS
No. 58 had been amortized against the equity in earnings of GRLLC.
GRLLC's balance sheet is not classified. Assets consist principally of
inventories and liabilities consist principally of Notes and accounts
payable. Inventories were $24,308,000, $21,659,000 and $21,738,000 at
September 30, 1997, December 31, 1996 and December 31, 1995,
respectively.
In July 1990, the Company contributed $725,000 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 $315,000 in return for a
30% interest as limited partners. Such other limited partners included
the Company's Chairman and a former Executive Vice-President and certain
members of the Company's Board of Directors. The Partnership, in turn,
contributed $1,040,000 to 3770 Hughes Parkway Associates Limited
Partnership, a Nevada limited partnership ("Hughes Parkway"), in return
for a 33% interest as a limited partner in Hughes Parkway. The Company
entered into an agreement with Hughes Parkway pursuant to which the
Company leases office space in a building in Las Vegas, Nevada (see Note
10).
47
<PAGE>
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt, collateralized by property, plant and
equipment used in the production of sodium azide, and collateralized by
substantially all development property and real estate equity
investments of the Company, is summarized as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------
September 30,
-----------------------------------------------------
1997 1996
---- ----
Subordinated secured term notes
<S> <C> <C>
(interest at 11%) $ 28,740,000 $ 33,310,000
Obligation to deliver AP (see Note 9) 1,166,000 2,334,000
Indemnity obligation (see Notes 3 and 9) 1,160,000 1,142,000
--------------------------------------------------------
Total 31,066,000 36,786,000
Less current portion 6,166,000 7,334,000
--------------------------------------------------------
Total $ 24,900,000 $ 29,452,000
========================================================
</TABLE>
In February 1992, the Company concluded the issuance of the Azide Notes
financing for the design, construction and start-up of a sodium azide
facility. The funds were provided by a major state public employee
retirement fund and a leading investment management company. The
financing was in the form of $40,000,000 principal amount of
noncallable subordinated secured notes issued at par, providing for the
semi-annual payment in arrears of interest at the rate of 11% per
annum. Principal is to be amortized to the extent of $5,000,000 on each
of the fourth (February 1996) through ninth (February 2001) anniversary
dates of the funding, with the remaining $10,000,000 principal amount
to be repaid on the tenth anniversary date. The Azide Notes are secured
by the fixed assets and stock of American Azide Corporation ("AAC"), an
indirect wholly-owned subsidiary of the Company, as well as by a
mortgage on land in Clark County, Nevada being developed by the Company
and by certain restricted cash (see Note 3). Approximately 240 acres of
such land has been contributed to GRLLC subject to certain conditions.
The Company's interest in GRLLC has been assigned to secure the Azide
47-A
<PAGE>
Notes (see Note 5). The Company issued to the purchasers of the 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 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. At
the option of the Warrant holders, the exercise price of the Warrants
may be paid by delivering an equal amount of Azide Notes.
The indenture imposes various operating restrictions upon the Company
including restrictions on (i) the incurrence of debt; (ii) the
declaration of dividends and the purchase and repurchase of stock; (iii)
certain mergers and consolidations, and (iv) certain dispositions of
assets. Management believes the Company has complied with these
operating restrictions.
On each of December 31, 1995, 1997 and 1999, holders of the Warrants
have or will have the right to put to the Company as much as one-third
thereof based upon the differences between the Warrant exercise price
and prices determined by multiplying the Company's fully diluted
earnings per share at multiples of 13, 12 and 11, respectively, but the
Company's obligation in such respect is limited to $5,000,000 on each
of such dates and to $15,000,000 in the aggregate. Such put rights may
not be exercised if the Company's Common Stock has traded at values
during the preceding 90-day period that would yield to the warrant
holders a 25% internal rate of return to the date of the put (inclusive
of the 11% Azide Notes' yield). At September 30, 1997, it is not
probable that the remaining put rights will be exercised since the
Company believes, based on current market conditions, that its stock
will trade at a higher multiple of fully diluted earnings per share
than the 11 multiple used to determine the put value, if any, at
December 31, 1999, thereby making exercise of the Warrants more
valuable to the holders thereof than exercise of the put rights. On or
after December 31 of each of the years 1995 through 1999, the Company
may call up to 10% of the Warrants (but no more than 50% in the
aggregate) at prices that would provide a 30% internal rate of return
to the holders thereof through the date of call (inclusive of the 11%
Azide Notes' yield). The holders of the Warrants were also granted the
right to require that the Common Stock underlying the Warrants be
registered on one occasion, as well as certain incidental registration
rights.
The Company has accounted for the proceeds of the financing applicable
to the Warrants (and the potential put right) 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. Although not
applicable for the fiscal years ended September 30, 1997, 1996 and 1995,
net income per common share will be calculated on an "equity" basis or a
"debt" basis using the more dilutive of the two methods. The "equity"
basis assumes the Warrants will be exercised and the effect of the put
feature adjustment, if any, on earnings available to common shareholders
will be reversed. The treasury stock method will then be used to
calculate net additional shares. The "debt" basis assumes that any
remaining puts will be exercised (if the rights are available) and the
Warrants will not be considered common stock equivalents.
48
<PAGE>
Notes payable and long-term debt maturities are as follows:
- ---------------------------------------
For the Years Ending
September 30,
- ---------------------------------------
1998 $ 6,166,000
1999 6,160,000
2000 5,000,000
2001 5,000,000
2002 8,740,000
-----------
Total $31,066,000
===========
7. INCOME TAXES
The Company accounts for income taxes using the asset and liability
approach required by SFAS 109. The asset and liability approach
requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of the Company's assets and
liabilities. Future tax benefits attributable to temporary differences
are recognized to the extent that realization of such benefits are more
likely than not. These future tax benefits are measured by applying
currently enacted tax rates.
The following table provides an analysis of the Company's credit for
income taxes for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ -------------- --------------
<S> <C>
Current $ $(1,349,000) $(4,888,000)
Deferred (federal and state) (10,101,000) 1,240,000 4,097,000
------------------ -------------- --------------
Credit for income taxes $(10,101,000) $ (109,000) $ (791,000)
================== ============== ==============
</TABLE>
A valuation allowance for the deferred tax asset was established in the
amount of $10,431,000 in 1997. The valuation allowance is necessary due
to the uncertainty related to the realizability of future tax benefits.
The deferred tax assets are composed, for the most part, of alternative
minimum tax credits and net operating losses. The alternative minimum
tax credit carryforward, valued at approximately $1,233,000, may be
carried forward indefinitely as a credit against regular tax. The net
operating loss carryforwards, valued at approximately $16,278,000, will
begin to expire for tax purposes in 2008 as follows:
<TABLE>
<CAPTION>
NOL DEDUCTION Tax Rate NOL Asset
-------------- ----------- -------------
Expiration of net operating losses
<S> <C> <C> <C> <C>
2008 $ 3,398,000 34.0% $1,155,000
2009 25,607,000 34.0% 8,706,000
2010 14,080,000 34.0% 4,787,000
2011 and thereafter 4,791,000 34.0% 1,630,000
------------ ------------
TOTAL $47,876,000 $16,278,000
============ ============
</TABLE>
49
<PAGE>
The Company's effective tax rate declined to 16.7% with the
establishment of the valuation allowance. The Company's effective tax
rate will be 0% until the net operating losses expire or the Company has
taxable income necessary to eliminate the need for the valuation
allowance. The credit for income taxes for the years ended September 30,
1997, 1996 and 1995, differs from the amount computed at the federal
income tax statutory rate as a result of the following:
<TABLE>
<CAPTION>
1997 % 1996 % 1995 %
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected credit for income taxes $(20,591,000) 34.0% $ (109,000) 34.0% $ (814,000) 35.0%
Adjustment:
Nondeductible expenses 59,000 (0.1%)
Surtax benefit 23,000 (1.0%)
Tax credit limitation due to the
valuation allowance 10,431,000 (17.2%)
---------------- --------------------- --------------
Credit for income taxes $(10,101,000) 16.7% $ (109,000) 34.0% $ (791,000) 34.0%
================ ===================== ==============
</TABLE>
The components of the net deferred taxes at September 30, 1997, 1996 and
1995 consisted of the following:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS:
Non-current:
<S> <C> <C> <C>
Net operating losses $16,278,000 $16,618,000 $14,353,000
Alternative minimum tax credits 1,233,000 1,395,000 1,354,000
Employee separation and management
reorganization costs 1,172,000
Inventory capitalization 436,000 349,000 269,000
Accruals 408,000 127,000
Other 250,000
----------- ----------- -----------
Total deferred tax assets: $19,777,000 $18,489,000 $15,976,000
----------- ------------ -----------
DEFERRED TAX LIABILITIES:
Non-current:
Property (includes azide impairment
in 1997) $(4,350,000) $(23,711,000) $ (25,394,000)
Accrued income and expenses (653,000) (412,000) (569,000)
State Taxes (600,000) (600,000) (575,000)
Other taxes payable (1,251,000) (1,945,000) --
Amortization (1,020,000) (737,000) --
Other (1,472,000) (1,185,000) (6,000)
----------- ------------ -------------
Total deferred tax liabilities: (9,346,000) (28,590,000) (26,544,000)
----------- ------------ -------------
Preliminary net deferred tax asset 10,431,000 (10,101,000) (10,568,000)
Valuation allowance for deferred tax asset (10,431,000)
------------ ------------ -------------
Net deferred tax credit: $ 0 $(10,101,000) $(10,568,000)
============ ============ =============
</TABLE>
50
<PAGE>
8. EMPLOYEE BENEFIT PLANS
The Company maintains, for the benefit of its employees, a group health
and life benefit plan, an employee stock ownership plan ("ESOP") that
includes a Section 401(k) feature,
50-A
<PAGE>
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 discount rate was 7.5% in 1997 and 1996 and 7% in 1995. The rate of
salary progression used to determine the projected benefit obligations
was 5% in 1997, 1996 and 1995. The expected long-term rate of return on
plan assets was 8% in 1997 and 1996 and 7% in 1995. The following table
reconciles the Plan's funded status and summarizes amounts recognized in
the Company's consolidated financial statements for the years ended
September 30, 1997 and 1996.
<TABLE>
<CAPTION>
-----------------------------------------------------
1997 1996
-----------------------------------------------------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefits $ 7,758,000 $ 6,524,000
Nonvested benefits 1,219,000 1,254,000
-----------------------------------------------------
Accumulated benefit $ 8,977,000 $ 7,778,000
=====================================================
Projected benefit obligation $11,275,000 $ 9,754,000
Plan assets at fair value 9,937,000 8,459,000
-----------------------------------------------------
Projected benefit obligation in excess of
Plan assets 1,338,000 1,295,000
Unrecognized net transition obligation
amortized over fifteen years (764,000) (916,000)
Unrecognized net loss and prior service cost (174,000) (499,000)
-----------------------------------------------------
Accrued (Prepaid) pension $ 400,000 $ (120,000)
=====================================================
</TABLE>
Net periodic pension cost was $986,000, $1,187,000 and $1,295,000,
respectively, for the years ended September 30, 1997, 1996 and 1995, and
consists of the following:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 687,000 $ 765,000 $ 787,000
Interest cost 772,000 696,000 620,000
Return on Plan assets (1,415,000) (519,000) (708,000)
Net total of other components 942,000 245,000 596,000
----------------------------------------------------------------------------
Net periodic pension cost $ 986,000 $ 1,187,000 $ 1,295,000
============================================================================
</TABLE>
See Note 16 for a discussion of the Company's Supplemental Retirement
Plan.
9. AGREEMENTS WITH THIOKOL CORPORATION
In 1989, the Company entered into an Advance Agreement and Surcharge
Agreement and certain other agreements (collectively the "NASA/Thiokol
Agreements") with Thiokol. Under the Advance and Surcharge Agreements
Thiokol was required to place sufficient orders for AP such that,
combined with orders from other AP customers, the Company
51
<PAGE>
would receive revenues in respect of at least 20 million pounds per
year, 5 million per quarter, over seven years (140 million pounds in
the aggregate), beginning with initial production. The Company was
required to impose a surcharge on all sales of AP sufficient to
amortize the AP Facility Loan over or during the period of such revenue
assurance.
On May 10, 1994, the Company and Thiokol executed an amendment to the
Advance Agreement (the "Amendment") and the AP Facility Loan was
repaid. Upon early repayment in full of the AP Facility Loan, the
Amendment provided for the termination as fulfilled of the Surcharge
Agreement and termination of certain other agreements relating to the
repayment of advances (the Working Capital Agreement and the Repayment
Plan).
The Amendment provided for the Company to receive revenues, excluding
surcharge revenues, from sales of AP of approximately $33 million, $28
million and $20 million during the fiscal years ending September 30,
1994, 1995 and 1996, respectively. Prior to the effective date of the
Amendment, the Company was indebted to Thiokol for approximately
$10,208,000 under the Working Capital Agreement and Repayment Plan. The
Amendment required the Company to pay $750,000 of this amount ratably
as deliveries of AP were made over the remainder of the fiscal year
ended September 30, 1994. The remaining obligation under the Working
Capital Agreement and Repayment Plan has been and will continue to be
repaid by the Company through delivery of AP.
10. COMMITMENTS AND CONTINGENCIES
In fiscal 1993, three shareholder lawsuits were filed in the United
States District Court for the District of Nevada against the Company and
certain of its directors and officers (the "Company Defendants"). The
complaints, which were consolidated, alleged that the Company's public
statements violated Federal securities laws by inadequately disclosing
information concerning its agreements with Thiokol and the Company's
operations. On November 27, 1995, the U.S. District Court granted in
part the Company's motion for summary judgment, ruling that the Company
had not violated the Federal securities laws in relation to disclosures
concerning the Company's agreements with Thiokol. The remaining claims,
which related to allegedly misleading or inadequate disclosures
regarding Halotron, were the subject of a jury trial that ended on
January 17, 1996. The jury reached a unanimous verdict that none of the
Company Defendants made misleading or inadequate statements regarding
Halotron. The District Court thereafter entered judgment in favor of the
Company Defendants on the Halotron claims. The plaintiffs appealed the
summary judgment ruling and the judgment on the jury verdict to the
Ninth Circuit of the United States District Court of Appeals. On June 5,
1997, the Court of Appeals affirmed the judgments of the United States
District Court in favor of the Company Defendants. On June 19, 1997, the
plaintiffs filed an Appellants Petition for Rehearing and Suggestion of
Rehearing En Banc with the Court of Appeals. On September 3, 1997, the
Court of Appeals denied the Petition for Rehearing. In October 1997, the
plaintiffs filed a Petition for Writ of Certiorari with the Supreme
Court of the United States.
During the third quarter of fiscal 1996, the Company settled certain
matters with its insurance carrier relating to legal fees and other
costs associated with the successful
52
<PAGE>
defense of the shareholder lawsuits. Under this settlement, the Company
was reimbursed for approximately $450,000 in costs that had previously
been expensed and incurred in connection with the defense. Such amount
was recognized as a reduction in operating expenses in the third quarter
of fiscal 1996. The insurance carrier agreed to and has paid attorneys
fees and other defense costs related to the plaintiffs' unsuccessful
appeals referred to above.
The Company was served with a complaint on December 10, 1993 in a
lawsuit brought by limited partners in a partnership of which one of the
Company's former subsidiaries, divested in 1985, was a general partner.
The plaintiffs alleged that the Company was liable to them in the amount
of approximately $5.9 million, plus interest, on a guarantee executed in
1982. In August 1996, the Company's cross-motion for summary judgment
was granted by the Superior Court of the State of Delaware in and for
New Castle County. The plaintiffs filed an appeal with the Supreme Court
of the State of Delaware in January 1997. In October 1997, the Delaware
Supreme Court affirmed the Superior Court's judgment.
Trace amounts of perchlorate chemicals were recently found in Lake Mead.
Clark County, Nevada, where Lake Mead is situated, is the location of
Kerr-McGee Chemical Corporation's ("Kerr-McGee") 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. Until these investigations
and evaluations have reached appropriate conclusions, it will not be
possible for the Company to determine the extent to which, if at all,
the Company may be called upon to contribute to or assist with future
remediation efforts, or the financial impacts, if any, of such
contributions or assistance. Accordingly, no accrual for potential
losses has been made in the accompanying Consolidated Financial
Statements of the Company.
The Company is a party to an agreement with Utah Power and Light Company
for its electrical requirements. The agreement provides for the supply
of power for a minimum of a ten-year period, which began in 1988, and
obligates the Company to purchase minimum amounts of power, while
assuring the Company competitive pricing for its electricity needs for
the duration of the agreement. Under the terms of the agreement, the
Company's minimum monthly charge for firm and interruptible demand is
approximately $22,000.
See Note 14 for a discussion of certain litigation involving Halotron.
The Company and its subsidiaries are also involved in other lawsuits.
The Company believes that these other lawsuits, individually or in the
aggregate, will not have a material adverse effect on the Company or any
of its subsidiaries.
As discussed in Note 5, the Company entered into an agreement with
Hughes Parkway pursuant to which the Company leases office space. The
lease is for an initial term of 10 years and is subject to escalation
every three years based on changes in the consumer price index, and
provides for the Company to occupy 22,262 square feet of office space.
53
<PAGE>
Rent expense was approximately $550,000 during the fiscal years ended
September 30, 1997, 1996 and 1995. Future minimum rental payments under
this lease for the years ending September 30, are as follows:
1998 550,000
1999 550,000
2000 275,000
----------
Total $1,375,000
==========
53-A
<PAGE>
11. SHAREHOLDERS' EQUITY
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. The
Series C redeemable convertible preferred stock was outstanding at
September 30, 1989, was redeemed in December 1989, and is no longer
authorized for issuance. No preferred stock is issued or outstanding.
The Company has granted options and warrants to purchase shares of the
Company's common stock at prices at or in excess of market value at the
date of grant. The options and warrants were granted under various plans
or by specific grants approved by the Company's Board of Directors. In
1994, the former Executive Vice President of the Company exercised
options for 45,000 shares of the Company's common stock by executing
demand notes bearing interest at a bank's prime rate for the total
option price of $174,000. Approximately $97,000 of this amount remains
outstanding at September 30, 1997. Interest income of $8,000, $7,000 and
$8,000 was recorded on these notes in fiscal 1997, 1996 and 1995.
Option and warrant transactions are summarized as follows:
--------------------------------------------
Shares Under
Options and
Warrants Option Price
--------------------------------------------
October 1, 1994 3,153,450 3.88 - 30.50
Granted 281,000 4.88 - 7.50
Exercised, expired or canceled (104,400) 3.88 - 30.50
--------------------------------------------
September 30, 1995 3,330,050 3.88 - 21.50
Exercised, expired or canceled (35,000) 3.88 - 12.50
--------------------------------------------
September 30, 1996 3,295,050 $3.88 - $21.50
Granted 587,000 6.38 - 7.13
Exercised, expired or canceled 75,050 3.88 - 12.63
--------------------------------------------
September 30, 1997 3,807,000 $4.88 - $21.50
--------------------------------------------
In February 1992, the Company issued $40,000,000 in Azide Notes with
Warrants. See Note 6 for a description of the Warrants. Shares under
options and warrants at September 30, 1997 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, 1997:
<TABLE>
<CAPTION>
Options and Warrants Outstanding Options Exercisable
----------------------------------------------------------- -----------------------------------------
Weighted Average Weighted
Remaining Weighted Average
Range of Number Contractual Average Number Exercise
Exercise Price Outstanding Life (Years) Exercise Price Exercisable Price
----------------- -------------- -------------------- ---------------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 4.88 40,000 2.5 $ 4.88 40,000 $ 4.88
5.63 - 7.50 860,000 4.1 6.97 569,000 7.07
21.50 50,000 1.0 21.50 50,000 21.50
14.00 2,857,000 6.0 14.00 2,857,000 14.00
--------- --------------------- ---------------------- ----------------- ---------------
3,807,000 5.49 $ 13.23 3,516,000 $ 13.60
========= ===================== ====================== ================= ===============
</TABLE>
54
<PAGE>
12. SEGMENT INFORMATION
The Company's principal business segments are specialty chemicals,
environmental protection equipment and technology, and
industrial/commercial and residential real estate development. Products
of the specialty chemicals segment include AP used in the solid rocket
propellant for the space shuttle and defense programs, other perchlorate
chemicals, sodium azide, and Halotron.
Information about the Company's industry segments is as follows:
<TABLE>
<CAPTION>
---------------------------------------------
Years ended September 30,
---------------------------------------------
1997 1996 1995
---- ---- ----
Revenues:
<S> <C> <C> <C>
Specialty chemicals $ 37,976,000 $ 34,061,000 $ 34,219,000
Environmental protection 2,429,000 3,099,000 1,656,000
Real estate 3,645,000 5,221,000 3,375,000
------------ ------------ ------------
Total $ 44,050,000 $ 42,381,000 $ 39,250,000
============ ============ ============
Operating income (loss) before
unallocated income and expenses:
Specialty chemicals $(55,227,000) $ (879,000) $ (2,150,000)
Environmental protection (659,000) (249,000) (640,000)
Real estate 1,624,000 2,069,000 1,356,000
------------ ------------ ------------
Total (54,262,000) 941,000 (1,434,000)
------------ ------------ ------------
Deduct (add) unallocated expense (income):
General corporate(1) 3,838,000 506,000 613,000
Equity in earnings of real estate venture (200,000) (700,000)
Interest and other income (1,115,000) (1,381,000) (1,429,000)
Interest and other expense 2,001,000 2,836,000 1,709,000
Income tax credit (10,101,000) (109,000) (791,000)
------------ ------------ ------------
Net loss $(48,685,000) $ (211,000) $ (1,538,000)
============ ============ ============
Specialty chemicals $ 32,166,000 $ 91,869,000 $ 95,845,000
Environmental protection 1,667,000 1,476,000 1,087,000
Real estate 29,215,000 28,996,000 29,827,000
Corporate 27,033,000 27,678,000 28,460,000
------------ ------------ ------------
Total $ 90,081,000 $150,019,000 $155,219,000
------------ ------------ ------------
Financial information relating to domestic
and export sales (domestic operations):
Domestic revenues $ 42,723,000 $ 40,029,000 $ 38,857,000
Export revenues 1,327,000 2,784,000 393,000
------------ ------------ ------------
Total $ 44,050,000 $ 42,381,000 $ 39,250,000
============ ============ ============
</TABLE>
(1) The increase in general corporate expenses in fiscal 1997 relates to
employee separation and management reorganization costs recognized in
the fourth quarter. (See Note 16.)
55
<PAGE>
The Company's operations are located in the United States. It is not
practicable to compute a measure of profitability for domestic and
export sales or for sales by geographic location. Substantially all
export revenues relate to environmental protection equipment sales in
the Far and Middle East.
55-A
<PAGE>
The majority of depreciation and amortization expense and capital
expenditures relate to the Company's specialty chemicals segment.
Depreciation and amortization expenses for the years ended September 30
are as follows:
----------------------------------------------
1997 1996 1995
----------------------------------------------
Specialty chemicals $ 6,749,000 $6,899,000 $4,824,000
All other segments 936,000 911,000 1,059,000
----------------------------------------------
Total $ 7,685,000 $7,810,000 $5,883,000
==============================================
Capital expenditures for the years ended September 30 are as follows:
---------------------------------------------
1997 1996
---------------------------------------------
Specialty chemicals $ 1,524,000 $ 3,157,000
All other segments 33,000 91,000
----------------------------------------------
Total $ 1,557,000 $ 3,248,000
=============================================
The Company had three customers that accounted for 10% or more of the
Company's revenues in one or more of fiscal 1997, 1996 and 1995. These
three customers accounted respectively for the following revenues during
the fiscal years ended September 30:
<TABLE>
<CAPTION>
-----------------------------------------------------
Customer Chemical Industry 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A Ammonium Perchlorate Space $15,661,000 $20,000,000 $27,963,000
B Ammonium Perchlorate Space 4,614,000
C Sodium Azide Airbag 11,715,000 9,378,000
-----------------------------------------------------
</TABLE>
13. SODIUM AZIDE
In July 1990, the Company entered into agreements (the "Azide
Agreements") pursuant to which Dynamit Nobel licensed to the Company on
an exclusive basis for the North American market its most advanced
technology and know-how for the production of sodium azide, the
principal component of the gas generant used in automotive airbag safety
systems. In addition, Dynamit Nobel has 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. As a result,
in the third quarter of fiscal 1996, the Company recognized an increase
in sodium azide sales of approximately $600,000. This amount had
previously been recognized as a reduction of net sodium azide sales
during the period July 1, 1995 through June 30, 1996.
In May 1997, the Company entered into a three-year agreement with
Autoliv ASP, Inc. ("Autoliv") (formerly Morton International Automotive
Safety Products). The agreement provides for the Company to supply
sodium azide used by Autoliv in the manufacture of automotive airbags.
Deliveries under the contract commenced in July 1997. The estimated
sales value of the agreement is approximately $45 - $55 million over the
three-
56
<PAGE>
year period. This actual sales value, however, will depend upon many
factors beyond the control of the Company, such as the number of
automobiles and light trucks manufactured and competitive conditions in
the airbag market, that will influence the actual magnitude of Autoliv's
sodium azide requirements, and there can therefore be no assurance as to
the actual sales value of the agreement.
The Company previously 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. The
Company believes this is the result of capacity expansions by existing
producers, although the Company's information with respect to
competitors' existing and planned capacity is limited. There can be no
assurance that other manufacturing capacities not now known to the
Company will not be established. By reason of this highly competitive
market environment, and other factors discussed below, there exists
considerable pressure on the price of sodium azide.
The Company believes that the price erosion of sodium azide over the
past few years has been due, in part, to unlawful pricing procedures of
Japanese sodium azide producers. In response to such practices, in
January 1996, the Company filed an antidumping petition with the
International Trade Commission ("ITC") and the Department of Commerce
("Commerce"). In August 1996, Commerce issued a preliminary
determination that Japanese imports of sodium azide have been sold in
the United States at prices that are significantly below fair value.
Commerce's preliminary dumping determination applied to all Japanese
imports of sodium azide, regardless of end-use. Commerce's preliminary
determination followed a March 1996 preliminary determination by ITC
that dumped Japanese imports have caused material injury to the U.S.
sodium azide industry.
On January 7, 1997 the anti-dumping investigation initiated by Commerce,
based upon the Company's petition, against the three Japanese producers
of sodium azide was suspended by agreement. It is the Company's
understanding that, by reason of the Suspension Agreement, two of the
three Japanese sodium azide producers have ceased their exports of
sodium azide to the United States for the time being. As to the third
and largest Japanese sodium azide producer, which has not admitted any
prior unlawful conduct, the Suspension Agreement requires that it make
all necessary price revisions to eliminate all United States sales at
below "Normal Value," and that it conform to the requirements of
sections 732 and 733 of the Tariff Act of 1930, as amended, in
connection with its future sales of sodium azide in the United States.
The Suspension Agreement contemplates a cost-based determination of
"Normal Value" and establishes reporting and verification procedures to
assure compliance. Accordingly, the minimum pricing for sodium azide
sold in the United States by the remaining Japanese producer will be
based primarily on its actual costs, and may be affected by changes in
the relevant exchange rates.
Finally, the Suspension Agreement provides that it may be terminated by
any party on 60 days' notice, in which event the anti-dumping proceeding
would be re-instituted at the stage to which it had advanced at the time
the Suspension Agreement became effective.
57
<PAGE>
The Company has incurred significant operating losses in its sodium
azide operation during the last three fiscal years. Such operating
history was partially expected by the Company as a result of the
generally lengthy process of qualification for use of new material in
automotive safety equipment. Sodium azide performance improved in the
fourth quarter of fiscal 1997, principally as a result of additional
sodium azide deliveries under the Autoliv agreement referred to above,
and the operations were cash flow positive during the year ended
September 30, 1997. Capacity utilization rates increased from
approximately 45% in the third quarter of fiscal 1997 to approximately
55% in the fourth quarter of 1997. However, even though performance
improved, Management's view of the economics of the sodium azide market
changed significantly during the fourth quarter of fiscal 1997. During
the late August, September, October and November of 1997 the following
events or developments occurred that changed the Company's view of the
economics of the sodium azide market.
o The Company was unsuccessful in its attempts to sell sodium azide to
major users other than Autoliv. With the procurement cycle for the
automotive model year beginning in July or August, the Company
previously believed it would be successful in achieving significant
sales to other major users.
o One major inflator manufacturer announced the acquisition of
non-azide based inflator technology and that they intended to be in
the market with this new technology by model year 1999. This
announcement, coupled with the fact that other inflator manufacturers
appear to be pursuing non-azide based inflator technology more
aggressively than before, caused a reduction in the Company's
estimates of annual sodium azide demand requirements and, possibly
more importantly, the duration that such requirements will exist.
o The effects of the antidumping petition appear to have been fully
incorporated into the sodium azide market by the end of fiscal 1997.
At September 30, 1997, Management believes that the antidumping
related environment will remain unchanged as a result of the
continued strength and outlook of the U.S. dollar relative to the
Japanese yen (the home country currency of the Company's major
competitor).
As a result of these events and developments, the Company's view of the
economics of the sodium azide market and the Company's future
participation in such market degraded substantially by October 30, 1997
and Management concluded that the cash flows associated with sodium
azide operations would not be sufficient to recover the Company's
investment in sodium azide operations would not be sufficient to
recover the Company's investment in sodium azide related fixed assets.
As quoted market prices were not available, the present value of
estimate future cash flows was used to estimate the value of sodium
azide fixed assets. Under the requirements of SFAS No. 121, and as a
result of this valuation technique, an impairment charge of $52,605,000
was recognized in the fourth quarter of fiscal 1997.
58
<PAGE>
This impairment charge was recorded as a reduction of the sodium azide
building and equipment and related accumulated depreciation in the
amounts of approximately $69,537,000 and $16,932,000, respectively, to
reduce the carrying value of these assets to $13,500,000 or the
estimate of their fair value.
The Company will continue to use the sodium azide assets in its
operations as long as the cash flows generated from the use of such
assets are positive. The Company estimates that cash flows will be
negligible around calendar 2005 and as such the sodium azide assets are
being depreciated over the lesser of their useful lives or seven years.
14. HALOTRON
On August 30, 1991, the Company entered into an agreement (the "Halotron
Agreement") granting the Company the option to acquire the exclusive
worldwide rights to manufacture and sell Halotron I (a replacement for
halon 1211). Halotron products are fire suppression systems, including a
series of chemical compounds and application technologies, designed to
replace halons, chemicals presently in wide use as a fire suppression
agent in military, industrial, commercial and residential applications.
The Halotron Agreement provides for disclosure to the Company of all
confidential and proprietary information concerning Halotron I, which
together with testing undergone by Halotron I at independent
laboratories in Sweden and the United States and consulting services
that were provided, was intended to enable the Company to evaluate
Halotron I's commercial utility and feasibility. In February 1992, the
Company announced that a series of technical evaluations and field tests
conducted at the University of New Mexico had been positive and
equivalent to the performance previously reported in testing at the
Swedish National Institute of Testing and Standards and the University
of Lund in Sweden.
In February 1992, the Company determined to acquire the rights provided
for in the Halotron Agreement, gave notice to that effect to the
inventors, and exercised its option. In addition to the exclusive
license to manufacture and sell Halotron I, the rights acquired by the
Company include rights under all present and future patents relating to
Halotron I throughout the world, rights to related and follow-on
products and technologies and product and technology improvements,
rights to reclaim, store and distribute halon and rights to utilize the
productive capacity of the inventors' Swedish manufacturing facility.
Upon exercise of the option, the Company paid the sum of $700,000 (the
exercise price of $1,000,000, less advance payments previously made) and
became obligated to pay the further sum of $1,500,000 in equal monthly
installments of $82,000, commencing in
58-A
<PAGE>
March 1992. The license agreement entered into between the Company and
the inventors of Halotron I provides for a royalty to the inventors of
5% of the Company's net sales of Halotron I over a period of 15 years.
The Company has designed and constructed a Halotron facility that has an
annual capacity of approximately 6,000,000 pounds, located on land owned
by the Company in Iron County, Utah.
As discussed above, in 1992, the Company purchased the rights to certain
fire suppression chemicals and delivery systems called Halotron from
their Swedish inventor, Jan Andersson and his corporation, AB Bejaro
Product. The Company claimed that Andersson and Bejaro breached the
contract in which they had sold the rights to Halotron. This alleged
breach resulted in litigation initiated by the Company. This initial
litigation was settled when Andersson and Bejaro 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
chemicals and delivery systems.
Following the settlement of the initial litigation, however, Andersson
and Bejaro failed to perform the acts they had promised in order to
secure dismissal of that litigation. As a result, litigation was
initiated in the Utah state courts in March 1994, for the purpose of
establishing the Company's exclusive rights to the Halotron chemicals
and delivery systems. On August 15, 1994, the court entered a default
judgment ("Judgment") against Andersson and Bejaro granting the
injunctive relief requested by the Company and awarding damages in the
amount of $42,233,000.
The trial court further ordered Andersson and Bejaro to execute
documents required for patent registration of Halotron in various
countries. When Andersson and Bejaro ignored this order, the Court
directed the Clerk of the Court to execute these documents on behalf of
Andersson and Bejaro. Finally, the Court ordered that Andersson's and
Bejaro's rights to any future royalties from sales of Halotron were
terminated. The Company is exploring ways to collect the Judgment from
Andersson and Bejaro. It appears that Andersson and Bejaro have few
assets and those assets they do have appear to have been placed beyond
reach of the Judgment.
The Company has initiated arbitration proceedings against Jan Andersson
and Bejaro to enforce Halotron's patent rights to Halotron against
Andersson. The parties have each submitted statements of claims, with
supporting documents, affidavits and briefs to the arbitration panel.
Jan Andersson and Bejaro have also asserted a counterclaim against the
Company, alleging that the Company wrongfully deprived Andersson and
Bejaro of royalties due under the agreements with the Company. Andersson
and Bejaro seek $6,200,000, including damages for alleged physical
suffering and punitive damages. The Company has sought to strike the
counterclaim as having been filed untimely. If the counterclaim is not
stricken, the Company will vigorously contest claims asserted in the
counterclaim. The Company believes the counterclaim to be without merit.
No hearing has been set in the arbitration.
15. ASSET PURCHASE AGREEMENT
On October 10, 1997, the Company entered into an Asset Purchase
Agreement (the "Agreement") with Kerr-McGee. The Agreement contemplates
that the Company will acquire certain intangible assets related to
Kerr-McGee's production of AP.
59
<PAGE>
The Agreement calls for a purchase price of $39 million, and grants the
Company the option to purchase limited AP inventory of Kerr-McGee for
additional consideration.
Closing of the transaction is subject to a number of conditions,
including the Company's securing of financing for 100 percent of the
purchase price and Board of Director approvals by both parties. In
December 1997, the Company received notification that the Federal Trade
Commission ("FTC") had determined to grant early termination of the
waiting period relating to the Company's and Kerr-McGee's premerger
notifications filings with the FTC and the Department of Justice under
the Hart-Scott- Rodino Antitrust Improvements Act of 1976. The Company
has entered into long-term pricing agreements for AP with its major
customers that are contingent upon the closing of the transaction and,
on a continuing basis, that will be contingent upon agreement on the
terms of specific purchase orders.
There can be no assurance that the conditions to closing of the
transaction will be satisfied, or that the transaction will close. The
management of the Company will, however, make all reasonable efforts to
meet all conditions, and to conclude successfully this transaction.
16. EMPLOYEE SEPARATION AND MANAGEMENT REORGANIZATION COSTS
During the fourth quarter of fiscal 1997, the Company implemented a
management reorganization plan. As a result, the former Chief Executive
Officer, Executive Vice President and two other senior executives
separated their employment with the Company and the Company vacated
approximately one-half of its leased corporate office facilities space.
In addition, activities associated with the Company's environmental
protection equipment division were relocated to the Company's Utah
facilities.
The Company recognized a charge of $3,616,000 to account for the costs
associated with the employee separations and vacating leased space. The
charge consists principally of four years of salary and benefits payable
to the former Executive Vice President under the terms of an employment
agreement, the present value of the estimated amount payable to the
former Chief Executive Officer under the terms of the Company's
Supplemental Executive Retirement Plan ("SERP") and severance costs
payable to the two other former senior executives. The former Chief
Executive Officer is the only person currently covered under the SERP.
Relocation costs amounted to approximately $387,000 and are classified
in operating expenses in the accompanying consolidated statement of
operations.
In the third quarter of 1995, the Company reduced total full-time
employee equivalents by approximately ten percent through involuntary
terminations and an offering of enhanced retirement benefits to a
certain class of employees. The Company recognized a charge of
approximately $226,000 as a result of these terminations and the
acceptance of the offer of enhanced retirement benefits by certain
employees.
60
<PAGE>
GIBSON RANCH
LIMITED LIABILITY COMPANY
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996, AND
INDEPENDENT AUDITORS' REPORT
61
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Members
Gibson Ranch Limited Liability Company
Las Vegas, Nevada
We have audited the accompanying balance sheets of Gibson Ranch Limited
Liability Company (the "Company") as of December 31, 1997 and 1996, and the
related statements of operations and members' equity and of cash flows for the
years ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gibson Ranch Limited Liability
Company as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Las Vegas, Nevada
July 10, 1998
62
<PAGE>
GIBSON RANCH LIMITED LIABILITY COMPANY
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and cash equivalents $ 498,465 $ 391,085
Receivables, net 377,597 53,586
Inventories 25,751,033 23,457,325
Deposits and other assets 1,032,269 992,887
------------ ------------
TOTAL $ 27,659,364 $ 24,894,883
============ ============
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES:
Notes payable $ 5,852,947 $ 3,603,904
Accounts payable and accrued liabilities 4,978,642 3,215,998
Due to members 2,379,393 2,786,621
Customer deposits 123,075 151,870
------------ ------------
Total liabilities 13,334,057 9,758,393
MEMBERS' EQUITY 14,325,307 15,136,490
------------ ------------
TOTAL $ 27,659,364 $ 24,894,883
============ ============
</TABLE>
See notes to financial statements.
63
<PAGE>
GIBSON RANCH LIMITED LIABILITY COMPANY
STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
REVENUES:
<S> <C> <C>
Home sales $ 19,407,397 $ 16,122,148
Land sale 2,240,000 2,480,000
------------ ------------
Total revenues 21,647,397 18,602,148
------------ ------------
COST OF SALES:
Home sales 17,291,000 14,420,944
Land sale 934,078 999,090
------------ ------------
Total cost of sales 18,225,078 15,420,034
------------ ------------
GROSS PROFIT 3,422,319 3,182,114
OPERATING EXPENSES 1,223,131 984,230
------------ ------------
NET INCOME $ 2,199,188 $ 2,197,884
============ ============
MEMBERS' EQUITY, JANUARY 1, 1996 (As previously stated) $ 13,348,889
ADJUSTMENT (See Note 1) 1,687,651
------------
MEMBERS' EQUITY, JANUARY 1, 1996 (As adjusted) 15,036,540
NET INCOME 2,197,884
DISTRIBUTIONS PAID (2,097,934)
------------
MEMBERS' EQUITY, DECEMBER 31, 1996 15,136,490
NET INCOME 2,199,188
DISTRIBUTIONS PAID (3,010,371)
------------
MEMBERS' EQUITY, DECEMBER 31, 1997 $ 14,325,307
============
</TABLE>
See notes to financial statements.
64
<PAGE>
GIBSON RANCH LIMITED LIABILITY COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,199,188 $ 2,197,884
Changes to reconcile net income to net cash provided by operating
activities:
Decrease (increase) in receivables (324,011) 154,237
Increase in deposits and other assets (39,382) (421,309)
Increase in inventories (2,293,708) (31,253)
Increase in accounts payable and accrued liabilities 1,762,644 786,755
Increase (decrease) in customer deposits (28,796) 90,325
------------ ------------
Net cash provided by operating activities 1,275,936 2,776,639
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of amounts due to members (407,228) (924,515)
Distributions paid to members (3,010,371) (2,097,935)
Proceeds from notes payable 18,466,503 15,099,943
Principal payments on notes payable (16,217,460) (14,498,835)
------------ ------------
Net cash used in financing activities (1,168,556) (2,421,342)
------------ ------------
NET INCREASE IN CASH 107,380 355,297
CASH, BEGINNING OF YEAR 391,085 35,788
------------ ------------
CASH, END OF YEAR $ 498,465 $ 391,085
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW
INFORMATION - Cash paid for interest $ 856,757 $ 835,396
============ ============
</TABLE>
See notes to financial statements.
65
<PAGE>
GIBSON RANCH LIMITED LIABILITY COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS--Gibson Ranch Limited Liability Company (the
"Company") was formed August 27, 1993, under the Nevada Limited
Liability Company Act. The members are The Developers of Nevada
("Developers"), its managing member, and AmPac Development Company
("AmPac"). Limited liability companies ("LLC") are statutorily
established legal entities containing features of corporations and
partnerships. Except as provided by law, the members are not personally
liable for any debts of the Company or any losses in excess of the
amount of their capital contribution. The Company has acquired real
property in Henderson, Nevada, for the purpose of developing lots,
selling undeveloped commercial land, and constructing single-family
homes and four-plex townhomes. The Company will continue until August
2023 unless dissolved prior to that time.
Prior to January 1, 1996, the Company had recorded the initial
contribution of land by Developers and AmPac at its agreed upon value in
accordance with the Company's operating agreement. Generally accepted
accounting principles require that the land be recorded at the lower of
the members' cost basis or market value. Therefore, an increase of
$1,687,651 has been made to members' equity and land at January 1, 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
BALANCE SHEET PREPARATION--The operations of the Company involve a
variety of real estate transactions and it is not possible to precisely
measure the operating cycle of the Company. The balance sheet of the
Company has been prepared on an unclassified basis in accordance with
real estate industry practice.
REVENUE RECOGNITION--Profits on the sale of real estate are recognized
upon closing in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 66, Accounting for Sales of Real Estate, when
title has passed, the buyer has made a substantial commitment, the usual
risks and rewards of ownership have been transferred to the buyer, and
the collectibilty of the sales price is reasonably assured. Construction
costs are generally allocated to lots using the specific identification
method. Payments received from buyers prior to closing are recorded as
deposits.
MANAGEMENT FEES--Over the life of the Company, a management fee is paid
to the Company's managing member in the amount of $50,000 per month.
This management fee is charged to expense as incurred.
66
<PAGE>
INVENTORIES--Inventories are stated at the lower of cost or net
realizable value. Inventory costs include preacquisition costs, property
taxes, interest, and insurance incurred during development and
construction, and direct and certain indirect project costs. General and
administrative costs are charged to expense as incurred. Model
construction, model furnishing costs, and semi-permanent signs are
capitalized. Costs of amenities such as swimming pools, parks, and
fitness centers are accounted for as common costs and allocated to units
to be sold.
The Company follows SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. As of
December 31, 1997, no adjustments to reduce cost to fair value less
estimated selling costs were required.
ALLOCATION OF PROCEEDS AND DISTRIBUTIONS OF PROFIT AND LOSSES--Under the
terms of the operating agreement, the capital contributions of all
members shall be returned on a pro rata basis as land in the project is
developed and sold. The profits and losses of the Company shall be split
equally between the members after the return of advances and agreed upon
values for initial contributions.
INCOME TAXES--As an LLC, the Company is taxed as a partnership. As a
result, the members separately account for their share of the Company's
income, deductions, losses, and credits. Accordingly, no provision for
income tax expense has been recognized in the accompanying financial
statements.
CASH AND CASH EQUIVALENTS--For purposes of reporting cash flows, cash
and cash equivalents includes cash on hand, cash in bank, and money
market accounts.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported period. Significant
estimates used include the allocation of lot development costs. Actual
results could differ from those estimates.
3. INVENTORIES
Inventories consist of the following as of December 31:
1997 1996
Land under development $10,869,926 $ 13,198,066
Land held for investment 726,817 726,817
Development and construction costs 13,755,706 9,240,426
Model home furnishings and signs 398,584 292,016
----------- ------------
Total $25,751,033 $23,457,325
=========== ============
Interest and finance costs capitalized were $1,248,846 and $544,922,
including $239,409 and $240,072 to AmPac, during the years ended
December 31, 1997 and 1996, respectively.
4. DEPOSITS AND OTHER ASSETS
Deposits and other assets consist of the following as of December 31:
1997 1996
Refundable deposits $ 759,985 $ 757,783
Other assets 272,284 235,104
---------- ---------
Total $1,032,269 $ 992,887
========== =========
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<PAGE>
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following as of
December 31:
1997 1996
Accounts payable - trade $4,121,209 $ 2,271,864
Special improvement district assessment 684,705 821,646
Warranty reserve 114,756 88,487
Accrued interest due to AmPac 57,972 34,001
---------- -----------
Total $4,978,642 $ 3,215,998
========== ===========
6. NOTES PAYABLE
Notes payable consist of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Note payable to a bank, monthly installments of interest only based on the
bank's prime lending rate (8.50% at December 31, 1997), due April 1999,
secured by deed of trust and guaranteed
by the members of Developers. $ 461,448
Notes payable to a corporation, monthly installments of interest only at 12.5%
through February 1998, due March 1998, secured
by deed of trust and guaranteed by the members of Developers. 1,830,649 $ 1,065,967
Revolving line of credit for $10,000,000 secured by deed of trust
and guaranteed by the members of Developers. Bears
interest at the prime (8.5% at December 31, 1997)
rate plus 1.25% and matures April 30, 1999. 3,560,850
Notes payable to banks, monthly installments of interest only based on the
bank's prime lending rate (8.25% at December 31, 1996) various maturities
through October 1997, secured by deeds of trust and guaranteed by Developers
and the members of
Developers. 2,537,937
---------- -----------
Total $5,852,947 $ 3,603,904
========== ===========
</TABLE>
Scheduled maturities of notes payable for the years ending December 31,
1997, are as follows:
1998 $ 1,830,649
1999 4,022,298
-----------
Total $ 5,852,947
===========
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<PAGE>
In accordance with the bank loan agreements, the Company is required to
maintain a minimum tangible net worth of no less than $5,000,000 at all
times. The Company is subject to certain other debt covenants which
includes providing reviewed or audited financial statements by a certain
date. Management believes the Company is in compliance with all
covenants contained in its debt agreements at December 31, 1997.
7. RELATED PARTY BALANCES AND TRANSACTIONS
Developers made advances to and received payments from the Company for
operating and development expenditures. Advances included in due to
members were $10,633 and $268,768 at December 31, 1997 and 1996,
respectively.
The Company also has a $2,400,000 revolving line of credit agreement
with AmPac and a $2,400,000 revolving line of credit agreement with
Developers that may be drawn only after the AmPac line has been
exhausted. The agreements have no stated repayment terms and accrue
interest at 10 percent. The AmPac line is unsecured; the Developers line
is secured by the land contributed by Developers. The balance included
in due to members at December 31, 1997 and 1996, respectively, is
$2,368,760 and $2,517,853 and is due to AmPac.
The Company incurred management fees to its managing member totaling
$600,000 for each of the years ended December 31, 1997 and 1996.
AmPac's initial contribution of land was subject to its ability to
obtain a release of a mortgage lien in favor of AmPac's creditors. In
December 1994 an agreement regarding release of liens was consummated.
Under the terms of this agreement, release amounts are distributed to a
trustee upon sales of the Company's property for payment of AmPac's
indebtedness. The release amounts paid by the Company are recorded as
distributions to the members.
69
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Amendment No. 1 to Registration
Statement No. 33-15674 on Form S-3, Post-Effective Amendment No. 2 to
Registration Statement No, 33-21565 on Form S-8, Post-Effective Amendment No. 1
to Registration Statement No. 33-30321 on Form S-8, Registration Statement No.
33-36887 on Form S-8, Registration Statement No. 33-52898 on Form S-8, Amendment
No. 2 to Registration Statement No. 33-52196 on Form S-3, Registration Statement
No. 33-11467 on Form S-3 and Registration Statement No. 333-11469 on Form S-8 of
American Pacific Corporation of our report dated November 14, 1997, appearing in
this Annual Report on Form 10-K/A Amendment No. 5 of American Pacific
Corporation for the year ended September 30, 1997.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
July 28, 1998
