-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HmoxlEd0YUv8Q3vyZWQT2VvArtzmeebfa8LUWxPnpP4CnxLqfYNOtNUaWtxU+qnS TKtnZm1bsrfRMoJNBgQnAg== 0000921895-98-000636.txt : 19980729 0000921895-98-000636.hdr.sgml : 19980729 ACCESSION NUMBER: 0000921895-98-000636 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980728 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PACIFIC CORP CENTRAL INDEX KEY: 0000350832 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 596490478 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-21046 FILM NUMBER: 98672447 BUSINESS ADDRESS: STREET 1: 3770 HOWARD HUGHES PKWY STE 300 CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027352200 MAIL ADDRESS: STREET 1: 3770 HOWARD HUGHES PKWY STE 300 STREET 2: 3770 HOWARD HUGHES PKWY STE 300 CITY: LAS VEGAS STATE: NV ZIP: 89109 10-K/A 1 AMENDMENT NO. 5 TO 10K 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. 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 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 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 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 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 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 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1997 AND 1996
Notes 1997 1996 ----------------------------------------------------- ASSETS CURRENT ASSETS: 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 ====================================
See Notes to Consolidated Financial Statements. 38 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
Notes 1997 1996 1995 ----------------------------------------------------------------------------- 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) ======================================================
See Notes to Consolidated Financial Statements. 39 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1997 1996 1995 ----------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: 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 ==============================================================
See Notes to Consolidated Financial Statements. 40 AMERICAN PACIFIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
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 ----------------------------------------------------------------------------------------------------------- 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) ====================================================================================================
See Notes to Consolidated Financial Statements. 41 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 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 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 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 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 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 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 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 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:
----------------------------------------------------- September 30, ----------------------------------------------------- 1997 1996 ---- ---- Subordinated secured term notes (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 ========================================================
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 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 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:
1997 1996 1995 ------------------ -------------- -------------- 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) ================== ============== ==============
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:
NOL DEDUCTION Tax Rate NOL Asset -------------- ----------- ------------- Expiration of net operating losses 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 ============ ============
49 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:
1997 % 1996 % 1995 % ------------------------------------------------------------------------------------- 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% ================ ===================== ==============
The components of the net deferred taxes at September 30, 1997, 1996 and 1995 consisted of the following:
DEFERRED TAX ASSETS: Non-current: 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) ============ ============ =============
50 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 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.
----------------------------------------------------- 1997 1996 ----------------------------------------------------- Actuarial present value of benefit obligations: 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) =====================================================
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:
---------------------------------------------------------------------------- 1997 1996 1995 ---------------------------------------------------------------------------- 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 ============================================================================
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 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 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 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 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:
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 ----------------- -------------- -------------------- ---------------------- ----------------- --------------- $ 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 ========= ===================== ====================== ================= ===============
54 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:
--------------------------------------------- Years ended September 30, --------------------------------------------- 1997 1996 1995 ---- ---- ---- Revenues: 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 ============ ============ ============
(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 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 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:
----------------------------------------------------- Customer Chemical Industry 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- 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 -----------------------------------------------------
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 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 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 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 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 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 GIBSON RANCH LIMITED LIABILITY COMPANY FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996, AND INDEPENDENT AUDITORS' REPORT 61 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 GIBSON RANCH LIMITED LIABILITY COMPANY BALANCE SHEETS DECEMBER 31, 1997 AND 1996 - --------------------------------------------------------------------------------
ASSETS 1997 1996 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 ============ ============
See notes to financial statements. 63 GIBSON RANCH LIMITED LIABILITY COMPANY STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 - --------------------------------------------------------------------------------
1997 1996 REVENUES: 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 ============
See notes to financial statements. 64 GIBSON RANCH LIMITED LIABILITY COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 - --------------------------------------------------------------------------------
1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: 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 ============ ============
See notes to financial statements. 65 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 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 ========== ========= 67 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:
1997 1996 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 ========== ===========
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 =========== 68 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 EX-23 2 CONSENT 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 -----END PRIVACY-ENHANCED MESSAGE-----