-----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, ACa7xP0l47i31ZwWORXkKurpDiRHqmE2A99odoZNncmDB2slBALOn0DEefu5FgyI mqYi3GrI1bZ/8oBeDrzEvw== 0000950152-99-003237.txt : 19990415 0000950152-99-003237.hdr.sgml : 19990415 ACCESSION NUMBER: 0000950152-99-003237 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENCORP INC CENTRAL INDEX KEY: 0000040888 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 340244000 STATE OF INCORPORATION: OH FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01520 FILM NUMBER: 99593299 BUSINESS ADDRESS: STREET 1: 175 GHENT RD CITY: FAIRLAWN STATE: OH ZIP: 44333 BUSINESS PHONE: 2168694200 MAIL ADDRESS: STREET 1: 175 GHENT RD CITY: FAIRLAWN STATE: OH ZIP: 44333 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL TIRE & RUBBER CO DATE OF NAME CHANGE: 19840330 10-Q 1 GENCORP INC. 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended February 28, 1999 Commission File Number 1-1520 ----------------- ------ GenCorp Inc. ------------ (Exact name of registrant as specified in its charter) Ohio 34-0244000 - ------------------------ ------------------------------------ (State of incorporation) (I.R.S. Employer Identification No.) 175 Ghent Road Fairlawn, Ohio 44333-3300 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (330) 869-4200 -------------- 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 --- --- At March 31, 1999, there were 41,706,560 outstanding shares of GenCorp Inc.'s Common Stock, par value $0.10. 2 GENCORP INC.
Table of Contents Part I. Financial Information Page No. -------- Item 1. Financial Statements Condensed Consolidated Statements of Income - Three Months Ended February 28, 1999 and 1998 -3- Condensed Consolidated Balance Sheets - February 28, 1999 and November 30, 1998 -4- Condensed Consolidated Statements of Cash Flows - Three Months Ended February 28, 1999 and 1998 -5- Notes to the Unaudited Interim Condensed Consolidated Financial Statements as of February 28, 1999 -6- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -13- Item 3. Quantitative and Qualitative Disclosures About Market Risk -17- Part II. Other Information Item 1. Legal Proceedings -17- Item 4. Submission of Matters to a Vote of Security Holders -18- Item 6. Exhibits and Reports on Form 8-K -19- Signatures -20-
-2- 3 PART I. FINANCIAL INFORMATION GENCORP INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in millions, except per share data)
Unaudited Three Months Ended ------------------------------ February 28, February 28, 1999 1998 ------------------------------ NET SALES $439.6 $365.5 ------ ------ COSTS AND EXPENSES Cost of products sold 341.2 290.6 Selling, general and administrative 46.1 37.0 Depreciation 17.7 15.7 Interest expense 5.4 2.1 Other (income) and expense, net (.3) (1.3) Unusual items .5 - ------ ------ 410.6 344.1 ------ ------ INCOME BEFORE INCOME TAXES 29.0 21.4 Income tax provision 11.8 8.6 ------ ------ NET INCOME $ 17.2 $ 12.8 ====== ====== EARNINGS PER SHARE OF COMMON STOCK Basic $ .41 $ .31 Diluted $ .41 $ .31 Average number of shares of common stock outstanding (in thousands) Basic 41,582 41,349 Diluted 42,036 41,942 Cash dividends paid per share of common stock $ .15 $ .15
See notes to the unaudited interim condensed consolidated financial statements. -3- 4 GENCORP INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in millions)
Unaudited Audited February 28, November 30, 1999 1998 ------------------------------- CURRENT ASSETS: Cash and equivalents $ 21.5 $ 28.6 Accounts receivable 272.2 275.7 Inventories 160.0 165.3 Prepaid expenses and other 56.3 59.1 -------- -------- TOTAL CURRENT ASSETS 510.0 528.7 -------- -------- Recoverable from U.S. Government and third parties for environmental remediation 148.0 149.3 Deferred income taxes 137.1 136.9 Prepaid pension 136.5 127.4 Investments and other assets 299.4 301.4 Property, plant and equipment: At cost 1,228.8 1,238.3 Accumulated depreciation (731.3) (738.6) -------- -------- Net property, plant and equipment 497.5 499.7 -------- -------- TOTAL ASSETS $1,728.5 $1,743.4 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Notes payable $ 53.2 $ 14.4 Accounts payable - trade 88.0 118.7 Income taxes 34.3 34.0 Other current liabilities 226.9 263.2 -------- -------- TOTAL CURRENT LIABILITIES 402.4 430.3 -------- -------- Long-term debt 356.1 356.2 Postretirement benefits other than pensions 315.6 318.4 Environmental reserves 248.5 245.7 Other liabilities 51.7 49.3 SHAREHOLDERS' EQUITY Preference stock - (none outstanding) - - Common stock - $0.10 par value; 41.7 million shares outstanding 4.2 4.2 Other capital 153.6 150.8 Retained earnings 209.1 198.1 Accumulated other comprehensive loss (12.7) (9.6) -------- -------- TOTAL SHAREHOLDERS' EQUITY 354.2 343.5 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,728.5 $1,743.4 ======== ========
See notes to the unaudited interim condensed consolidated financial statements. -4- 5 GENCORP INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions)
Unaudited Three Months Ended February 28, 1999 1998 ----------------------------- OPERATING ACTIVITIES Net income $ 17.2 $ 12.8 Depreciation, amortization and gain/loss on disposal of fixed assets 19.0 16.4 Deferred income taxes (.2) (.1) Changes in operating assets and liabilities net of effects of acquisitions and dispositions of businesses: Current assets 11.6 26.5 Current liabilities (66.7) (49.2) Other non-current assets (1.8) (3.2) Other non-current liabilities .6 (11.2) ------ ------ NET CASH USED IN OPERATING ACTIVITIES (20.3) (8.0) ------ ------ INVESTING ACTIVITIES Capital expenditures (19.0) (12.9) Proceeds from asset dispositions 9.0 .3 Acquisitions (9.0) - ------ ------ NET CASH USED IN INVESTING ACTIVITIES (19.0) (12.6) ------ ------ FINANCING ACTIVITIES Long-term debt incurred 20.0 20.0 Long-term debt paid (20.1) (10.4) Net short-term debt incurred 38.8 18.0 Dividends (6.2) (6.2) Other equity transactions (.3) 1.7 ------ ------ NET CASH PROVIDED BY FINANCING ACTIVITIES 32.2 23.1 ------ ------ NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (7.1) 2.5 Cash and equivalents at beginning of year 28.6 18.4 ------ ------ Cash and equivalents at end of period $ 21.5 $ 20.9 ====== ======
Cash paid for interest was $6.1 million and $2.1 million for the three months ended February 28, 1999 and 1998, respectively. Cash paid for income taxes was $10.2 million and $2.9 million for the three months ended February 28, 1999 and 1998, respectively. See notes to the unaudited interim condensed consolidated financial statements. -5- 6 GENCORP INC. NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF FEBRUARY 28,1999 Note A - Basis of Presentation The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These interim statements should be read in conjunction with the financial statements and notes thereto included or incorporated by reference in the GenCorp Inc. (Company) Annual Report on Form 10-K for the fiscal year ended November 30, 1998. All normal recurring accruals and adjustments considered necessary for a fair presentation of the unaudited results for the three months ended February 28, 1999 and 1998, have been reflected. The results of operations for the three months ended February 28, 1999, are not necessarily indicative, if annualized, of those to be expected for the full fiscal year. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain reclassifications have been made to conform prior year's data to the current presentation. Note B - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Unaudited Three Months Ended February 28, (Dollars in millions, except per share amounts and shares in thousands) 1999 1998 -------------------------- Numerator Net income $17.2 $12.8 ===== ===== Denominator Denominator for basic earnings per share - weighted average shares 41,582 41,349 Effect of dilutive securities: Employee stock options 435 578 Other 19 15 ----- ----- Dilutive potential common shares 454 593 ----- ----- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 42,036 41,942 ====== ====== Earnings Per Share Of Common Stock Basic earnings per share $.41 $.31 ==== ==== Diluted earnings per share $.41 $.31 ==== ====
-6- 7 Note C - Comprehensive Income The Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), as of December 1, 1998, which established standards for reporting and displaying comprehensive income and its components in the financial statements. The adoption of SFAS 130, which had no impact on the Company's net income or shareholders' equity, requires cumulative translation adjustments and minimum pension liability adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. During the quarters ended February 28, 1999 and 1998, total comprehensive income was $14 million and $10 million, respectively. Note D - Acquisitions, Divestitures and Other Matters On December 2, 1998, the Company acquired the U.S. acrylic emulsion polymers business of PolymerLatex, located in Fitchburg, Massachusetts, for $9 million. This acquisition was accounted for using the purchase method and was included in the results of operations for the Company from the date of acquisition. On December 14, 1998, the Company sold its residential wallcovering business to Blue Mountain Wallcoverings, Inc. for an aggregate consideration of approximately $9 million. The loss on the sale of this business was reflected in the 1998 results of operations. On December 14, 1998, the Company announced it had initiated the process for divesting its Penn Racquet Sports division for which the Company expects to realize a gain. On December 17, 1998, the Company announced a plan to spin off its Performance Chemicals and Decorative & Building Products businesses to GenCorp shareholders as a separate publicly traded polymer products company. Following the spin-off, GenCorp would continue to operate Aerojet, its aerospace, defense and fine chemicals segment, and its automotive Vehicle Sealing business unit. Implementation of the plan is subject to approval by GenCorp shareholders, the receipt of a favorable ruling from the Internal Revenue Service, as well as market conditions at the time of the proposed spin-off. Note E - Inventories Inventories are stated at the lower of cost or market value. A portion of the inventories is priced by use of the last-in, first-out (LIFO) method using various dollar value pools. Interim LIFO determinations involve management's judgments of expected year-end inventory levels. Components of inventory are as follows:
Unaudited Audited February 28, November 30, (Dollars in millions) 1999 1998 --------------------------------- Raw materials and supplies $ 49.1 $ 48.0 Work-in-process 8.6 8.5 Finished products 75.4 74.6 ------- ------- Approximate replacement cost of inventories 133.1 131.1 Reserves, primarily LIFO (40.2) (40.2) Long-term contracts at average cost 274.4 276.2 Progress payments (207.3) (201.8) - ------- ------- $ 160.0 $ 165.3 ======= =======
-7- 8 Note F - Long-term Debt and Credit Lines The Company has a five-year unsecured $400 million revolving credit facility (Facility) which expires in May 2001. As of February 28, 1999, unused and available revolving lines of credit totaled $120 million. The Company pays a variable commitment fee, which was 1/5 of one percent, on the unused balance. Interest rates were variable, primarily based on LIBOR, and were at an average rate of 5.6 percent. The Facility contains various debt restrictions and provisions relating to net worth, interest coverage and debt to earnings before interest, taxes, depreciation and amortization (Debt/EBITDA) ratios. As of February 28, 1999, the Company was required to maintain consolidated net worth of at least $192 million. On September 30, 1998, the Company entered into a $75 million revolving credit facility for the purchase of certain assets of Sequa Chemicals, the specialty chemicals unit of Sequa Corporation. This facility is available through April 29, 1999 and contains various debt restrictions and other provisions which are the same as those in the Facility described above. The rate is 75 basis points over LIBOR. The Company pays a commitment fee of approximately 1/4 of one percent on the unused balance. The Company intends to convert the $75 million revolving credit facility into the Facility at or before the date of expiration. At that time, the unused available revolving lines of credit on the Facility will be reduced accordingly. At February 28, 1999, the Company had unsecured, uncommitted lines of credit with several banks for short-term borrowings aggregating $92 million, of which $50 million was outstanding. Interest rates for these lines of credit were variable and were at an average rate of 5.3 percent on February 28, 1999. Borrowings under such lines are payable on demand. The Company also had outstanding letters of credit totaling $23 million at February 28, 1999. Note G - Contingencies Spin-off Related Matters On March 22, 1999, the Company announced a Voluntary Enhanced Retirement Program (VERP) and an Enhanced Involuntary Separation Pay Plan (EISP) which are associated with and contingent upon completion of the Company's plan to spin-off its Performance Chemicals and Decorative & Building Products divisions as a separate publicly traded company. The VERP offers enhanced retirement benefits to eligible salaried employees within a number of corporate facilities and divisional headquarters. The majority of the related benefits will be paid from the Company's defined benefit pension and retiree healthcare plans. The maximum estimated cost of the VERP could range up to $7.6 million. The actual cost of both the VERP and the EISP plans will be reflected in the financial statements after the total number of participants is known and the spin-off has occurred. In January 1999, the Company's Board of Directors approved the 1999 GenCorp Key Employee Retention Plan. This plan provides for the issuance of retention agreements to selected key employees with a total maximum payout of up to $3.2 million payable before March 2001. -8- 9 Note G - Contingencies (continued) Environmental Matters Sacramento, California In 1989, the United States District Court approved a Partial Consent Decree (Decree) requiring Aerojet to conduct a Remedial Investigation/Feasibility Study (RI/FS) of Aerojet's Sacramento, California site and to prepare a RI/FS report on specific environmental conditions present at the site and alternatives available to remedy such conditions. Aerojet also is required to pay for certain governmental oversight costs associated with compliance with the Decree. The State of California expanded surveillance of perchlorate and nitrosodimethylamine (NDMA) under the RI/FS because these chemicals were detected in public water supply wells near Aerojet's property at previously undetectable levels using new testing protocols. Aerojet has substantially completed its efforts under the Decree to determine the nature and extent of contamination at the facility and to identify the technologies that will likely be used to remediate the site. The remediation costs are principally for design, construction, enhancement and operation of groundwater and soil treatment facilities, ongoing project management and regulatory oversight, and are expected to be incurred over a period of approximately 15 years. Aerojet is also addressing groundwater contamination off of its facility. San Gabriel Valley Basin, California Aerojet, through its Azusa facility, has been named by the U.S. Environmental Protection Agency (EPA) as a potentially responsible party (PRP) in the portion of the San Gabriel Valley Superfund Site known as the Baldwin Park Operable Unit (BPOU). Regulatory action involves requiring site specific investigation, possible cleanup, issuance of a Record of Decision (ROD) regarding regional groundwater remediation and issuance to Aerojet and 18 other PRPs Special Notice letters requiring groundwater remediation. Aerojet's investigation demonstrated that the principal groundwater contamination, volatile organic compounds (VOC), is upgradient of Aerojet's property and that lower concentrations of VOC contaminants are present in the soils of Aerojet's presently and historically owned properties. The EPA contends that Aerojet is one of the four largest sources of groundwater contamination at the BPOU of the nineteen PRPs identified by the EPA. Aerojet contests the EPA's position regarding the source of contamination and the number of responsible PRPs. Aerojet is participating in a Steering Committee comprised of nineteen of the PRPs. The ROD and Special Notice letters issued by the EPA require groundwater remediation for the BPOU, estimated to cost $47 million in non-recurring costs and $4 million to $5 million in annual operating expense. Aerojet, as part of the Steering Committee, is participating in an effort to develop an alternative "watermaster" plan in which certain water supply entities would integrate the remedial requirements into a water supply project. If implemented, the watermaster plan approach would allow the project to be eligible for federal funding for 25 percent of the non-recurring costs and additional funding from water supply entities receiving benefit from the project, thus reducing the PRPs' costs. -9- 10 Note G - Contingencies (continued) San Gabriel Valley Basin, California (continued) Soon after the EPA issued the Special Notice letter, the State of California also detected perchlorate in water wells in Southern California, including the San Gabriel Valley, at previously undetectable levels using new testing protocols. As a result of the recent finding of perchlorate, the EPA has required investigation for and studies regarding treatability of perchlorate contaminated water. Consequently, the EPA has allowed time extensions for submittal by the PRPs of a good faith offer and negotiation of a consent decree in response to the Special Notice letter. More recently, NDMA has been detected in water supply wells, also at previously undetectable levels. The extent of NDMA in the groundwater is being studied. Treatment technology is established. The perchlorate and NDMA investigations and studies are underway, primarily funded by Aerojet. The final perchlorate and NDMA cleanup standards (which have not yet been determined) could impact total cleanup cost, allocation among the PRPs, and implementation of the proposed consensus plan. Muskegon, Michigan In a lawsuit filed by the EPA, the United States District Court ruled in 1992 that Aerojet and its two inactive Cordova Chemical subsidiaries (Cordova) are liable for remediation of Cordova's Muskegon, Michigan site, along with a former owner/operator of an earlier chemical plant at the site, who is the other potentially responsible party (PRP). That decision was appealed to the United States Court of Appeals. In May 1997, the United States Court of Appeals for the Sixth Circuit issued an en banc decision reversing Aerojet's and the other PRP's liability under the CERCLA statute. Petitions for certiorari to the United States Supreme Court for its review of the appellate decision were filed on behalf of the State of Michigan and the EPA and were granted in December 1997. On June 8, 1998, the U.S. Supreme Court issued its opinion. The Court held that a parent corporation could be directly liable as an operator under CERCLA if it can be shown that the parent corporation operated the facility. The Supreme Court vacated the Sixth Circuit's 1997 ruling and remanded the case back to the U.S. District Court in Michigan for retrial. Aerojet does not expect that it will be found liable on remand. Aerojet is involved in settlement discussions with the EPA and expects the filing of a proposed consent decree which, if approved by the District Court, would allow Aerojet and Cordova to be dismissed. In a separate action, Aerojet and Cordova won indemnification for the Muskegon site investigation and remediation costs from the State of Michigan in the state Court of Claims. The Michigan Court of Appeals affirmed on appeal, and the Michigan Supreme Court refused to hear the case. Further, the Michigan Supreme Court also denied the State's motion for reconsideration. As a result, the Company believes that most of the $50 million to $100 million in anticipated remediation costs will be paid by the State of Michigan and the former owner/operator of the site. A settlement agreement with the State of Michigan, related to the proposed consent decree discussed above, is also being finalized and will be executed contingent on the U.S. consent decree being approved. In addition, Aerojet believes it has insurance coverage for the site. -10- 11 Note G - Contingencies (continued) Aerojet's Reserve and Recovery Balances On January 12, 1999, having finally received all necessary Government approvals, Aerojet and the U.S. Government implemented, with effect retroactive to December 1, 1998, the October 1997 Agreement in Principle resolving certain prior environmental and facility disagreements between the parties. Under this Agreement, a "global" settlement covering all environmental contamination (including perchlorate) at the Sacramento and Azusa sites was achieved; the Government/Aerojet environmental cost sharing ratio was raised to 88 percent/12 percent from the previous 65 percent/35 percent (with both Aerojet and the Government retaining the right to opt out of this sharing ratio for Azusa only, after at least $40 million in allowable environmental remediation costs at Azusa have been recognized); the cost allocation base for these costs was expanded to include all of Aerojet (in lieu of the prior limitation to the Sacramento business base); and Aerojet obtained title to all of the remaining Government facilities on its Sacramento property, together with an advance agreement recognizing the allowability of certain facility demolition costs. At February 28, 1999, Aerojet had total reserves of $239 million for costs to remediate the above sites and has recognized $164 million for probable future recoveries. These estimates are subject to change as work progresses, additional experience is gained and environmental standards are revised. Legal proceedings to obtain reimbursements of environmental costs from insurers are continuing. Lawrence, Massachusetts The Company has studied remediation alternatives for its closed Lawrence, Massachusetts facility, which was contaminated with PCBs, and has begun site remediation and off-site disposal of debris. The Company has a reserve of $17 million for estimated decontamination and long-term operating and maintenance costs of this site. The reserve represents the Company's best estimate for the remaining remediation costs. Estimates of future remediation costs could range as high as $38 million depending on the results of future testing and the ultimate remediation alternatives undertaken at the site. The time frame for remediation is currently estimated to range from 5 to 10 years. Other Sites The Company is also currently involved, together with other companies, in 35 other Superfund and non-superfund remediation sites. In many instances, the Company's liability and proportionate share of costs have not been determined largely due to uncertainties as to the nature and extent of site conditions and the Company's involvement. While government agencies frequently claim PRPs are jointly and severally liable at such sites, in the Company's experience, interim and final allocations of liability costs are generally made based on relative contributions of waste. Based on the Company's previous experience, its allocated share has frequently been minimal, and in many instances, has been less than 1 percent. The Company has reserves of approximately $20 million as of February 28, 1999 which it believes are sufficient to cover its best estimate of its share of the environmental remediation costs at these other sites. Also, the Company is seeking recovery of its costs from its insurers. Environmental Summary In regard to the sites discussed above, management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures and future results of operations. -11- 12 Note G - Contingencies (continued) Other Legal Matters Olin Corporation In August 1991, Olin Corporation (Olin) advised GenCorp that Olin believed GenCorp to be jointly and severally liable for certain Superfund remediation costs, estimated by Olin to be $70 million, associated with a former Olin manufacturing facility and waste disposal sites in Ashtabula County, Ohio. In 1993, GenCorp sought declaratory judgment in the United States District Court for the Northern District of Ohio that the Company is not responsible for environmental remediation costs. Olin counterclaimed seeking a judgment that GenCorp is jointly and severally liable for a share of remediation costs. In late 1995, the Court hearing on the issue of joint and several liability was completed, and in August 1996 the Court held hearings relative to allocation. The Court has not yet rendered a decision and, at its request, in 1998, it received an additional briefing regarding the impact of the recent Best Foods Supreme Court decision which the Company believes definitively addresses many issues in this case in its favor. Another hearing relative to liability and allocation was held on January 11, 1999. The parties argued their respective positions based on recent case law. The judge indicated that a decision may be forthcoming in the next several months. If the Court finds GenCorp is liable, subsequent trial phases will address damages. The Company continues to vigorously litigate this matter and believes that it has meritorious defenses to Olin's claims. While there can be no certainty regarding the outcome of any litigation, in the opinion of management, after reviewing the information currently available with respect to this matter and consulting with the Company's counsel, any liability which may ultimately be incurred will not materially affect the consolidated financial condition of the Company. Other Matters The Company and its subsidiaries are subject to various other legal actions, governmental investigations, and proceedings relating to a wide range of matters in addition to those discussed above. In the opinion of management, after reviewing the information which is currently available with respect to such matters and consulting with the Company's counsel, any liability which may ultimately be incurred with respect to these additional matters will not materially affect the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted because any such effect depends on both future results of operations and the amount and timing of the resolution of such matters. -12- 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Material Changes in Financial Condition Cash flow used in operating activities for the first three months of fiscal 1999 was $20.3 million as compared to $8.0 million in the first three months of 1998. The increase in cash flow used by operating activities primarily reflects a higher working capital requirement. For the three month period ending February 28, 1999, $19.0 million was used for investing activities, including the acquisition of the Fitchburg, Massachusetts facility for $9.0 million and capital expenditures of $19.0 million, offset by proceeds of $9.0 million from asset dispositions. This is compared to $12.6 million used for investing activities in the first three months of 1998, which was mainly for capital expenditures. Cash flow provided from financing activities in the first three months of 1999 primarily reflects a $38.7 million net increase in debt offset by payments of $6.2 million in dividends. The net increase in debt from November 30, 1998 to February 28, 1999 was mainly due to the acquisition of the Fitchburg facility and capital expenditures. Cash flow provided from financing activities in the first three months of 1998 reflected a $27.6 million net increase in debt and payments of $6.2 million in dividends. Interest expense increased to $5.4 million in the first quarter of 1999 versus $2.1 million in the same period a year ago due to the higher debt levels. Material Changes in Results of Operations Sales during the first quarter of 1999 of $439.6 million were up 20 percent, compared to sales of $365.5 million in the first quarter of 1998. Segment operating profit for the first quarter of 1999 of $38.0 million increased 28 percent versus $29.6 million for the first quarter of 1998, and was up in all three GenCorp reporting segments, aerospace and defense, polymer products and automotive. Consolidated segment operating profit margins rose to 8.6 percent in the first quarter of 1999 versus 8.1 percent for the same period of 1998. The Company announced on December 17, 1998, that it plans to spin off its Performance Chemicals and Decorative & Building Products businesses to GenCorp shareholders as a separate publicly traded polymer products company. Under the plan, GenCorp would continue to operate Aerojet's aerospace, defense and fine chemicals businesses, and the Vehicle Sealing automotive business unit. The Company expects to complete the spin-off in the second half of 1999, a plan that is contingent upon a tax-free ruling from the IRS, shareholder approval and market conditions at the time of the spin-off. During the quarter, the Company expensed $0.5 million of spin-off related activities. Within the Company's polymer products segment, net sales increased for the first quarter of 1999 by 26 percent to $185.5 million compared to $147.5 million in the first quarter of 1998. Performance Chemicals and Decorative & Building Products both posted double-digit sales gains during the quarter. Higher sales and improved operating performance were also posted by Penn Racquet Sports, which the Company is in the process of divesting. Operating profit for the polymer products segment during the first quarter of 1999 improved 15 percent to $16.8 million versus $14.6 million in the first quarter of 1998. Segment operating profit margins declined to 9.1 percent versus 9.9 percent last year, primarily due to lower pricing in several markets and integration costs related to acquisition activity in the latter half of 1998. -13- 14 Material Changes in Results of Operations (continued) During the quarter, Decorative & Building Products continued its integration of GenCorp U.K. Wallcoverings Inc. This August 1998 acquisition elevated the Company to the worldwide market share leader in commercial wallcovering. In the North American market, introduction of new wallcovering designs in late 1998 has resulted in encouraging growth of new orders in the past several months. Synergies realized from the 1997 Printworld acquisition have led to double-digit sales growth in the decorative laminates business from new coordinated paper and vinyl product lines. During the quarter, Decorative & Building Products also increased market share across all of its Building Systems product lines. Performance Chemicals completed the acquisition of PolymerLatex's U.S. acrylics business located in Fitchburg, Massachusetts in the first quarter of 1999, further diversifying its product lines and technology and expanding geographic reach into the Northeastern United States. Aerojet's 1999 first quarter operating profits improved to $18.4 million versus $14.2 million in the first quarter of 1998. Operating margins grew to 12.2 percent in the current quarter versus 10.5 percent last year, primarily as a result of strong performance in the Strategic and Space Propulsion and Space Surveillance businesses. Sales in the first quarter of 1999 increased 11 percent to $150.3 million, versus $135.4 million during the first quarter of 1998. Higher revenues were achieved from the Titan, Space Based Infrared System (SBIRS High), and tactical programs. Highlights during the quarter included three Delta II launches, one of which marked the 200th consecutive successful launch of Aerojet's second-stage engine. Also during the quarter, Aerojet booked new contract awards of $223 million, increasing contract backlog to $1.8 billion. One major contract awarded by Lockheed Martin calls for Aerojet to build a new generation solid rocket motor for the Atlas V medium-to-heavy lift launch vehicle for the commercial satellite market and government missions. This new contract, with potential to exceed one half billion dollars of sales over the next decade, fits with Aerojet's continuing strategy of aggressively pursuing work in the commercial space arena. Aerojet also won an $8.5 million contract from the Boeing Company to provide altitude control systems for the National Missile Defense (NMD) first stage booster rocket. Aerojet expects to deliver a flight-qualified system in less than six months, with additional units to be supplied over the next year to support the flight test program. Also during the quarter, Aerojet finalized an important agreement with the U.S. Air Force, which significantly enhances Aerojet's environmental cost recovery from 65 percent to 88 percent. Automotive segment sales were $103.8 million in the first quarter of 1999, versus $82.6 million in the same quarter of 1998. The 26 percent sales increase came from higher volumes on the Ford F-150 and Explorer, Mercedes AAV, and General Motors C/K pickup programs. The automotive segment operating profit improved, as expected, to $2.8 million during the first quarter of 1999, compared to operating profit of $0.8 million during the first quarter of 1998, due to the completion of launch activities for several new programs in 1998. Improvements were offset slightly by some launch costs on several new 1999 passenger car programs, and currency exchange rates from Canadian operations. Henniges, the business unit's European operation, had positive operating profit during the quarter. The automotive segment continues to focus on light trucks and sport utility vehicles, the most profitable and fastest growing segment of the market. Profitability is expected to gradually increase during the year as programs launched in 1998 and early 1999 mature. -14- 15 Environmental Matters GenCorp's policy is to conduct its businesses with due regard for the preservation and protection of the environment. The Company devotes a significant amount of resources and management attention to environmental matters and actively manages its ongoing processes to comply with extensive environmental laws and regulations. The Company is involved in the remediation of environmental conditions which resulted from generally accepted manufacturing and disposal practices in the 1950s and 1960s which were followed at certain GenCorp plants. In addition, the Company has been designated a potentially responsible party, with other companies, at sites undergoing investigation and remediation. The nature of environmental investigation and cleanup activities often makes it difficult to determine the timing and amount of any estimated future costs that may be required for remedial measures. However, the Company reviews these matters and accrues for costs associated with the remediation of environmental pollution when it becomes probable that a liability has been incurred and the amount of the liability (usually based upon proportionate sharing) can be reasonably estimated. The Company's Condensed Consolidated Balance Sheet at February 28, 1999 reflects accruals of $276 million and amounts recoverable of $164 million from the U.S. Government and other third parties for such costs. The effect of resolution of environmental matters on results of operations cannot be predicted due to the uncertainty concerning both the amount and timing of future expenditures and future results of operations. However, management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. The Company will continue its efforts to mitigate past and future costs through pursuit of claims for insurance coverage and continued investigation of new and more cost effective remediation alternatives and associated technologies. For additional discussion of environmental matters, refer to Note G - Contingencies. Year 2000 The Company is currently engaged in a comprehensive project to upgrade its information, technology, and manufacturing and facilities computer hardware and software programs to address the Year 2000 issue at its domestic and international businesses. Many of the Company's systems include new hardware and updated software packages purchased from established vendors who have represented that these systems are Year 2000 ready. The Company does not have large centralized systems, a factor, which the Company believes, reduces the risk of a single point of failure having widespread impact on the Company. As part of this project, the Company has formally communicated with all of its significant suppliers, vendors and large customers to determine the extent to which the Company is vulnerable to those parties' failures to correct their own Year 2000 issues. As of February 28, 1999, the Company has received approximately 95 percent of the responses, and those responses generally indicate that these parties will be Year 2000 ready. The Company has completed an inventory and assessment of its information technology systems. Both internal and external resources are being utilized to test the Company's software for Year 2000 readiness and, where necessary, the systems are being remediated through upgrading, replacement or reprogramming. Also, the Company has completed an inventory and assessment of its non-information technology (embedded) systems, prioritizing the impact of each of these systems on the Company's ability to conduct its operations and, as necessary, obtaining vendor verification and/or remediation of those systems. The process of analyzing, prioritizing, remediating and testing will be an iterative process until all critical systems are Year 2000 ready. -15- 16 Year 2000 (continued) The estimated cost for this project is projected to range between $6 million and $8 million, which is being funded through operating cash flows. The Company has spent approximately $2 million as of February 28, 1999 on this project and expects to spend the remaining budget by the third quarter of 1999. Excluding recent acquisitions, the Company believes that approximately 70 percent of its systems are Year 2000 ready as of February 28, 1999 and the remaining systems will be Year 2000 ready by mid-year 1999. Recent acquisitions are targeted for completion by the end of the third quarter of 1999. Based upon currently available information and considering the Company's diversified business base, decentralized systems and Year 2000 efforts, management believes that the most reasonably likely worst case scenario could result in minor short-term business interruptions. The Company is preparing contingency plans which include alternative sourcing to minimize any disruptions to its businesses resulting from a vendor or supplier not being Year 2000 ready. However, failure by the Company and/or vendors and customers to complete Year 2000 readiness work in a timely manner could have a material adverse effect on certain of the Company's operations. The Company's exposure could increase or its timetable for Year 2000 readiness could be delayed as a result of any new acquisitions. Adoption of the Euro Based upon a preliminary evaluation, management believes that the adoption of the Euro by the European Economic Community will not have a material impact on the Company's international businesses. The Company's foreign operations currently are small and each operation conducts the majority of its business in a single currency with minimal price variations between countries. Quantitative and Qualitative Disclosure About Market Risk The Company is exposed to market risk from changes in interest rates on long-term debt obligations. The Company's policy is to manage its interest rate exposures through the use of a combination of fixed and variable rate debt. Currently, the Company does not use derivative financial instruments to manage its interest rate risk. Substantially all of the Company's long-term debt of $359 million which matures in the year 2001 is variable and had an average variable interest rate of 5.6 percent at February 28, 1999. The Company's long-term debt bears interest at market rates and therefore, the carrying value approximates fair value. Although the Company conducts business in foreign countries, international operations were not material to the Company's consolidated financial position, results of operations or cash flows as of February 28, 1999. Additionally, foreign currency transaction gains and losses were not material to the Company's results of operations for the three months ended February 28, 1999. Accordingly, the Company should not be subject to material foreign currency exchange rate risk with respect to future costs or cash flows from its foreign subsidiaries. To date, the Company has not entered into any significant foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. The Company is evaluating the future use of such financial instruments. Forward-Looking Statements This report on Form 10-Q contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements may present (without limitation) management's expectations, beliefs, plans and objectives, future financial performance, and assumptions or judgments concerning such matters. Any discussions contained in this report, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. There are a number of factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking statements. Such factors are detailed in the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1998 filed with the Securities and Exchange Commission. -16- 17 Item 3. Quantitative and Qualitative Disclosure About Market Risk See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Quantitative and Qualitative Disclosure About Market Risk." PART II. OTHER INFORMATION Item 1. Legal Proceedings Information concerning legal proceedings, including proceedings relating to environmental matters, which appears in Note G beginning on page 8 of this report is incorporated herein by reference. PUC Investigation Because of recent "toxic tort" lawsuits which named California water purveyors as defendants, on March 12, 1998, the PUC announced a wide ranging investigation of drinking water quality in California. The PUC's General Counsel has publicly stated that he believes that under the California Constitution, the PUC's jurisdiction overrides that of the Courts in this area. Accordingly, Aerojet is also preparing to defend its interests before the PUC. Aerojet's intervention petition to allow Aerojet to participate in the PUC's proceedings has been granted. The PUC's investigation is expected to be completed by fall 1999, at which point the stays in the toxic tort cases (as discussed in the Company's 1998 annual report on Form 10-K) may be lifted, unless the Court of Appeal so orders earlier. In re: Proposition 65 Notices Aerojet was served in February 1999 with a notice from a private party alleging that it had released chemicals into air and groundwater at and near its Azusa, California facility above state limits in violation of California's Proposition 65 and/or without filing sufficiently detailed public notifications as required by Proposition 65. Following collection and review of all of its Proposition 65 records, air release reports and groundwater reports, Aerojet believes it is in compliance with Proposition 65 and will vigorously defend a Proposition 65 lawsuit if such a lawsuit is initiated. McKinley, et al. v. GenCorp Inc., et al. Following an "investigative" report published in the Houston Chronicle on November 29, 1998 (which was reprinted by other newspapers and may well generate further media coverage), a "toxic tort" lawsuit was filed against 40 chemical companies and trade association co-defendants in Common Pleas Court for Ashtabula County, Ohio, Case No. 98CV00797. The complaint was filed by the heirs of a former production employee at GenCorp's former polyvinyl chloride ("PVC") resin facility in Ashtabula, Ohio and GenCorp was served on December 21, 1998. GenCorp, as the former employer, is alleged to have intentionally exposed the decedent to vinyl chloride ("VC"), a building block compound for PVC that is listed as a carcinogen by certain government agencies. The alleged exposure is claimed to have resulted in fatal liver damage. Plaintiffs also allege that all of the co-defendants engaged in a conspiracy to suppress information regarding the carcinogenic risk of VC to industry workers, despite the fact that OSHA has strictly regulated workplace exposure to VC since 1974. GenCorp has notified its insurers and will vigorously defend this and any future actions which may be generated. This lawsuit is apparently an outgrowth of three similar but unrelated "toxic tort" civil conspiracy cases brought in 14th Judicial District Court, Calcasieu Parish, Louisiana by the heirs of deceased former employees of two chemical plants in Lake Charles, Louisiana Ross, et ux. v. Conoco, Inc., et al. (Case No. 90-4837); Landon, et ux. v. Conoco, Inc., et al. (Case No. 97-7949); Tousaint, et ux. v. Insurance Co. of North America, et al. (Case No. 92-6172). GenCorp was named as a "conspiring" co-defendant in all three cases, along with most of the same co-defendants in the McKinley case. On March 22, 1999, GenCorp was served with a similar conspiracy suit alleging VC exposure from various aerosol products, including hairspray. Bland, et al. v. Air Products & Chemicals, Inc., et al., Jefferson County (Beaumont), Texas, (Case No. D-160,599). VC was used as an aerosol propellant in the 1960's. Again, the same co-defendants are named, with the addition of various consumer products and personal care manufacturers. -17- 18 Item 1. Legal Proceedings (continued) McKinley, et al. v. GenCorp Inc., et al. (continued) Unlike McKinley, in none of these cases was GenCorp alleged to be an employer, manufacturer or VC supplier. Nonetheless, GenCorp notified its insurers and has vigorously defended these actions since served. While there can be no certainty regarding the outcome of any litigation, in the opinion of management, after reviewing the information currently available with respect to the matters discussed above and consulting with the Company's counsel, any liability which may ultimately be incurred will not materially affect the consolidated financial condition of the Company. The effect of resolution of these matters on results of operations cannot be predicted because any such effect depends on both future results of operations and the amount and timing of the resolution of such matter. The Company and its subsidiaries are presently engaged in other litigation, and additional litigation has been threatened. However, based upon information presently available, none of such other litigation is believed to constitute a "material pending legal proceeding" within the meaning of Item 103 of Regulation S-K (17 CFR Reg. 229.103) and the Instructions thereto. Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of Shareholders held on March 31, 1999, holders of GenCorp Common Stock elected C. A. Corry, W. K. Hall, R. K. Jaedicke, and D. M. Steuert as directors to serve a three year term expiring in 2002. Previously, J.M. Osterhoff, J.G. Cooper and J.B. Yasinsky were elected as directors to serve three year terms which continue until March 2000 and D.E. McGarry, Dr. R.B. Pipes and S.W. Percy were elected as directors to serve three year terms which continue until March 2001. Shareholders also ratified the Board of Directors' appointment of Ernst & Young LLP as the Company's independent auditors for 1999. Following is the final result of the Common votes cast: A) Election of Directors:
For Withheld Broker Nonvotes C. A. Corry 37,490,658 461,637 -0- ---------- ------- --- W. K. Hall 37,515,913 436,382 -0- ---------- ------- --- R. K. Jaedicke 37,480,773 471,522 -0- ---------- ------- --- D. M. Steuert 37,383,225 569,070 -0- ---------- ------- ---
B) Ratification of the Board of Directors' appointment of Ernst & Young LLP as independent auditors: For: 37,685,399 Against: 151,229 Abstain: 115,667 Broker Nonvotes: -0- ---------- ------- ------- ---
-18- 19 Item 6. Exhibits and Reports on Form 8-K a) Exhibits
Table Exhibit Item No. Exhibit Description Number ------------------------------------------------------------------------------------------------------ 10 Material Contracts 10.(iii)(A) Management contracts, compensatory plans or arrangements Form of Restricted Stock Agreement between the 10.1 Company and Non employee Directors providing for payment of part of Directors' compensation for service on the Board of Directors in Company Stock 1999 GenCorp Key Employee Retention Plan 10.2 providing for payment of up to two annual cash retention payments to Eligible Employees who satisfactorily continue their employment with GenCorp, attain specified performance objectives (including the spin-off of the GenCorp Performance Chemicals and Decorative and Building Products Divisions), and meet all plan provisions. To date, 14 key employees have received Key Employee Retention Letter Agreements pursuant to the Plan, providing for individual total retention payments ranging from $75,000 to $800,000. 27 Financial Data Schedule 27 (Filed for EDGAR only)
b) Reports on Form 8-K The Company filed a Report on Form 8-K on December 22, 1998 incorporating its press release dated December 17, 1998 regarding its proposed plan to spin off its Performance Chemicals and Decorative & Building Products businesses. -19- 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENCORP INC. Date April 12, 1999 By /s/ Michael E. Hicks ---------------- -------------------------------------------- M. E. Hicks Senior Vice President and Chief Financial Officer Date April 12, 1999 By /s/ William R. Phillips ---------------- ------------------------------------------- W. R. Phillips Senior Vice President, Law; General Counsel -20- EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 RESTRICTED STOCK AGREEMENT GENCORP INC. March 1999 AGREEMENT, Made in Fairlawn, Ohio as of March 30, 1999 between GenCorp Inc., an Ohio corporation ("Company") and the undersigned non-employee director of the Company ("Director"). WHEREAS, the Company desires to increase Director's identification with the interests of its shareholders and to increase Director's compensation for service on the Board of Directors of the Company ("Board") by granting to Director Two Hundred Fifty (250) shares of GenCorp Inc. Common Stock, $0.10 par value per share ("Shares"), subject to the conditions and restrictions set forth in this Restricted Stock Agreement ("Agreement"). NOW, THEREFORE, In consideration of the premises and the mutual covenants set forth in this Agreement and for other good and valuable consideration, the parties hereto agree as follows: 1. Grant of Shares. As consideration for services to be rendered as a member of the Board, the Company will issue in the name of the Director Two Hundred Fifty (250) Shares which shall be subject to restrictions described below and shall be legended as having been issued in a private transaction not registered with the Securities and Exchange Commission. 2. Escrow of Shares During Restriction Period. In aid of the restrictions to which the Shares shall be subject pursuant to this Agreement, the Shares shall be deposited in the name of the Director with the Shareholder Services Department of the Company and shall be so held by the Company during the period of Director's service on the Board ("Restriction Period"). 3. Shareholder Rights. Director shall, during the Restriction Period, have the right to vote all Shares deposited hereunder and to receive all dividends and other distributions paid with respect to such Shares. 4. Automatic Dividend Reinvestment. As to the Shares deposited hereunder, Director shall be automatically enrolled in GenCorp's dividend reinvestment program, pursuant to the standard terms and conditions of participation. Additional shares of GenCorp common stock accumulated pursuant to the dividend reinvestment feature shall not be subject to the Restriction Period. Director may decline to participate in such program by so indicating below his or her signature on this Agreement. 5. Adjustments. Shares issued pursuant to this Agreement and held by the Company during the Restriction Period will be subject to the same adjustment, if any, accorded to all other outstanding shares in the event of (i) any change in the total number of shares of common stock of the Company outstanding or the number or kind of securities into which shares have been changed, (ii) any reorganization or change in the Company's capital structure, or (iii) any other transaction or event having an effect similar to the foregoing. 6. Vesting. Unless vesting is accelerated pursuant to paragraphs 7 or 10 hereof, ownership of the Shares deposited hereunder shall vest irrevocably in the Director on March 30, 2001, subject to the other terms and restrictions of this Agreement. 2 -2- 7. Change in Control. (a) Notwithstanding paragraph 6 above, the ownership of the Shares granted hereby shall automatically vest, the Restriction Period shall terminate, all restrictions shall lapse and delivery to Director of certificate(s) representing such Shares shall occur immediately, if at any time during the Restriction Period a Change in Control (as defined herein) shall occur. (b) For purposes of this Agreement, "Change in Control" shall mean the occurrence during the term of this Agreement of any of the following events, subject to the provisions of Section (7)(b)(vi) hereof: (i) All or substantially all of the assets of the Company are sold or transferred to another corporation or entity, or the Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than 51% of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity are owned directly or indirectly, by the shareholders of the Company generally prior to the transaction; or (ii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act (a "Person")) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act (a "Beneficial Owner")) of securities representing 20% or more of the combined voting power of the then-outstanding voting securities of the Company; or (iii) The individuals who, at the beginning of any period of two consecutive calendar years, constituted the Directors of the Company cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's stockholders of each new Director of the Company was approved by a vote of at least two-thirds of the Directors of the Company still in office who were Directors of the Company at the beginning of any such period; or (iv) There shall be an announcement of the intent of any Person to commence a tender offer or exchange offer to acquire (when added to any shares as to which such Person is the beneficial owner immediately prior to such tender or exchange offer) beneficial ownership of 30% or more of the combined voting power of the then-outstanding voting securities of the Company; or (v) The Board determines that (A) any particular actual or proposed merger, consolidation, reorganization, sale or transfer of assets, accumulation of shares or tender offer for shares of the Company or other transaction or event or series of transactions or events will, or is likely to, if carried out, result in a Change in Control falling within Subsections (i), (ii), (iii) or (iv) and (B) it is in the best interests of the Company and its shareholders, and will serve the intended purposes of this Agreement, if the provisions of paragraph 7(a) of this Agreement shall thereupon become immediately operative. 3 -3- (vi) Notwithstanding the foregoing provisions of this Section (7)(b): (A) If any such merger, consolidation, reorganization, sale or transfer of assets, or tender offer or other transaction or event or series of transactions or events mentioned in Section (7)(b)(v) shall be abandoned, or any such accumulations of shares shall be dispersed or otherwise resolved, the Board may, by notice to the Director, reinstate such restrictions on transfer of Shares under this Agreement as were previously in effect, but without prejudice to any action that may have been taken prior to such reinstatement. (B) Unless otherwise determined in a specific case by the Board of Directors, a "Change in Control" shall not be deemed to have occurred for purposes of Section (7)(b)(ii) or 7(b)(iv) solely because (X) the Company, (Y) a Subsidiary, or (Z) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company or any Subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing beneficial ownership by it of shares of the then-outstanding voting securities of the Company, whether in excess of 20% or otherwise, or because the Company reports that a change in control of the Company has occurred or will occur in the future by reason of such beneficial ownership. 8. Restrictions on Transfer. During the Restriction Period, the Shares may not be sold, transferred, pledged, assigned, alienated or hypothecated, or otherwise transferred to another person whether by operation of law or otherwise, except by will, the laws of descent and distribution or a qualified domestic relations order. 9. Beneficiary Designation. Director may designate any beneficiary or beneficiaries (contingently or successively) to whom Shares are to be paid if Director dies during the Restriction Period, and may at any time revoke or change any such designation. Absent such designation, any Shares which are due to Director under this Agreement upon Director's death will be payable to Director's estate. The designation of a Beneficiary will be effective only when Director has delivered a completed Designation of Beneficiary form to the Company's Secretary. A successive designation of Beneficiary will revoke a prior designation. 10. Termination Due to Death, Disability, or Retirement. If Director's service on the Board terminates by reason of his or her death, disability or retirement under the Non-Employee Directors' Retirement Plan, Shares not already vested, if any, shall automatically vest, the Restriction Period shall terminate and all restrictions shall lapse. 11. Termination Due to Other Reasons. If Director's service on the Board terminates for any reason other than a reason set forth in paragraphs 7 or 10 above, Shares which have not vested prior to such date of termination will be forfeited and cancelled as of such date. Notwithstanding the foregoing, by a majority vote of the directors then in office (with the terminating director abstaining), the Board shall have the right, in its sole discretion, to waive the forfeiture of all or any portion of such Shares subject to such terms as it deems appropriate. 12. Disputes. The Board shall have full and exclusive authority to determine all disputes and controversies concerning the interpretation of this Agreement by a majority vote of the directors then in office (with any disputing director abstaining). 4 -4- 13. Notices. All written notices and communications directed to the Company pursuant to this Agreement must be addressed to GenCorp Inc., 175 Ghent Road, Fairlawn, Ohio 44333-3300; Attention: Secretary. All communications directed to Director pursuant to this Agreement will be mailed to the Director's current address as recorded on the payroll records of the Company. 14. Governing Law. To the extent not preempted by federal law, this Agreement will be governed by and interpreted in accordance with the laws of the State of Ohio. IN WITNESS WHEREOF, this Agreement has been executed by a duly authorized officer of the Company and by the Director as of the 30th day of March, 1999. GENCORP INC. By:__________________________ J. B. Yasinsky Chairman and Chief Executive Officer Agreed to and accepted: - ---------------------------------- Director Signature* TO OPT OUT OF PARTICIPATION IN THE COMPANY'S DIVIDEND REINVESTMENT PROGRAM, INITIAL THE STATEMENT BELOW: ____ I DO NOT ELECT TO PARTICIPATE IN THE DIVIDEND REINVESTMENT PROGRAM *Sign and return one copy by April 30, 1999 to GenCorp Inc., 175 Ghent Road, Fairlawn, Ohio 44333-3300; Attention: Secretary. EX-10.2 3 EXHIBIT 10.2 1 EXHIBIT 10.2 1999 GENCORP KEY EMPLOYEE RETENTION PLAN ARTICLE 1 Introduction 1.1 GenCorp Inc. ("GenCorp") hereby adopts this 1999 GenCorp Key Employee Retention Plan ("Plan"), effective as of February 1, 1999, to provide periodic cash payments ("Retention Benefits") to Eligible Employees who satisfactorily continue their employment with GenCorp, attain specified performance objectives (including the "spin-off" of the GenCorp Performance Chemicals and Decorative & Building Products Divisions), and meet all Plan provisions. 1.2 The term of the Plan is expected to extend beyond the proposed "spin-off" of GenCorp's Performance Chemicals and Decorative & Building Products Divisions to a new entity (currently unnamed, but designated herein as "NewCo"). After the "spin-off" occurs, all references herein to GenCorp should be construed as reference to GenCorp and/or NewCo, as applicable to the Eligible Employee. 1.3 GenCorp intends to pay the Retention Benefits provided hereunder from the general assets of GenCorp; however, GenCorp reserves the right to fund and provide all or part of the Retention Benefits hereunder through one or more welfare trusts. 1.4 This plan document contains all information required by law to be provided to employees. Information regarding the Plan, its claims procedures and employees' rights under the Employee Retirement Income Security Act of 1974 ("ERISA") are included as Section 5.7 and Articles 6 and 8. 1.5 This Plan shall be administered, in all respects, by the Organization and Compensation Committee of the GenCorp Board of Directors or its adopted designee (the "Committee"), including sole responsibility for determining eligibility for benefits under the Plan, interpreting Plan terms, and resolving disputes under the Plan, all of which is set forth herein. 2 ARTICLE 2 Eligibility For Retention Benefits 2.1 Eligibility: Subject to the exclusions contained in Section 2.2, an employee must satisfy all of the following conditions, during the term of this Plan as defined in Section 5.5, or such shorter term as designated by the Committee, to be eligible for Retention Benefits under this Plan: (a) GenCorp must offer such employee a Letter Agreement incorporating the terms and conditions of this Plan and setting forth the Retention Benefits, if any, available to the employee under Article 3 hereof. The identity of employees to be offered a Letter Agreement will be decided by GenCorp, in its sole and complete discretion; (b) The employee must execute and deliver to GenCorp the Letter Agreement within the time period set forth in the Letter Agreement; (c) The employee must work diligently in the best interests of GenCorp throughout the period that (i) GenCorp prepares to "spin-off" its Performance Chemicals and Decorative & Building Products Divisions; (ii) the "spinoff" occurs; and (iii) GenCorp and NewCo complete all post-spinoff transactions and filings; and (d) Upon payment of the final installment of Retention Benefits for which the Employee is eligible under the Plan or in the event of involuntary employment termination for other than cause during the term of the Plan and/or Letter Agreement, the employee must execute and deliver a Release in substantially the form attached hereto as Exhibit "A". An employee who satisfies the foregoing conditions shall be deemed to be an "Eligible Employee." 2.2 Exclusion: Notwithstanding the satisfaction by an employee of all of the conditions in Section 2.1, the following employees are not Eligible Employees: (a) Any employee who refuses Comparable Employment with GenCorp or Newco. As used herein, "Comparable Employment" means employment in any capacity, whether as an employee, consultant, independent contractor, leased employee or otherwise, which is broadly within the career scope indicated by the employee's present and previous training and positions, and for which his annualized cash compensation (salary and any incentive bonus) is at least equal to his annual cash compensation at the time of offer. 2 3 (b) Any employee who voluntarily retires or resigns from employment. (c) Any employee whose employment is terminated "for cause" as defined in Article 4, below. 2.3 Failure of Purpose: (a) In the event that the spinoff does not occur before February 1, 2000, for whatever reason, only a pro-rata share of those Retention Benefits payable as of February 1, 2000 shall be paid (based on the number of months between February 1, 1999 and the date that the proposed spin-off is formally cancelled), and there shall be no obligation to pay any future Retention Benefits, contemplated, anticipated or accrued. Pro-rata Retention Benefits shall be paid within thirty (30) days of formal spinoff cancellation (b) In the event that a "Change in Control" of GenCorp occurs (as defined in applicable severance agreements) prior to completion of the spinoff, this Plan and related Letter Agreements shall be cancelled, and any obligation to pay any Retention Benefits, contemplated, anticipated or accrued, shall be deemed null and void. ARTICLE 3 Retention Benefits 3.1 Retention Benefits: Subject to the terms of the Plan, up to two (2) annual cash retention payments ("Retention Benefits") will be designated in the Letter Agreement for each potentially Eligible Employee. All Retention Benefits are taxable compensation subject to normal tax withholding. 3.2 Payment Date: As a condition of payment of any Retention Benefit, an Eligible Employee must be actively employed by GenCorp or NewCo on the designated Payment Date, and no pro-rata payments shall be made, except for the reasons set forth in Section 2.3(a) above and 3.4 below. 3.3 Involuntary Employment Termination: In the event of involuntary employment termination for any reason, (other than Termination Without Compensation as defined in Article 4 below), and subject to Section 2.3 above, an Eligible Employee shall be paid all unpaid Retention Benefits in the amount(s) set forth in his Letter Agreement within thirty (30) days of employment termination, and conditioned upon execution of the Release attached hereto as Exhibit "A". 3 4 3.4 Pension Enhancements: In the event that an age and service pension enhancement is offered and elected by an Eligible Employee, a pro-rata portion of those Retention Benefits payable as of February 1, 2000 will be paid to the Eligible Employee base on the number of months between February 1, 1999 and the date that the proposed spin-off becomes effective. The pro-rata retention benefits payable under this provision shall be paid on or about February 1, 2000. ARTICLE 4 Termination Without Compensation 4.1 Other provisions of this Plan notwithstanding, GenCorp will have no obligation to pay Retention Benefits to any employee whose employment is terminated according to Section 4.2 or 4.3. 4.2 "Termination Without Compensation" means circumstances where the employment termination results from any activity of the employee deemed contrary to the best interests of GenCorp, its subsidiaries or its operating business units, as determined in the sole discretion of the Committee. Such determination is to be approved by the GenCorp Senior Vice President of Human Resources, or his designee. For the purposes of this Plan, "Termination Without Compensation" shall be defined as: (a) A material violation of any of GenCorp's published Company Policies. (b) A serious violation of facility rules adopted to promote the safety of employees, protect GenCorp's property or reputation, or maintain general working conditions and employee discipline. (c) The commission of any crime against GenCorp, such as embezzlement or falsification or theft of documents or records. (d) Any material act deliberately committed to provoke dismissal in order to obtain termination pay. 4.3 "Termination Without Compensation" may also occur in the event of unsatisfactory work performance. 4 5 ARTICLE 5 General Provisions 5.1 Other Plans: (a) Benefits received under this Plan will not be included in compensation or earnings for purposes of determining benefits, including pension benefits, under any other employee benefit plan of GenCorp. (b) Except as otherwise provided in this Plan, payment of benefits under this Plan will not adversely affect an Eligible Employee's rights under any other employee benefit plan of GenCorp, including any other plan, program or agreement that provides other severance benefits. An Eligible Employee's rights under such other plans shall be governed by the terms of the plans in effect at the time of the Eligible Employee's termination from GenCorp. 5.2 Reductions: GenCorp may setoff and reduce the amount of Retention Benefits to recover any amounts which an Eligible Employee owes to GenCorp. 5.3 No Rights to Employment: Nothing herein, or in any Letter Agreement offered or executed hereunder, or in oral discussions regarding this Plan shall constitute a commitment for employment for any specified duration, or be deemed to limit GenCorp's right or power to terminate the employment of any employee. 5.4 No Right to Transfer or Assign Benefits: Benefits under this Plan are intended for the exclusive benefit of Eligible Employees. Present and future benefits cannot be subjected to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge (except as required by law), and any attempt to do so is null and void. 5.5 Duration/Amendment/Termination of the Plan: (a) This Plan will be effective as of February 1, 1999 and, unless modified or terminated in accordance with Section 5.5(b), will terminate on February 1, 2001, or, if earlier, upon the announcement by GenCorp's Chief Executive Officer that GenCorp has ceased further consideration of the spinoff of its Performance Chemicals and Decorative & Building Products Divisions. (b) The Committee retains the right to modify or terminate the Plan, at any time, in its entirety or in part, with or without prior notice to employees. However, any such amendment or termination shall not adversely affect an Eligible Employee's right to Retention Benefits if all conditions set forth in Section 2.1 as currently written are thereafter satisfied. 5 6 5.6 Plan Administration: (a) The Plan constitutes an employee welfare benefit plan as defined by the Employee Retirement Income Security Act of 1974. The Plan Administrator for the Plan is the Organization and Compensation Committee of the Board of Directors of GenCorp Inc., 175 Ghent Road, Fairlawn, OH 44333-3300, (330) 869-4220. (b) Legal matters, including service of process, relating to the Plan should be addressed to the GenCorp Senior Vice President, Law; General Counsel, at the address shown above. (c) Records for the Plan are kept on a plan year basis, beginning December 1 and ending the following November 30. (d) For government reporting purposes, the Employer Identification Number for GenCorp is 34-02244000. In addition, the Plan is identified by the following official name and plan number: 1999 GenCorp Key Employee Retention Plan Plan Number: 501 This plan name and number should be used in any formal correspondence relating to the Plan. ARTICLE 6 Claims Procedure 6.1 Claim: (a) An Eligible Employee need not present a formal claim in order to qualify for rights or benefits under this Plan. However, if GenCorp fails to provide any benefit to which an Eligible Employee is entitled hereunder or if any Eligible Employee believes (i) that the Plan is not being administered or operated in accordance with its terms, (ii) that fiduciaries of the Plan have breached their duties, or (iii) that his or her own legal rights are being violated with respect to the Plan (a "claimant"), the claimant must file a formal claim under the procedures set forth in this Article 6. The procedures in this Article 6 shall apply to all claims that any person has with respect to the Plan, including claims against fiduciaries and former fiduciaries, except to the extent the Plan Administrator determines, in its sole discretion, that it does not have the power to grant, in substance, all relief reasonably being sought by the claimant. 6 7 (b) A claim by any person shall be presented to GenCorp's Senior Vice President of Human Resources ("Claims Official") in writing within ninety (90) days of the date upon which the claimant (or his or her predecessor in interest) first knew (or should have known) of the facts upon which the claim is based, unless the Plan Administrator in writing consents otherwise. The Claims Official shall, within ninety (90) days of receiving the claim, consider the claim and issue his or her determination thereon in writing. The Claims Official may extend the determination period for up to an additional ninety days by giving the claimant written notice. If the claim is granted, the benefits or relief the claimant seeks will be provided. 6.2 Denial: If the claim is wholly or partially denied, the Claims Official shall, within ninety (90) days (or such longer period as described above), provide the claimant with written notice of the denial, setting forth, in a manner calculated to be understood by the claimant, (a) the specific reason or reasons for the denial, (b) specific references to pertinent Plan provisions on which the denial is based, (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why the material or information is necessary, and (d) an explanation of the Plan's claim review procedure. With the consent of the claimant, this determination period can be extended further. If the Claims Official fails to respond to the claim in a timely manner, the claimant may treat the claim as having been denied by the claims official. 6.3 Appeal: Each claimant may appeal in writing the Claims Official's denial of a claim to the Committee within sixty (60) days after receipt by the claimant of written notice of the claim denial, or within sixty (60) days after such written notice was due, if the written notice was not sent. In connection with the review proceeding, the claimant or his or her duly authorized representative may review pertinent documents and may submit issues and comments in writing. The claimant may only present evidence and theories during the review which the claimant presented during the claims procedure, except for information which the Claims Official requested the claimant to provide to perfect the claim (see Section 6.2(c). Any claims which the claimant does not in good faith pursue through the review stage of the procedure shall be treated as having been irrevocably waived. 7 8 6.4 Review Procedures: The Committee shall adopt procedures pursuant to which claims shall be reviewed and may adopt different procedures for different claims without being bound by past actions. Any procedures adopted, however, shall be designed to afford a claimant a full and fair review of his or her claim. 6.5 Final Decision: The decision by the review official upon review of a claim shall be made not later than sixty (60) days after the written request for review is received by the Committee, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of the request for review, unless the claimant agrees to a greater extension of that deadline. 6.6 Form: The decision on review shall be in writing and shall include specific reasons for the decision written in a manner calculated to be understood by the claimant, with specific references to the pertinent Plan provisions on which the decision is based. 6.7 Legal Effect: To the extent permitted by law, the decision of the Claims Official (if no review thereof is requested as herein provided) or the decision of the Committee, as the case may be, shall be final and binding on all parties. Any claims which the claimant does not pursue through the review and appeal stages of the procedures herein provided shall be deemed waived, finally and irrevocably. No legal action for benefits under the Plan shall be brought unless and until the claimant has exhausted his or her remedies under this Article 6. If, after exhausting the claims and appeal procedures, a claimant institutes any legal action against the Plan and/or GenCorp, the claimant may present only the evidence and theories which the claimant presented during the claims and appeal procedures. Judicial review of the claimant's denied claim shall be limited to a determination of whether the denial was an abuse of discretion based on the evidence and theories which were presented to and considered by the Committee during the claims and appeal procedure. ARTICLE 7 Effect of Fiduciary Action 7.1 Plan Interpretation: The Plan Administrator shall administer the Plan in accordance with its terms and the intended meanings of the Plan and any other welfare or pension benefit plan of GenCorp. The Plan Administrator shall have the discretion to make any findings of fact needed in the administration of the Plan. 8 9 7.2 Authority of Committee: The Committee shall have the discretion to interpret or construe the terms of the Plan, whether express or implied, and resolve any ambiguities, including but not limited to terms governing the eligibility of employees and the administration of the Plan, and fashion any remedy which the Committee, in its sole judgment, deems appropriate. The validity of any such finding of fact, interpretation, construction or decision shall not be given de novo review if challenged in court, by arbitration or in any other forum, and shall be upheld unless clearly arbitrary or capricious. 7.3 Exercise of Discretion: To the extent the Plan Administrator or the Committee has been granted discretionary authority under the Plan, such fiduciary's prior exercise of such authority shall not obligate it to exercise its authority in a like fashion thereafter. 7.4 Intent: If, due to errors in drafting, any Plan provision does not accurately reflect its intended meaning, as demonstrated by consistent interpretations or other evidence of intent, or as determined by the Committee in its sole and exclusive judgment, the provision shall be considered ambiguous and shall be interpreted by the Plan Administrator in a fashion consistent with its intent, as determined by the Committee in its sole discretion. The Committee, without the need for Board of Directors' approval, may amend the Plan retroactively to cure any such ambiguity. 7.5 Consistency: This Article 7 may not be invoked by any person to require the Plan to be administered in a manner which is inconsistent with its interpretation by the Committee. 7.6 Final and Binding: All actions taken and all determinations made in good faith by the Plan Administrator or by the Committee shall be final and binding upon all persons claiming any interest in or under the Plan. ARTICLE 8 The Plan and ERISA 8.1 ERISA Requirements: "ERISA" -- the Employee Retirement Income Security Act of 1974 -- is a comprehensive law that sets standards and procedures for employee benefit plans. You have the right under ERISA to get further information about the Plan. Specifically, you are entitled to: o Examine without charge, at the Plan Administrator's office or upon request at your local Human Resources Department, all documents related to the Plan and copies of all documents filed by the Plan with the U.S. Department of Labor, such as Annual Reports and Plan Descriptions. 9 10 o Obtain copies of all documents related to the Plan and other Plan information upon written request to the Plan Administrator. The Plan Administrator may make a reasonable charge for the copies. 8.2 Discrimination: In addition to creating rights for participants, ERISA imposes duties upon the persons who are responsible for the operation of the Plan. The persons who operate the Plan, called "fiduciaries" of the Plan, have a duty to do so prudently in your interest and that of other participants and beneficiaries. No one may fire you or otherwise discriminate against you in any way to prevent you from obtaining benefits or exercising your rights under ERISA. If your claim for a benefit is denied in whole or in part, you must receive a written explanation of the reason for the denial. You have the right to have your claim reviewed and reconsidered. (See Article 7, above). 8.3 ERISA Claims: Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials from the Plan Administrator and do not receive them within thirty days, you may file suit in a federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to one hundred dollars a day until you receive the materials, unless the materials were not sent because of reasons beyond the Plan Administrator's control. If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a state or federal court. If you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose and the court finds that your claim is frivolous, the court may order you to pay these costs and fees. 8.4 Information Requests: If you have any questions about the Plan, you should contact the Plan Administrator. If you have any questions about your rights under ERISA, you should contact the nearest area office of the U.S. Labor-Management Services Administration, Department of Labor. GenCorp supports both the spirit and letter of ERISA and is committed to assuring proper treatment and full disclosure of all pertinent information to plan participants. It is the policy of GenCorp that no employee will be fired or discriminated against, either to prevent him from obtaining benefits or for exercising his rights under ERISA. 10 11 This Plan is hereby adopted and approved this 15th day of March, 1999. GenCorp Inc. By: /s/ Samuel W. Harmon ------------------------ Samuel W. Harmon, Senior Vice President, Human Resources APPROVED AS TO FORM: /s/ William Gorenc, Jr. - ----------------------------- William Gorenc, Jr., Esq. GenCorp key employee retention 11 EX-27 4 EXHIBIT 27
5 1,000 3-MOS NOV-30-1999 FEB-28-1999 21,500 6,900 272,200 0 160,000 510,000 1,228,800 731,300 1,728,500 402,400 0 0 0 4,200 350,000 1,728,500 439,600 439,600 341,200 405,000 200 0 5,400 29,000 11,800 17,200 0 0 0 17,200 .41 .41
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