-----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, Hm/fTfQgaele4f/dJEy245dXm/DIjWOZeExeqXJM1240f2Kab+/DUMVvSjgMPgWu eLtZexySr8rL6phJmgxu6w== 0001045969-98-000859.txt : 19981126 0001045969-98-000859.hdr.sgml : 19981126 ACCESSION NUMBER: 0001045969-98-000859 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19981125 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIANT TECHSYSTEMS INC CENTRAL INDEX KEY: 0000866121 STANDARD INDUSTRIAL CLASSIFICATION: ORDNANCE & ACCESSORIES, (NO VEHICLES/GUIDED MISSILES) [3480] IRS NUMBER: 411672694 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-10582 FILM NUMBER: 98759938 BUSINESS ADDRESS: STREET 1: 600 2ND ST NE CITY: HOPKINS STATE: MN ZIP: 55343-8384 BUSINESS PHONE: 6129316000 MAIL ADDRESS: STREET 1: 600 2ND ST NE CITY: HOPKINS STATE: MN ZIP: 55343-8384 10-K/A 1 AMENDMENT NO. 1 TO FORM 10-K FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended MARCH 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________. Commission file number 1-10582 ALLIANT TECHSYSTEMS INC. ------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 41-1672694 - ----------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 600 SECOND STREET N.E., HOPKINS, MINNESOTA 55343-8384 ------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 931-6000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - --------------------------------------- ---------------------------------- Common Stock, par value $.01 New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None. 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. [ X] As of May 31, 1998, 12,609,063 shares of the registrant's voting common stock were outstanding (excluding 1,254,550 treasury shares). The aggregate market value of such stock held by non-affiliates of the registrant on such date was approximately $796.5 million. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to stockholders for the fiscal year ended March 31, 1998 are incorporated by reference into Parts I, II and IV. Portions of the definitive Proxy Statement for the 1998 Annual Meeting of stockholders are incorporated by reference into Part III. INTRODUCTORY COMMENT As discussed in Note 20 to the consolidated financial statements, the Company has restated the accompanying fiscal year 1997 financial statements to reclassify certain nonrecurring costs out of discontinued operations and into continuing operations. PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Alliant Techsystems Inc. (the "Company" or the "Registrant") was incorporated as a Delaware corporation and a wholly owned subsidiary of Honeywell Inc. ("Honeywell") on May 2, 1990, in connection with Honeywell's plan to spin off to its stockholders the following business operations (the "Businesses") of Honeywell: Defense and Marine Systems Business; Test Instruments Division (subsequently renamed Metrum Information Storage); and Signal Analysis Center. On September 28, 1990, (i) Honeywell declared a distribution (the "Spin-off") payable to the holders of record of Honeywell common stock on October 9, 1990 (the "Record Date") of one share of the Company's common stock, par value $.01 per share (the "Common Stock"), together with the associated preferred stock purchase rights, for every four shares of Honeywell common stock outstanding on the Record Date, and (ii) Honeywell transferred to the Company substantially all of the assets and liabilities of the Businesses. As a result of the Spin-off, 100% of the Company's Common Stock was distributed to Honeywell's stockholders on a pro rata basis. In January 1991, the Company changed its fiscal year end from December 31 to March 31, effective with the fiscal year that began April 1, 1991 and ended March 31, 1992. In December 1992, the Company divested the Metrum Information Storage business. In October 1993, the Company acquired Accudyne Corporation ("Accudyne") and Kilgore Corporation ("Kilgore"), and in November 1993, the Company acquired Ferrulmatic, Inc. ("Ferrulmatic"). Each of these acquisitions was accounted for as a purchase, and the financial statements included in this report include the acquired companies' assets and liabilities and their results of operations since the date of their acquisition. Effective March 31, 1994, Accudyne, Kilgore and Ferrulmatic were merged into the Company. In March 1995, the Company acquired certain assets and operations of the Hercules Aerospace Company division ("HAC") of Hercules Incorporated ("Hercules"). The acquisition of HAC (the "HAC Acquisition") was accounted for as a purchase, and the financial statements included in this report include the acquired operations' assets and liabilities and their results of operations since the date of their acquisition. In March 1996, Company management, after evaluating its strategic plans for the future, elected to discontinue its role as an owner of foreign demilitarization businesses located in the former Soviet republics of Ukraine and Belarus. The Company subsequently completed its withdrawal from its Belarus joint venture, and has an agreement with the government of Ukraine under which the Company intends to transfer its ownership interest in its Ukraine joint venture to the government of Ukraine or its representative if and when the joint venture repays its debt to the Company. In February 1997 the Company divested its Marine Systems Group. The financial statements included in this report account for this divested business as a discontinued operation. 1 The Company's principal executive offices are located at 600 Second Street N.E., Hopkins, Minnesota 55343-8384 (telephone number: (612) 931-6000). (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company's business is conducted in a single industry segment. Incorporated herein by reference are the following portions of Part II of this Form 10-K/A: PAGE NUMBER(S) IN FORM 10-K/A Note 18 of Notes to Financial Statements..................... 57 (c) NARRATIVE DESCRIPTION OF BUSINESS GENERAL During the fiscal year ended March 31, 1998 ("fiscal year 1998"), the Company conducted its business through four business groups: Conventional Munitions, Defense Systems, Space and Strategic Systems, and Emerging Business. Effective April 1, 1998, the Company reorganized its business into three business groups: Conventional Munitions, Defense Systems, and Space and Strategic Systems. The description of the Company's business that follows reflects the reorganized business structure currently in effect. CONVENTIONAL MUNITIONS Conventional Munitions supplies, designs and develops medium caliber ammunition, tank ammunition, munitions propellants, commercial gun powders, solid rocket propulsion systems, flares, warheads, and composite structures for the U.S. and allied governments as well as for commercial applications. It operates in four business units: Ammunition Systems, Ordnance, Tactical Propulsion and Kilgore Operations. AMMUNITION SYSTEMS. The Ammunition Systems business unit produces, designs, and develops medium caliber ammunition, tank ammunition, submunitions, and advanced warhead systems for missiles and other weapon systems. The Company is a leading supplier of medium caliber ammunition and fuzes. Production programs include 25mm Bushmaster rounds for the U.S. Army's Bradley Fighting Vehicle, the Marine Corps Light Armored Vehicle, the U.S. Navy's shipboard defense systems, and platforms of the U.S. allies; the PGU-32 25mm round for the AV-8B aircraft; PGU-38 25mm enhanced combat rounds for the U.S. Air Force's AC-130 gunship; Lightweight 30mm ammunition for the Apache helicopter; and GAU-8/A 30mm family of armor-piercing, high-explosive incendiary, and target practice rounds currently used by the U.S. Air Force's A-10 aircraft. Development efforts include improving the performance of medium caliber ammunition for the advanced threats of the future. The Company is also the sole source producer of the M758/M759 fuze for medium caliber ammunition. 2 In the tank ammunition area the Company produces and develops tactical and training tank rounds which are used for the M1A1/M1A2 Abrams tanks of the U.S. Army, Army Reserve, National Guard, Marine Corps, and U.S. allies. Such rounds include the M830A1 multi-purpose round and the M831A1 and M865 training rounds. The Company is the sole producer of the M830A1 multi-purpose round. The Company is one of two suppliers to the U.S. Government for the M831A1 and M865 training rounds. Opportunities being pursued include advanced kinetic-energy rounds, developed for future threats, and rounds that will meet specifications for international sales. In submunitions and advanced warhead systems, the Company currently has contracts for the production of warheads for the following missiles: Hellfire, Longbow and the Advanced Medium Range Air-to-Air Missile ("AMRAAM"), and a contract for the development of the Brimstone warhead. The Company has teamed with Raytheon in pursuit of a contract for the ordnance module for the Follow-on-to-TOW program. The business unit is also completing performance of certain ordnance reclamation services contracts transferred from the former Emerging Business Group. These contracts are with the Naval Underseas Warfare Center in Newport, Rhode Island, to dispose of lithium-filled boilers that power the MK50 torpedo, and with the U.S. Army at Rock Island, Illinois, for reclamation of six-inch and eight-inch gun projectiles and M117 bombs. Ammunition Systems operations are conducted at Hopkins, Elk River and New Brighton, Minnesota, Totowa, New Jersey, and Wilmington, Illinois. ORDNANCE. The Ordnance business unit has the capability to manufacture annually over 100 million pounds of solid extruded propellant for ammunition and rockets for the U.S. and foreign military services. The unit, through New River Energetics, Inc., a wholly owned subsidiary, also manufactures and commercially markets gun powders for both reloaders and manufacturers of sporting ammunition. Primary production programs include propellants for multiple training and war reserve 120mm tank rounds, for artillery propelling charges, and for 30mm ammunition and 25mm ammunition. The Company is also the sole source supplier of Mk90 propellant grains for use in the HYDRA 70 rocket and launch motors for the TOW II missile. In addition to the military programs, the Company produces a wide range of commercial gun powders and has activated stand-by military capacity for commercial chemical commodity sales. Development opportunities being pursued include improved smokeless gun powders, modular charges for advanced artillery systems, and high explosive energetic materials used in munitions. Ordnance operations are conducted primarily at Radford Army Ammunition Plant in Radford, Virginia, which is also the U. S. Army's Group Technology Center for propellant development and production. The Company has also been actively involved in relocating Company operations and several unrelated commercial businesses onto the Radford facility under the Army Retooling and Manufacturing Support Act (ARMS) initiative. The Ordnance business 3 unit also manages the Sunflower Army Ammunition Plant in DeSoto, Kansas, where it seeks commercial tenants for the property and provides general plant management services, including maintenance or demolition of inactive facilities, security and fire protection. TACTICAL PROPULSION. The Tactical Propulsion business unit supplies and develops solid propulsion systems for various U.S. Department of Defense ("DoD") tactical weapons. Principal products include solid rocket motors, gas generators and tactical missile warheads for the U.S. Army, Navy and Air Force. It also develops and supplies high-strength, low-weight structures made of metals and composites for use in products such as missile launch tubes and critical parts for ammunition and military aircraft. Current production programs include propulsion systems for AMRAAM, AGM-130, Sparrow, Sensor Fuzed Weapon ("SFW"), Hellfire II/Longbow, Maverick and TOW II. AMRAAM and SFW are the unit's largest production programs and have firm funding support through the end of the decade. AGM-130 is an air-to-ground stand-off attack missile used by the U.S. Air Force. Boeing North American is the sole prime contractor for AGM-130 and the Company is the sole source propulsion supplier. The SFW system is presently in Full Rate Production and has become one of the unit's largest programs. The Company is the sole source supplier on the SFW submunition propulsion deployment system. The unit has been the U.S. Army's primary supplier of flight motors for TOW II since the program's inception in 1981. Production programs in related areas include warheads for the Maverick and AMRAAM missile systems, metal cases for the U.S. Army's Tactical Missile System ("ATACMS") surface-to-surface missile, gas generators for the Trident II (D5) and Tomahawk Cruise missiles, composite launch tubes for the Army's Javelin anti-tank missile, and composite overwrapped pressure vessels for use on satellites. Major development programs include the propulsion systems for the Evolved Sea Sparrow Missile ("ESSM"), the AIM-9X Evolved Sidewinder, the AMRAAM Propulsion Enhancement Program ("PEP"), the Predator anti-tank system ("Predator"), and the advanced smart 120mm kinetic energy tank round ("TERM-KE"). The Company recently completed successful development tests on the ESSM and AMRAAM PEP programs. The Company is co-developing the propulsion system for the ESSM Program which is a NATO program involving 13 nations. Raytheon Systems Company is the prime contractor. The Company is the sole developer of a higher performance AMRAAM rocket motor, under contract from the U.S. Navy, with production planned to commence in U.S. Government fiscal year 1998. The prime contractor on Predator is Lockheed Martin Corporation, and the prime contractor on TERM-KE is Alliant Defense Electronics Systems, Inc., a subsidiary of the Company. The Company is the sole propulsion source on both Predator and TERM-KE. The Company is developing and producing composite structures for the F-22 fighter being developed by Lockheed Martin Corporation. Other new business opportunities being pursued include the Standard Missile Second Stage, the Beyond Visual Range Air-to-Air Missile, and Follow-on-to-TOW. The Tactical Propulsion business unit is located in Rocket Center, West Virginia. KILGORE OPERATIONS. The Kilgore Operations business unit produces and develops infrared countermeasure flares, 20mm ammunition, and a wide spectrum of pyrotechnic devices for the U.S. and foreign governments. It also makes pyrotechnics for various commercial activities. 4 Kilgore is the world's leading supplier of infrared countermeasure products. Production programs include the MJU-7A/B, M206, MJU-10/B, MJU-32/B and MJU-38/B U.S. countermeasures. In addition, Kilgore-designed flare products, such as the 55mm KC-004/A flares, are routinely provided for export. Kilgore is currently manufacturing an Israeli flare design under a Foreign Military Funding contract. Kilgore has manufactured over six (6) million infrared flares over the last decade. Kilgore was the original designer for the MJU-10/B and first sequenced version of the MJU-7 and 1x1 inch flares. Kilgore has patented a variety of advanced countermeasure designs. On-going development efforts include sole source supplier to Lockheed Martin for the infrared flares for the F-22 aircraft and performing development efforts for advanced flares for the U.S. Navy. Kilgore is also the only current producer of the MK 186 TORCH shipboard countermeasure. Kilgore has been one of the two suppliers for the U.S. Navy Phalanx MK149 20mm ammunition as well as an international supplier of 20mm ammunition. Current production programs include the M55 TP ammunition. New business opportunities include the M56 high explosive series. Over 100 different pyrotechnic products have been produced by Kilgore. The pyrotechnic product lines include impulse cartridges, marine location markers, explosive squibs, colored smoke and signaling devices, screening devices, and commercial day/night signals. Current programs include efforts for NATO and non-NATO countries for improved signaling and screening devices as well as standard pyrotechnic products. Kilgore also supports a variety of intra-company production programs such as primers and tracers for tank ammunition, flashtubes for the GAU-8/A, and critical components for the TERM-KE program. Kilgore operations are conducted in Toone, Tennessee. DEFENSE SYSTEMS Defense Systems develops and supplies smart munitions, fuzes, electronic systems, unmanned vehicles, and batteries through four business areas: Tactical Systems, Defense Electronics Systems, Unmanned Vehicle Systems and Power Sources Center. TACTICAL SYSTEMS. The Tactical Systems business area develops and produces electronics and fuzes, demolition munitions, weapons systems, guided weapons systems, and guided weapons. In the electronics and fuzing area, the Company develops and manufacturers stand-alone fuzes for mortar, artillery, and rocket munitions and bombs; electronic systems; and battlefield management systems. Sole source fuze production programs are the M734/M745 fuzes for mortar rounds; and the M732A2 proximity fuze for artillery. The Company is also developing the XM773 Multi-Option Fuze Artillery, which provides point detonation, delay, variable time, and proximity functions. Other development and production programs include the U.S. Air Force's Multiple Event Hard Target Fuze program and the FMU-139 Fuze program. During fiscal year 1998, the Company acquired part of Motorola's military fuze business, which develops and manufactures high-quality electronic fuzes for projectiles, air-delivered weapons and penetrating weapons. In electronics, the 5 Company has developed and is producing an automatic fire control system and integrated on-board electronics for the Paladin self-propelled Howitzer, which provides the Paladin with a "shoot and scoot" capability for increased survivability and effectiveness. In the battlefield monitoring systems, the Company has developed a Remote Sentry system that utilizes proprietary acoustic sensor technology in combination with other sensors, signal processing and hostile forces well behind enemy lines. In the demolition munitions area, the Company develops and produces munition systems, demolitions, and air delivered systems. In munition systems the Company is currently working on advanced systems for delivery from artillery, trucks, tracked vehicles and helicopters. Primary production programs are the Volcano system, a modular system delivered from ground and air platforms, and Shielder, a Vehicle-Launched Smart Anti-tank Munition System, for which the Company is systems prime to the U.K.'s Ministry of Defence. The Company is pursuing several other international opportunities in this area. The Company is also producing the Selectable Lightweight Attack Munition (SLAM), a hand-emplaced anti-materiel munition with multiple activation modes for the U.S. Special Forces and the U.S. Army. The Company has developed the Penetration Augmentation Munition (PAM) for applications such as concrete bridge abutments and the Badger Fighting Position Excavator ("Badger") for U.S. and international applications. The Badger allows the soldier to significantly reduce foxhole digging time while increasing safety and effectiveness. In air-delivered systems, the Company is the sole producer of the Gator air-delivered scatterable munition system and provides tactical munitions dispensers (TMDs) for the Combined Effects Munition, Gator and the Sensor Fuzed Weapon programs. In the weapon systems area, the Company is developing the Objective Individual Combat Weapon ("OICW") and is jointly pursuing the Cased Telescoped Weapon System ("CTWS") with foreign partners. OICW is a lightweight, shoulder-fired weapon to selectively replace the M16 rifle/M203 grenade launcher. The OICW is the lethality element of the Force XXI Land Warrior. The system consists of a combinatorial weapon, ballistic fire control system and thermal sight, and both a 20mm high explosive ("HE") bursting munition with a remote autonomous fuze and a 5.56mm kinetic energy round. The Company is responsible for systems integration and development of the HE ammunition and won the downselect phase of the contract in March 1998. CTWS is a non-developmental item consisting of a medium caliber gun, ammunition and an ammunition handling system. It is a candidate weapon system for the Future Scout and Cavalry System, the Advanced Amphibious Assault Vehicle and the U.K.'s Tracer vehicle programs. In the guided weapons area, the primary program is the Sense and Destroy Armor ("SADARM") munition. SADARM is being developed by the Company together with the prime contractor, Aerojet (a business segment of GenCorp., Inc.). SADARM has entered low rate initial production, and is presently the only tube artillery smart munition in production. The SADARM munition is used on 155mm Howitzers and combines millimeter wave and infrared sensor and signal processing technologies. In addition, SADARM is currently being evaluated for potential application to air and rocket delivery systems. The Company is also participating in a Northrop-Grumman competitive program to develop an improved seeker for the Brilliant Anti Tank ("BAT") munition Preplanned Product Improvement (BAT P3I) Program. The objective of the program is to demonstrate systems performance against cold/stationary tank and armored combat vehicle units and sparsely located Surface to Surface Transporter Erector Launcher vehicles. BAT is a hit-to-kill guided submunition intended for delivery on the battlefield by the 6 ATACMS missile. Downselect for the Engineering/Manufacturing Development (EMD) phase is scheduled during the fiscal year ending March 31, 1999 ("fiscal year 1999"). New business opportunities being pursued include Advanced Fuzing, Sensors and Seekers for Smart Munitions, Scatterable Anti-Tank Systems, Next Generation Alternatives to Land Mines and Advanced Gun Weapon Systems utilizing case telescoped ammunition. Tactical Systems operations are conducted at Hopkins and New Brighton, Minnesota, and Janesville, Wisconsin. DEFENSE ELECTRONICS SYSTEMS. The Defense Electronics business area is conducted through Alliant Defense Electronics Systems, Inc., a wholly-owned subsidiary of the Company. Principal products include millimeter wave and laser radar ("LADAR") seeker technology and products, smart weapon systems, missile warning systems, electronic warfare systems, test equipment, chaff and chaff dispensing systems, and advanced imaging and document management software. Principal customers are U.S. and foreign governments. Software capabilities are marketed to both commercial and government customers. Major programs include the XM-1007 smart tank cartridge, the AAR-47 Missile Warning System, the Common Munitions BIT/Reprogramming Equipment ("CMBRE"), Demonstration of Advanced Solid State Laser Radar (DASSL), and the Analog-to-Digital Adaptable Recorder Input-Output (ADARIO). The XM-1007 is currently in development for application to a Tank Extended Range Munition (TERM) requirement that includes beyond line of sight missions using scout vehicles for target location and target designation. The Company is the sole development prime contractor for the XM-1007. Production is anticipated to begin in 2006. The Company is bidding the XM-1007 design in a competitive procurement for an Army-sponsored advanced technology application program. The AAR-47 Missile Warning system is a passive electro-optic threat warning device used to protect low, slow flying helicopters and fixed wing aircraft against attack from ground-to-air-missiles. The Company completed a production contract for the system and is currently engaged in a Central Processor Unit ("CPU") upgrade (both hardware and software) for improved probabilities of detection, longer warning times, and lower false alarm rates. Production deliveries of the upgraded CPU will begin in fiscal year 1999. The Company will enter a competitive bid for an upgraded, higher performance sensor to include laser warning capability early in fiscal year 1999. The CMBRE is a portable field tester with a common interface to support the growing U.S. inventory of smart weapons. The Company completed development ahead of contract schedule and shipped the first production units in fiscal year 1998. Fiscal year 1999 production is on-going and is expected to continue for eight years. LADAR is the preferred seeker technology for future precision guided weapons surpassing Imaging InfraRed ("IIR") and Synthetic Aperture Radar ("SAR"). It combines the active ranging capability of SAR with the optical resolution of IIR at a cost less than either. The Company, teamed with prime contractor, Raytheon Systems, is nearing completion of phase two 7 of a four phase technology demonstration program for the U.S. Air Force. The team intends to pursue a competitive program for the Low Cost Autonomous Attack System (LOCAAS) during fiscal year 1999. The Company, through its Advanced Imaging Strategies, provides a family of software products known as DocMaestro(TM). These are state-of-the-art imaging and document management tools that provide easy access and navigation to and through electronic documents with automatic hyperlinks, and electronic documents on demand through the internet/intranet. New business opportunities being pursued include Sensors and Seekers for Smart Munitions and guided projectile systems. Defense Electronics Systems operations are conducted in Clearwater, Florida. UNMANNED VEHICLE SYSTEMS. The Unmanned Vehicle Systems business area is the developer and producer of the Outrider(TM) Tactical Unmanned Aerial Vehicle system. The Outrider system consists of four air vehicles, two ground control stations, one air vehicle trailer, one auxiliary trailer, and one remote video terminal. Outrider is designed to be readily deployed from land or ship deck. No external pilot is required--takeoff and landing are completely autonomous. Outrider provides real-time reconnaissance, surveillance, and target acquisition information for the armed forces using the system. The military utility assessment for Outrider is expected to be completed in the third quarter of 1998, and a decision regarding whether to proceed with low rate initial production is expected in the fall of 1998. Unmanned Vehicle Systems is also supporting the development of the Tactical Control System (TCS), which is a DoD program to provide joint warfighters with a surface command, control, communication and data dissemination systems for unmanned aerial vehicles. Unmanned Vehicle Systems operations are conducted in Hopkins, Minnesota and Hondo, Texas. POWER SOURCES CENTER. The Power Sources Center business area develops and manufactures specialized disposable and rechargeable batteries for use in the Company's own products, and for U.S. and foreign military and aerospace customers. Its principal disposable products are lithium reserve batteries, which are used in such applications as anti-tank mines and fuzes that require long-term storage capacity. The Company is developing a new miniature battery production line capable of producing six million batteries per year for artillery fuzes. The Company also produces specialty batteries, such as space-qualified battery modules for space probes such as Galileo and Huygens. Its principal rechargeable products are lithium-ion polymer batteries, which offer very high energy density and packaging flexibility for use where weight and space may be limited or where unique operational configurations are required. The Company is also developing a flexible manufacturing line for "wearable" lithium-ion polymer batteries for the U.S. Army. The Company has also been awarded a contract by the U.S. Navy to supply large rechargeable batteries for underwater vehicles. New business opportunities being pursued include high density flexible power sources. 8 Power Sources Center operations are conducted at Horsham, Pennsylvania. SPACE AND STRATEGIC SYSTEMS Space and Strategic Systems designs and produces solid rocket propulsion systems for space launch vehicles, strategic missile systems, provides reinforced composite structures and components for aircraft, spacecraft and space launch vehicles, and provides safety management services. The space propulsion business represents the largest portion of the group's sales base and includes a broad product portfolio encompassing all vehicle payload classes (small to heavy lift). The Company is presently producing solid propulsion systems for Titan IVB, Delta II, Delta III, Pegasus(R), and Taurus(R) launch vehicles. The Company produces the Titan SRMU space booster for Lockheed Martin Corporation. The SRMU serves as the strap-on propulsion system (two per vehicle) for the U.S. Air Force upgraded Titan IVB heavy-lift launch vehicle. The Company also has a follow-on contract for Titan launch operations support which extends into 2002. Delta II is a medium-lift expendable launch vehicle developed for both government and commercial applications. The Delta II launch vehicle family employs solid strap-on boosters in multiple configurations using three, four and nine motors, all of which are produced by the Company for The Boeing Company. During fiscal year 1998, Boeing awarded the Company additional production quantities for Delta II. During fiscal year 1998, the Company also completed development and is now producing, under contract to Boeing, a new, larger strap-on GEM booster for the new, enhanced medium-lift Delta III expendable launch vehicle. Each Delta III launch vehicle employs nine solid strap-on boosters, all of which are produced by the Company. The Pegasus(R) air launched vehicle is used to deploy small U.S. Government, foreign government and commercial payloads. Each Pegasus(R) vehicle contains three solid propulsion stages, all of which are produced by the Company for Orbital Sciences Corporation. The Pegasus(R) motors are also used as upper stages on Orbital Sciences' Taurus(R) ground launched vehicle. The Taurus(R) is also used to deploy small U.S. Government and commercial payloads. During fiscal year 1998, Orbital Sciences awarded the Company contracts for additional quantities of Pegasus(R) and Taurus(R) motors that will extend production into 1999. The strategic propulsion business, which now consists of one large production program and various operational service contracts, has been involved with substantially all of the land and sea based strategic propulsion systems since their inception. Currently, the principal strategic propulsion production program is Trident II (D5), a submarine-launched intercontinental ballistic missile composed of three solid propulsion stages. The Company, through a joint venture with the Thiokol Propulsion unit of Cordant Technologies Inc., developed and produced the first and second propulsion stages of the Trident II (D5) missile under a contract with Lockheed Martin Corporation. In 1997, the joint venture completed the qualification process to also produce the third stage of the missile. In addition to the Trident II production contract, the Company has contracts with Lockheed Martin to support both the U.S. Navy's existing fleet of Trident I (C4) missiles and the operational D5 units. The Company developed and produced the Peacekeeper third stage motor for the U.S. Air Force, and provides some continuing aging and surveillance services support to the missile system. The Company also continues to provide surveillance services to the U. S. Air Force for Minuteman third stage motors it previously produced. 9 The composite structures operation designs and fabricates a broad range of structures from carbon/carbon, graphite, aramid, and glass fiber reinforced composite materials. Applications include instrument benches and dimensionally stable assemblies for satellites, space based antennae, aircraft and engine components, space launch vehicle tanks and structures, and other specialty structures. Target markets include both government and commercial users. Key programs are concentrated primarily in the commercial and government satellite, launch vehicle and aircraft segments. The Company is under contract to Lockheed Martin to develop composite cryogenic liquid hydrogen fuel tanks for the NASA X-33 Phase II reusable launch vehicle. It is also working jointly with Lockheed Martin to build the fiber-placed liquid hydrogen tank for the full-scale operational VentureStar(TM) when production begins in 2000. In addition, the Company is presently under contract to develop the inlet bypass offtake screens and composite pivot shafts on the U.S. Air Forces' F-22 fighter aircraft. The Company is also under contract to produce a counterbalance mechanism for the C-17 transport aircraft and the production of composite door springs for the Boeing Company's 767 aircraft. Other programs and opportunities include additional aircraft and engine structures, other components and assemblies for spacecraft, military land vehicles, and various structures for reusable and expendable launch vehicles. The safety management services business assists customers in analyzing and safeguarding against potential manufacturing hazards and in meeting both internal and external safety requirements. Primary emphasis is placed on meeting OSHA and EPA regulatory compliance. Space and Strategic Systems operations are conducted in Magna and Clearfield, Utah. RAW MATERIALS Key raw materials used in the Company's operations include aluminum, steel, steel alloys, copper, depleted uranium, graphite fiber, hydroxy terminated polybutadiene, epoxy resins and adhesives, nitrocellulose, diethylether, x-ray film, plasticizers and nitrate esters, and ammonium perchlorate. The Company also purchases chemicals, electronic, electro-mechanical and mechanical components, subassemblies, and subsystems which are integrated with the Company's own manufactured parts for final assembly into finished products and systems. The Company closely monitors its sources of supply in order to assure an adequate supply of raw materials and other supplies needed in its manufacturing processes. U.S. Government contractors like the Company are frequently limited to procuring materials and components from sources of supply approved by the DoD. In addition, as defense budgets contract, suppliers of specialty chemicals and materials consider dropping low volume items from their product lines, which may require (and in the past has required) qualification of new suppliers for raw materials on key programs. The supply of ammonium perchlorate, a principal raw material used in the Company's operations, has been limited to two third-party sources which supply the entire domestic solid propellant industry. These two suppliers have recently entered into an agreement to combine their ammonium perchlorate businesses. Any disruption in the Company's supply of ammonium perchlorate could have a material adverse effect on the Company's results of operations or financial condition. 10 The Company also presently relies on one primary supplier for its graphite fiber, which is used in the production of composite materials. Although other sources of fiber exist, the addition of a new supplier would require the Company to qualify the new sources for use on the Company's programs. Any prolonged disruption in the supply of this material or any delay as a result of the qualification of a new source could have a material adverse effect on the Company's results of operations or financial condition. Current suppliers of some insulation materials used in rocket motors have announced plans to close manufacturing plants and discontinue product lines. As a result, the Company will need to find replacement materials or new sources of supply for these materials, which are polymers and neoprene used in EPDM rubber insulation, and aerospace rayon used in nozzles. Difficulty finding replacement materials or new sources of supply could have a material adverse effect on the Company's results of operations or financial condition. MANUFACTURING AND HANDLING OF EXPLOSIVE MATERIALS Certain of the Company's products, including those relating to propulsion systems, propellants, ammunition and artillery systems, involve the manufacture and/or handling of a variety of explosive materials. From time to time in the past, such manufacturing and/or handling has resulted in explosive incidents which have temporarily shut down or otherwise disrupted certain of the Company's manufacturing processes, thereby causing production delays. There can be no assurance that the Company will not experience such incidents in the future or that any such incidents will not result in production delays or otherwise have a material adverse effect on the Company's results of operations or financial condition. MAJOR CUSTOMERS - U.S. GOVERNMENT The Company's sales are predominantly derived from contracts with agencies of, and prime contractors to, the U.S. Government. The various U.S. Government customers, which include the U.S. Army, Navy and Air Force, exercise independent purchasing decisions, and sales to the U.S. Government generally are not regarded as constituting sales to one customer, but instead, each contracting entity is considered to be a separate customer. U.S. Government sales, including sales to U.S. Government prime contractors, for fiscal year 1998, fiscal year 1997 and fiscal year 1996, were $879.1, $884.7 million, and $887.5 million, respectively. During fiscal year 1998, approximately 82 percent of the Company's sales were derived from contracts with the U.S. Government or U.S. Government prime contractors. Approximately 50% of the Company's fiscal year 1998 net sales were derived from prime contractor activities and approximately 50% from subcontractor activities. Approximately 43% of such sales were derived from business with the U.S. Army, 20% from the U.S. Air Force, 11% from the U.S. Navy, and 26% from other government, commercial or international sources. The Company's top ten contracts accounted for approximately 61% of its fiscal year 1998 net sales. During fiscal year 1998, sales to each of Lockheed Martin Corporation and The Boeing Company and their respective affiliates accounted for more than 10% of the Company's sales. These sales related to multiple contracts and, in the case of Boeing, included commercial contracts. 11 This significant reliance upon contracts related to U.S. Government programs entails inherent risks, including risks particular to the defense industry, which are summarized below. REDUCTIONS OR CHANGES IN MILITARY EXPENDITURES. The overall U.S. defense budget declined in real terms from the mid-1980's through the early 1990's. Although U.S. defense budgets have recently stabilized, future levels of defense spending cannot be predicted with certainty and further declines in U.S. military expenditures could materially adversely affect the Company's results of operations and financial condition. The impact of possible further declines in the level of defense procurement on the Company's results of operations and financial condition will depend upon the timing and size of the changes and the Company's ability to mitigate their impact with new business, business consolidations or cost reductions. The loss or significant curtailment of a material program in which the Company participates could materially adversely affect the Company's future results of operations and financial condition. CONTRACT TERMINATION. All of the Company's U.S. Government contracts are, by their terms, subject to termination by the U.S. Government either for its convenience or in the event of a default by the contractor. Cost-plus contracts provide that, upon termination, the contractor is entitled to reimbursement of its allowable costs, and, if the termination is for convenience, payment of a total fee proportionate to the percentage of the work completed under the contract. Fixed-price contracts provide for payment upon termination for items delivered to and accepted by the U.S. Government, and, if the termination is for convenience, for payment of fair compensation for work performed plus the costs of settling and paying claims by terminated subcontractors, other settlement expenses, and a reasonable profit on the costs incurred or committed. If a contract termination is for default, however, (i) the contractor is paid an amount agreed upon for completed and partially completed products and services accepted by the U.S. Government, (ii) the U.S. Government is not liable for the contractor's costs with respect to unaccepted items, and is entitled to repayment of advance payments and progress payments, if any, related to the terminated portions of the contract, and (iii) the contractor may be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source. Termination for convenience provisions provide only for the recovery by the Company of costs incurred or committed, settlement expenses and profit on work completed prior to termination. Termination for default provisions may render the contractor liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source. LOSS OF APPROPRIATIONS. In addition to the right of the U.S. Government to terminate contracts for convenience or default, such contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a fiscal year basis even though contract performance may take more than one year. Consequently, at the outset of a major program, the contract is usually partially funded, and additional monies are normally committed to the contract by the procuring agency only as appropriations are made by Congress for future fiscal years. In addition, most U.S. Government contracts are subject to modification in the event of changes in funding. Any failure by Congress to appropriate additional funds to any program in which the Company participates, or any contact modification as a result of funding changes could materially delay or terminate such program and, therefore, have a material adverse effect on the Company's results of operations or financial condition. 12 PROCUREMENT AND OTHER RELATED LAWS AND REGULATIONS. The Company is subject to extensive and complex U.S. Government procurement laws and regulations. These laws and regulations provide for ongoing U.S. Government audits and reviews of contract procurement, performance and administration. Failure to comply, even inadvertently, with these laws and regulations and with laws governing the export of munitions and other controlled products and commodities, and any significant violations of any other federal law, could subject the Company or one or more of its businesses to potential contract termination, civil and criminal penalties, and under certain circumstances, suspension and debarment from future U.S. Government contracts for a specified period of time. Any such actions could have a material adverse effect on the Company's results of operations or financial condition. Under U.S. Government regulations, the Company, as a government contractor, is subject to audit and review by the U.S. Government of performance of, and the accounting and general practices relating to, U. S. Government contracts. The costs and prices under such contracts may be subject to adjustment based upon the results of such audits. To date, such audits have not had a material effect on the Company's results of operations or financial condition; however, no assurance can be given that future audits will not have a material adverse effect on the Company's results of operations or financial condition. In addition, licenses are required from U.S. Government agencies for export from the United States of many of the Company's products. Accordingly, certain of the Company's products currently are not permitted to be exported. COMPETITIVE BIDDING. The Company obtains military contracts through either competitive bidding or sole-sourced procurement. Contracts from which the Company has derived and expects to derive a significant portion of its sales were or will be obtained through competitive bidding in which, in many instances, numerous bidders participated or will participate. There can be no assurance that the Company will continue to be successful in having its bids accepted or, if accepted, that awarded contracts will be profitable. In addition, inherent in either procurement process is the risk that if a bid is submitted and a contract is subsequently awarded, actual performance costs may exceed the projected costs upon which the submitted bid or contract price was based. To the extent that actual costs exceed the projected costs on which bids or contract prices were based, the Company's profitability could be materially adversely affected. TYPES OF CONTRACTS. The Company's U.S. Government business is performed under cost-plus contracts (cost-plus-fixed-fee, cost-plus-incentive-fee, or cost-plus-award fee) and under fixed-price contracts (firm fixed-price, fixed-price incentive, or fixed-price-level-of-effort), which accounted for the following portions of the Company's U.S. Government business in fiscal year 1998: 13 COST-PLUS CONTRACTS: Cost-plus-fixed-fee 20% Cost-plus-incentive-fee/cost-plus-award-fee 17% 37% FIXED-PRICE CONTRACTS: Firm fixed-price 55% Fixed-price incentive/fixed-price-level-of-effort 8% 63% ---- TOTAL .................................................. 100% Cost-plus-fixed-fee contracts provide for reimbursement of costs, to the extent that such costs are allowable, and the payment of a fixed fee. Cost-plus-incentive-fee contracts and cost-plus-award-fee contracts provide for increases or decreases in the contract fee, within specified limits, based upon actual results as compared to contractual targets for such factors as cost, quality, schedule and performance. Under firm fixed-price contracts, the Company agrees to perform certain work for a fixed price and, accordingly, realizes all the benefit or detriment resulting from decreases or increases in the costs of performing the contract. Fixed-price incentive contracts are fixed-price contracts providing for adjustment of profit and establishment of final contract prices by a formula based on the relationship which final total costs bear to total target cost. The final contract price under a fixed-price incentive contract is a function of cost, which may be affected by schedule and performance. Fixed-price-level-of- effort contracts are generally structured with a fixed price per labor hour subject to the customers' labor hour needs up to a contract cap. All fixed-price contracts present the inherent risk of unreimbursed cost overruns which could have a material adverse effect on the Company's results of operations or financial condition. In addition, certain costs, including certain financing costs, portions of research and development costs, and certain marketing expenses related to the preparation of competitive bids and proposals and international sales, are not reimbursable under U.S. Government contracts. The U.S. Government also regulates the methods under which costs are allocated to U.S. Government contracts. OTHER. In addition, the Company, like all defense contractors, is subject to risks associated with uncertain cost factors related to scarce technological skills and components, the frequent need to bid on programs in advance of design completion (which may result in unforeseen technological difficulties and/or cost overruns), the substantial time and effort required for relatively unproductive design and development, design complexity, rapid obsolescence and the potential need for design improvement. COMPETITION The Company encounters intense competition for its contracts from numerous other companies. Some of these companies, particularly those competitors outside the Company's core business areas, have financial, technical, marketing, manufacturing, distribution and other resources substantially greater than those of the Company. The Company's ability to compete for these contracts depends to a large extent on the effectiveness and innovativeness of its research and development programs, its ability to offer better program performance than its competitors at a lower cost, and its readiness in facilities, equipment and personnel to undertake the programs for which it competes. In some instances, programs are sole sourced or work directed by the U.S. Government to a single supplier. In such cases, there may be other suppliers who have the 14 capability to compete for the programs involved, but they can only enter or reenter the market if the U.S. Government should choose to reopen the particular program to competition. The Company's principal sole source contracts are for the following programs: Trident (D5) missile (through the joint venture with the Thiokol Propulsion unit of Cordant Technologies Inc.), Titan IV SRMU space boosters, AGM-130 and SFW propulsion systems, M830A1 multi-purpose tank ammunition round, Volcano mine and M758 fuze for medium caliber ammunition, the M732A2 proximity fuze, and the M734/M735 mortar fuzes. The Company generally faces competition from a number of competitors in each business area. However, Primex Technologies, Inc. is the principal competitor in the Conventional Munitions Ammunition Systems business area for medium caliber ammunition and tank ammunition, and the sole domestic competitor for commercial gun powders produced by the Conventional Munitions Ordnance business unit. The Company shares the production of tank ammunition training rounds with Primex, and Primex is currently the sole source for the M829A2 Kinetic Energy round, while the Company is the sole source for the M830A1 multi-purpose round. The Company also shares the 25mm and 30mm medium-caliber ammunition market with Primex, its sole domestic competitor. The downsizing of the munitions industrial base has resulted in a reduction in the number of competitors, through consolidations and departures from the industry. This has reduced the number of competitors for some programs, but has strengthened the capabilities of some of the remaining competitors. In addition, it is possible that there will be increasing competition from the remaining competitors in business areas where they do not currently compete, particularly in those business areas dealing with electronics. NOVATION OF U.S. GOVERNMENT CONTRACTS As required by federal procurement regulations providing for the U.S. Government to recognize the Company as the successor in interest to Honeywell on contracts between Honeywell and the U.S. Government, Honeywell has entered into novation agreements with the Company and the U.S. Government which provide, among other things, for Honeywell to directly or indirectly guarantee or otherwise become liable for the performance of the Company's obligations under such contracts (the "Guaranteed Contracts") which were transferred to the Company in connection with the Spin-off. Such novation agreements provide that the Company assumes all obligations under the Guaranteed Contracts and that the U.S. Government recognizes the transfer of such Guaranteed Contracts and related assets. While these Guaranteed Contracts are scheduled to be performed over a period of time, it is not expected that they will be fully and finally discharged for a number of years. The Company has agreed to perform all of its obligations under each Guaranteed Contract and to indemnify Honeywell against any liability Honeywell may incur under the novation agreements by reason of any failure by the Company to perform such obligations. The Company has entered into similar novation agreements in connection with the divestiture of Metrum Information Storage ("MIS") and the former Marine Systems Group. In these cases, however, the Company, as the seller, has guaranteed performance of the buyer's obligations under the contracts transferred to the buyer, and the buyers of MIS and Marine Systems, respectively, rather than the Company, have the performance and indemnification obligations described in the last sentence of the preceding paragraph. 15 The Company and Hercules have agreed to use all reasonable efforts to enter into novation agreements with the U.S. Government, as required by federal procurement regulations applicable to contracts between or relating to HAC and the U.S. Government (the "Acquired Government Contracts") which were acquired by the Company in the HAC Acquisition. Such novation agreements are expected to provide, among other things, that the Company assumes all obligations under the Acquired Government Contracts and that the U.S. Government recognizes the transfer to the Company of the Acquired Government Contracts and related assets. The Acquired Government Contracts are scheduled to be performed over time; it is not expected that they will be fully and finally discharged for several years. Hercules has agreed to indemnify the Company against any liability which the Company may incur under such novation agreements by reason of any prior failure by Hercules to perform its obligations under the novated contracts. The Company has agreed to indemnify Hercules against any liability which Hercules may incur under such novation agreements by reason of any failure by the Company to perform its obligations under the novated contracts. RESEARCH AND DEVELOPMENT The expense incurred on Company-sponsored research and development activities related to new products or services and the improvement of existing products or services was $12.4, $16.2, and $14.1 million for fiscal year 1998, fiscal year 1997, and fiscal year 1996, respectively. The expense incurred during the same periods for research and development activities that were customer-sponsored (primarily funded by the U.S. government) was $241.6, $231.3, and $281.8, million, respectively. BACKLOG The aggregate amount of contracted backlog orders on April 1, 1998, and April 1, 1997, was $1,700.7, and $1,438.9 million, respectively. It is expected that approximately 78 percent of sales during the fiscal year ending March 31, 1999, will fill orders that were in backlog at April 1, 1998. The backlog represents the value of contracts for which goods and services are yet to be provided. The backlog consists of firm contracts and although they can be and sometimes are modified or terminated, the amount of modifications and terminations historically has been limited compared to total contract volume. In May 1998, the Company received orders from Boeing aggregating $750 million for the production of solid rocket boosters for Delta space launch vehicles. These orders are not expected to have a material impact on fiscal year 1999 sales. SEASONALITY The Company's business is not seasonal in nature. However, since the Company's sales on certain production contracts are not recorded until product is delivered to the customer, extra effort is expended to complete and deliver product prior to fiscal year end, which has typically resulted in higher sales in the fourth fiscal quarter. 16 EXPORT SALES Export sales from the United States to unaffiliated customers for the Company were $33.2, $58.0, and $58.5 million, for fiscal year 1998, fiscal year 1997, and fiscal year 1996, respectively. EMPLOYEES As of March 31, 1998, the Company employed approximately 6,550 active employees (including approximately 1,050 employees of government-owned company-operated facilities), of which approximately 2,150 were covered by collective bargaining agreements. Set forth below is a table indicating the number of such agreements, the number of employees covered and the expiration dates of the agreements: NUMBER OF EXPIRATION NUMBER OF EMPLOYEES LOCATION CONTRACTS DATE REPRESENTED - -------- --------- ---- ----------- Rocket Center, WV............... 2 8/14/00 213 9/14/00 9 Magna, UT....................... 1 2/15/99 239 Janesville, WI.................. 1 3/21/01 356 Minneapolis, MN area............ 1 9/30/99 294 Radford, VA..................... 2 10/06/98 1,001 DeSoto, KS...................... 1 11/18/98 34 Although relations between the Company and its unionized and non-unionized employees and their various representatives are generally considered satisfactory, there can be no assurance that new labor contracts can be concluded without work stoppages. PATENTS As of March 31, 1998, the Company owned approximately 265 U.S. patents, approximately 210 foreign patents, and had approximately 55 U.S. patent applications and 100 foreign patent applications pending. Although the conduct of the Company's business involves the manufacture of various products that are covered by patents, the Company's management does not believe that any one single existing patent or license or group of patents is material to the success of its business as a whole. Management believes that research, development and engineering skills also make an important contribution to the Company's business. The U.S. Government typically receives royalty-free licenses to inventions made under U.S. Government contracts, with the Company retaining all other rights, including all commercial rights, with respect to such inventions. In addition, the Company's proprietary information is protected through the requirement that employees execute confidentiality agreements as a condition of employment, and the Company's policy of protecting proprietary information from unauthorized disclosure. ENVIRONMENTAL MATTERS The Company's operations and ownership or use of real property are subject to a number of federal, state and local environmental laws and regulations. For example, under the federal 17 Clean Water Act (CWA), the Company's facilities may be required to obtain permits and to construct pollution control equipment to reduce the levels of pollutants being discharged into surface waters. Under the federal Clean Air Act (CAA), the Company's facilities may be required to obtain permits and install pollution control equipment to limit the emission of various kinds of air pollutants. The Company may also be required to comply with the provisions of the federal Resource Conservation and Recovery Act (RCRA) which regulates the generation, storage, handling, transportation, treatment and disposal of hazardous and solid wastes. In addition, the Company could be subject to the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), which imposes liability for the cleanup of releases of hazardous substances. Such liability may involve, for example, releases at off-site locations as well as at presently and formerly owned or leased facilities. Environmental laws and regulations change frequently, and it is difficult to predict what impact these environmental laws and regulations may have on the Company in the future. When the Company becomes aware of environmental concerns for which it is potentially liable, the Company works with the various governmental agencies in investigating the situation, proposing remedial and/or corrective action and performing the agreed-upon action without unreasonable delay. To date, these environmental laws and regulations have not had a material adverse effect on the Company's results of operations or financial condition. It is difficult to predict whether and to what extent these environmental laws and regulations may impact the Company's results of operations or financial condition in the future. Due to the nature of the Company's operations, the Company is involved from time to time in legal proceedings involving remediation of environmental contamination from past or present operations or use or ownership of real property, as well as compliance with environmental requirements applicable to ongoing operations. The Company may also be subject to fines and penalties, toxic tort suits or other third party lawsuits due to its or its predecessors' present or past use of hazardous substances or the alleged contamination of the environment through past or present operations. There can be no assurance that material costs or liabilities will not be incurred in connection with any such proceedings or claims. With respect to the disposal of material at environmental treatment, recycling, storage, disposal, or similar sites that occurred prior to the Spin-off, the Company has agreed to assume the liability and indemnify Honeywell for the Company's proportional share of the costs of remedial and/or corrective action allocated to Honeywell as a "potentially responsible party." The Company's proportional share is the percentage that the volume of such material generated by the Businesses bears to the total volume of such material generated by Honeywell at each such site. The Company does not believe that its ultimate contribution or liability relating to these matters, individually or in the aggregate, would be reasonably likely to have a material adverse effect on the business of the Company taken as a whole. As part of the HAC Acquisition, the Company has generally assumed responsibility for environmental compliance at the facilities utilized by the operations acquired in the HAC Acquisition (the "Aerospace Facilities"). There may also be significant environmental remediation costs associated with the Aerospace Facilities that will, with respect to some facilities, be funded in the first instance by the Company, subject to reimbursement or indemnification as described below. Management believes that much of the compliance and remediation costs associated with the Aerospace Facilities will be reimbursable under U.S. Government contracts, and that those environmental remediation costs not covered through such contracts will be covered by Hercules 18 under agreements entered into in connection with the HAC Acquisition (the "Environmental Agreements"). Under the Environmental Agreements, Hercules has agreed to indemnify the Company for environmental conditions relating to releases or hazardous waste activities occurring prior to the closing of the HAC Acquisition, fines relating to pre-closing environmental compliance, environmental claims arising out of breaches of Hercules' representations and warranties and certain compliance requirements at the Kenvil, New Jersey facility ("Kenvil Facility"). The indemnity obligation is subject to a total deductible of $1.0 million for all claims (including non-environmental claims) that the Company may assert under the HAC Acquisition purchase agreement (the "Purchase Agreement"). In addition, Hercules is not required to indemnify the Company for any individual claims below $50,000. Hercules is obligated to indemnify the Company for the lowest cost response of remediation required at the facility. The limitations of Hercules' indemnification obligations do not apply to amounts incurred by Hercules in connection with the performance of remedial actions relating to preacquisition conditions at the Clearwater, Florida facility ("Clearwater Facility") or in connection with its obligation to comply with certain environmental regulations at the Kenvil Facility. Pursuant to the Environmental Agreements, Hercules will be responsible for conducting any remedial activities and seeking reimbursement from the U.S. Government with respect to the Kenvil Facility and the Clearwater Facility. There can be no assurance that the U.S. Government or Hercules will reimburse the Company for any particular environmental costs or reimburse the Company in a timely manner. U.S. Government reimbursements for non-CERCLA cleanups are financed out of a particular agency's operating budget. The ability of a particular governmental agency to make timely reimbursements for cleanup costs will be subject to national budgetary constraints. Where the Company is required to first conduct the remediation and then seek reimbursement from the U.S. Government or Hercules, the Company's working capital may be materially affected until the Company receives such reimbursement. YEAR 2000 COMPLIANCE The Company utilizes a significant number of computer hardware and software programs and operating systems across its entire organization, including applications used in manufacturing, product development, financial business systems and various administrative functions. To the extent that this hardware and software contains source code that is unable to appropriately interpret the upcoming calendar year 2000, some level of modification, or even replacement, of such applications will be necessary. The Company's process for becoming "Year 2000" compliant includes activities to increase awareness of the issue across the Company, assess where the Company has issues, determine proposed resolutions, validate those proposed resolutions, and finally, implement the agreed-upon resolutions. The Company has substantially completed its assessment of applications within the Company that are not Year 2000 compliant and is in varying stages of determining appropriate resolutions to the issues identified. The Company currently expects to complete all relevant internal hardware and software modifications and testing by early 1999. In addition, the Company has initiated formal communications with all of its significant suppliers and customers to determine their Year 2000 compliance readiness and the extent to which the Company is vulnerable to any third party Year 2000 issues. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be converted to Year 2000 19 compliant systems in a timely manner, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. Given information known at this time about the Company's systems having such issues, coupled with the Company's ongoing, normal course-of-business efforts to upgrade or replace business critical systems and software applications, as necessary, it is currently expected that Year 2000 costs, the majority of which are expected to be incurred in fiscal year 1999, will not have an impact exceeding a range of $5-10 million on the Company's liquidity or results of operations. These costs include incremental personnel costs, consulting costs, and costs for modification of existing hardware and software. The costs of the project and the timing in which the Company believes it will complete the necessary Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, success of the Company in identifying systems and programs having Year 2000 issues, the nature and amount of programming required to upgrade or replace the affected programs, the availability and cost of personnel trained in this area, and the extent to which the Company might be adversely impacted by the failure of third parties (suppliers, customers, etc.) to remediate their own Year 2000 issues. Failure by the Company and/or its suppliers and customers (in particular, the U.S. Government, on which the Company is materially dependent) to complete Year 2000 compliance work in a timely manner could have a material adverse effect on the Company's operations. 20 ADDITIONAL INFORMATION Incorporated herein by reference are the following portions of the Company's Annual Report to Stockholders for fiscal year 1998 (the "Annual Report") and Part II of this Form 10-K/A:
PAGE NUMBER(S) PAGE NUMBER(S) IN ANNUAL REPORT IN FORM 10-K/A Conventional Munitions.......................................... 7-9 Space and Strategic Systems..................................... 11-13 Defense Systems................................................. 15-17 Summary Business Group Descriptions (Business Overview; Sales as a Percent of Total Company Revenues; Our Customers; Our Inside Back Competitive Strengths; Our Major Programs and Products).... Cover Foldout Selected Financial Data......................................... 26 Discontinued Operations......................................... 29 Contingencies--Environmental Matters............................ 31-32 Year 2000....................................................... 33-34 Risk Factors.................................................... 34 Long-Term Contracts............................................. 40 Environmental Remediation and Compliance........................ 40 Note 6 of Notes to Financial Statements......................... 43 Note 14 of Notes to Financial Statements........................ 54 Note 15 of Notes to Financial Statements........................ 55 Note 16 of Notes to Financial Statements........................ 56
ITEM 2. PROPERTIES At March 31, 1998, the Company occupied manufacturing/assembly, warehouse, test, research and development and office properties having an aggregate floor space of approximately 12 million square feet, which either is owned or leased by the Company, or is occupied under facilities contracts with the U.S. Government. The following table provides summary information regarding these properties, and indicates whether they are used principally by Conventional Munitions ("CM"), Defense Systems ("DS"), and/or Space and Strategic Systems ("SSS"): 21 GOVERNMENT OWNED LEASED OWNED (2) TOTAL ------- ------- ------- ------- PRINCIPAL PROPERTIES(1) (THOUSANDS OF SQUARE FEET) ----------------------- Florida Clearwater (DS) ........ -- 112 -- 112 Illinois Wilmington (CM) ........ -- -- 440 440 Iowa Burlington (CM) ........ -- 40 -- 40 Kansas DeSoto (CM) ............ -- -- 730 730 Minnesota Elk River (CM) ......... 143 -- -- 143 Hopkins (CM/DS)(3) ..... 536 -- -- 536 New Brighton (CM/DS) ... -- -- 1,522 1,522 New Jersey Totowa (CM) ............ 93 20 -- 113 Pennsylvania Horsham (DS) ........... -- 53 -- 53 Tennessee Toone (CM) ............. 224 -- -- 224 Texas Hondo (DS) ............. -- 27 -- 27 Utah Clearfield (SSS) ....... -- 606 -- 606 Magna (SSS) ............ 1,810 -- 518 2,328 Tekoi (SSS) ............ -- 25 -- 25 Virginia Radford (CM) ........... -- -- 3,809 3,809 West Virginia Rocket Center (CM) ..... 96 -- 915 1,011 Wisconsin Janesville (DS) ........ 212 -- -- 212 ------- ------- ------- ------- Subtotal .. 3,114 883 7,934 11,931 OTHER PROPERTIES(4) ------- CM/DS/SSS ..................... -- 27 -- 27 ------- ------- ------- ------- Subtotal .. -- 27 -- 27 ------- ------- ------- ------- TOTAL .................. 3,114 910 7,934 11,958 ======= ======= ======= ======= (26%) (8%) (66%) (100%) - ------------------------------------ (1) Excludes properties in the following states aggregating 276,100 square feet of space that is owned or leased, but is no longer occupied by the Company: Colorado (265,000 owned square feet, 170,100 square feet of which is leased); and Virginia (11,100 leased square feet, which is subleased). (2) These properties are occupied rent-free under five-year facilities contracts that require the Company to pay for all utilities, services, and maintenance costs. 22 (3) This facility also serves as the Company's corporate headquarters. (4) Principally sales and other offices, each of which has less than 10,000 square feet of floor space. In addition to the properties listed above, the Company owns proving grounds totaling 3,045 acres, with several small storage and testing buildings, in Elk River, Minnesota, and 1,200 acres of undeveloped land in Hot Springs, South Dakota. The Company leases an aggregate of 1,400 acres of land in Socorro, New Mexico for use as a test range and load-assemble-and-pack facilty, and 27 acres of land in Hondo, Texas for use as an airstrip for flight testing. Since the Spin-off, the Company has implemented a significant program of consolidating its operations and facilities, due in part to an underutilization of facilities. The Company continues to explore opportunities for further facility consolidations. The Company considers its properties to be in generally good condition and adequate for the needs of its business. Incorporated herein by reference are the following portions of the Annual Report and this Form 10-K/A:
PAGE NUMBER(S) PAGE NUMBER(S) IN ANNUAL REPORT IN FORM 10-K/A Facilities and Offices......................................... 47 Restructuring and Facility Closure Charges..................... 28 Discontinued Operations........................................ 29 Property and Depreciation...................................... 40 Note 4 of Notes to Financial Statements........................ 42 Note 11 of Notes to Financial Statements....................... 50 Note 12 of Notes to Financial Statements....................... 50
23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Company Common Stock is listed and traded on the New York Stock Exchange ("NYSE") under the symbol ATK. The following table sets forth the high and low sales prices of the Common Stock for each full quarterly period within the two most recent fiscal years, as reported on the NYSE Composite Tape: PERIOD HIGH LOW Fiscal year ended March 31, 1998: Quarter ended June 29, 1997..................... $52.875 $40.50 Quarter ended September 28, 1997................ 69.00 51.4375 Quarter ended December 28, 1997................. 65.6875 53.75 Quarter ended March 31, 1998.................... 65.00 54.50 Fiscal year ended March 31, 1997: Quarter ended June 30, 1996..................... $49.125 $43.75 Quarter ended September 29, 1996................ 53.25 46.25 Quarter ended December 29, 1996................. 57.375 47.625 Quarter ended March 31, 1997.................... 55.00 42.00 The number of holders of record of Company Common Stock as of May 31, 1998, was 12,006. The Company has not, since the Spin-off, paid cash dividends. The Company's dividend policy will be reviewed by the Board of Directors of the Company at such future times as may be appropriate in light of relevant factors existing at such times, including the extent to which the payment of cash dividends may be limited by covenants contained in its bank Credit Agreement (the "Credit Agreement") and the Indenture pursuant to which its 11-3/4% Senior Subordinated Notes due 2003 (the "Notes") were issued (collectively, the "Debt Agreements"). The Credit Agreement, as amended and restated in November 1996, currently limits the aggregate sum of dividends plus certain other restricted payments incurred after March 31, 1995 to an amount equal to the sum of (i) $110 million, plus (ii) 50% of cumulative quarterly net income, as defined, after March 31, 1997. The Notes limit the Company's dividends and certain other restricted payments to an amount equal to 50% of cumulative quarterly net income, as defined, after March 31, 1995, provided that after such payments the Company's ratio of earnings (before interest, taxes, depreciation and amortization) to fixed charges equals or exceeds three to one. The Debt Agreements also prohibit dividend payments if loan defaults exist or certain financial covenant ratios are not maintained. 24 Incorporated herein by reference are the following portions of Part II of this Form 10-K/A: PAGE NUMBER(S) IN FORM 10-K/A Consolidated Income Statements-- Basic and diluted earnings (loss) per common and common equivalent share......................... 37 Earnings Per Share Data............................................. 41 Note 7 of Notes to Financial Statements............................. 43-44 25 ITEM 6. SELECTED FINANCIAL DATA
--------------------------- Selected Financial Data --------------------------- - --------------------------------------------------------------------------------------------------------------------------- Amounts in thousands except per share data (Years Ended March 31) 1998 1997/3/ 1996 1995/1/ 1994 - --------------------------------------------------------------------------------------------------------------------------- Results of Operations Sales $1,075,506 $1,089,397 $1,020,605 $504,190 $544,236 Cost of sales 881,237 907,695 834,298 438,558 458,602 Change in accounting estimate - Environmental liabilities/2/ - 17,442 - - - Non-recurring contract move costs/3/ - 4,700 - - - Research and development 12,447 16,207 14,126 11,763 12,132 Selling 37,757 35,778 33,143 24,820 23,672 General and administrative 52,011 41,881 40,186 19,066 23,893 Restructuring charges - - - 35,600 - Change of control charges - - - 23,039 - Litigation settlement charges - - - 15,000 - - --------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations 92,054 65,694 98,852 (63,656) 25,937 Interest expense, net (24,531) (34,386) (37,427) (7,076) (2,800) Other income (expense), net 435 651 657 (2,332) (3,081) - --------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes 67,958 31,959 62,082 (73,064) 20,056 Income tax provision - - 13,658 - - - --------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 67,958 31,959 48,424 (73,064) 20,056 Income from discontinued operations, net of income taxes - 4,819 5,617 456 12,418 Gain (loss) on disposal of discontinued operations, net of income taxes 225 22,381 (6,240) - - - --------------------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of accounting change 68,183 59,159 47,801 (72,608) 32,474 Cumulative effect of accounting change, net of income taxes - - - (1,500) - - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 68,183 $ 59,159 $ 47,801 $(74,108) $ 32,474 - --------------------------------------------------------------------------------------------------------------------------- Basic earnings (loss) per common share: Continuing operations $ 5.21 $ 2.46 $ 3.72 $ (7.27) $ 2.06 Discontinued operations .02 2.09 (.05) .05 1.27 Cumulative effect of accounting change - - - (.15) - - --------------------------------------------------------------------------------------------------------------------------- Basic earnings (loss) per common share $ 5.23 $ 4.55 $ 3.67 $ (7.37) $ 3.33 - --------------------------------------------------------------------------------------------------------------------------- Diluted earnings (loss) per common share: Continuing operations $ 5.08 $ 2.38 $ 3.61 $ (7.27) $ 1.98 Discontinued operations .02 2.03 (.05) .05 1.23 Cumulative effect of accounting change - - - (.15) - - --------------------------------------------------------------------------------------------------------------------------- Diluted earnings (loss) per common share $ 5.10 $ 4.41 $ 3.56 $ (7.37) $ 3.21 - --------------------------------------------------------------------------------------------------------------------------- Financial Position Net current assets (liabilities) $ 95,628 $ 108,191 $ 42,978 $ 70,007 $(16,489) Property, plant, and equipment, net 333,181 358,103 382,513 484,985 85,094 Total assets 932,180 1,000,588 1,035,142 1,022,235 419,437 Long-term debt 180,810 237,071 350,000 395,000 - Total equity and redeemable common shares/4/ 265,754 218,792 157,477 140,370 91,980 Other Data Depreciation and amortization $ 47,517 $ 52,721 $ 58,623 $ 16,283 $15,323 Capital expenditures 20,406 28,522 25,593 12,635 13,499 Gross margin as a percentage of sales 18.1% 14.6%/2//3/ 18.3% 13.0% 15.7% ===========================================================================================================================
/1/ Hercules Aerospace Company was acquired from Hercules Incorporated on March 15, 1995. For the fiscal year ended March 31, 1995, results of operations include Hercules Aerospace Company (Aerospace) only from March 15, 1995, through March 31, 1995. /2/ Includes the impact of the fiscal 1997 adoption of Statement of Position 96- 1 "Environmental Remediation Liabilities," which resulted in a $17.4 million charge to earnings, or $1.30 per share on a diluted basis. See Note 16 to the consolidated financial statements. /3/ Includes $4.7 million in non-recurring costs for moving production lines out of a facility previously used by the Company's former Marine Systems business, which was sold on February 28, 1997. As restated; see Note 20 to the consolidated financial statements included herein. /4/ Redeemable common shares represent 813,000 shares, redeemable at prescribed prices totaling $44,979. Shares are redeemable in three equal lots of 271,000 shares each during each of the last three calendar quarters of 1998. See Note 13 to the consolidated financial statements. 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and notes, thereto, beginning on page 37. Results of Operations Sales - Sales from continuing operations in fiscal 1998 were $1,075.5 million, a decrease of $13.9 million or 1.3 percent from sales of $1,089.4 million in fiscal 1997. Conventional Munitions Group sales in fiscal 1998 were $460.3 million, a decrease of $22.7 million or 4.7 percent, from sales of $483.0 million in fiscal 1997. The decrease was primarily the result of lower tank ammunition sales in fiscal 1998. Space and Strategic Systems Group sales in fiscal 1998 were $370.0 million, an increase of $30.5 million or 9.0 percent, from sales of $339.5 million in fiscal 1997. The increase was driven primarily by increased space propulsion and composite structures sales in fiscal 1998, up $44 million and $19 million respectively, compared to fiscal 1997 sales. These increases were offset partially by the absence in the current year of $21 million in fiscal 1997 sales generated on the Evolved Expendable Launch Vehicle program (EELV), on which the Company completed its role in the prior year. Defense Systems Group sales in fiscal 1998 were $227.5 million, a decrease of $15.9 million or 6.5 percent, from sales of $243.4 in fiscal 1997. The net decrease in fiscal 1998 sales was the result of decreased revenues on programs at or nearing completion, offset partially by increased revenues on the Outrider(TM) unmanned aerial vehicle contract, where sales in fiscal 1998 increased $28 million over fiscal 1997. Emerging Business Group sales in fiscal 1998 were $27.2 million, a decrease of $14.2 million from sales of $41.4 million in fiscal 1997. In late fiscal 1998, management began to implement a plan that it believes will enhance the Company's focus on core business. As a result, effective April 1, 1998, certain of the Emerging Business Group business pursuits were consolidated into other Company business groups. Certain other non-core operations were phased out. This reorganization is not expected to have a material impact on the Company's financial results. Sales from continuing operations of $1,089.4 million in fiscal 1997 represented an increase of $68.8 million, or 6.7 percent, over sales of $1,020.6 million in fiscal 1996. The increase was primarily driven by increased tank ammunition sales, due to the resolution of technical issues in fiscal 1997 which had delayed fiscal 1996 shipments. Company sales for fiscal 1999 are expected to be approximately $1.1 billion. Restatement -- Subsequent to the issuance of the Company's Consolidated Financial Statements in its Form 10-K filing for the year ended March 31, 1998, Company management determined that it had misclassified $4.7 million of continuing operations costs as discontinued operations costs. These costs represented the costs associated with moving the contract-specific production lines for certain minor contracts not sold as part of the Company's sale of the Marine Systems Group (MSG) in February, 1997. Production for these non-MSG contracts occurred in a facility used primarily for MSG production. As the purchaser of MSG planned to move the MSG operations out of this facility, it was no longer a cost-competitive facility for the non-MSG contracts. Therefore, concurrent with the decision to sell MSG, management began moving these production lines to alternative facilities. The costs accrued for the move were charged to the gain on sale of discontinued operations. Management now believes that it should classify those $4.7 million of costs to continuing operations in fiscal 1997. As a result, the Consolidated Financial Statements for the year ending March 31, 1997 has herein been restated from the amounts previously reported to reflect these costs as costs of sales in continuing operations, as follows (in thousands, except per share data); Year ending March 31, 1997 -------------------------- As reported As restated ----------- ----------- Nonrecurring contract move costs $ -- $ 4,700 Income from continuing operations before income taxes 36,659 31,959 Income tax provision -- -- Income from continuing operations 36,659 31,959 Gain(loss) on disposal of discontinued operations, net of income taxes 17,681 22,381 Basic earnings per common share Continuing operations $ 2.82 $ 2.46 Discontinued operations 1.73 2.09 ----------- ----------- Basic earnings per common share $ 4.55 $ 4.55 =========== =========== Diluted earnings per common share Continuing operations $ 2.73 $ 2.38 Discontinued operations 1.68 2.03 ----------- ----------- Diluted earnings per common share $ 4.41 $ 4.41 =========== =========== Gross Margin -- The Company's gross margin as a percentage of sales was 18.1 percent, 14.6 percent, and 18.3 percent in fiscal 1998, 1997, and 1996, respectively. Gross margin in fiscal 1998 was $194.3 million, an increase of $34.7 million, compared to $159.6 million for fiscal 1997. The increased margin in fiscal 1998 was driven in large part by the fiscal 1997 one-time $17.4 million charge for the Company's adoption of AICPA Statement of Position No. 96-1 (SOP 96-1), "Environmental Remediation Liabilities." Fiscal 1997 costs also include a $4.7 million charge, reflecting costs to move certain contract production lines from a facility that the Company closed as a result of the February 28, 1997 sale of the Company's former Marine Systems Group (MSG). Concurrent with the sale of MSG, management began to move these contract- specific production lines to alternate sites, as the facility, after being vacated by MSG, would not be cost-competitive. Fiscal 1998 margin also benefitted from cost underruns on space propulsion and composite structures programs. Fiscal 1998 gross margin was adversely impacted by cost growth in the company's Emerging Business Group, driven primarily by the Explosive "D" fixed price contract for ordnance reclamation. Production delays on the Explosive "D" contract have resulted in additional costs to the Company, a portion of which the Company believes will ultimately be reimbursed by the customer. Potential technical and safety issues have been identified that, depending on the outcome of the continuing evaluation of these risks and the potentially mitigating solutions, could add cost growth to the program. These potential technical and safety issues would similarly result in cost growth on another fixed price Explosive "D" contract (for 6 and 8-inch gun projectiles) for which contract performance efforts are yet to begin. As a result of the above and other cost growth during fiscal 1998, the Company wrote off $6 million, which represents the Company's best estimate of unrecoverable contract costs. Based on information known at this time, management's estimated range of possible additional cost growth as a result of the potential technical and safety issues on Explosive "D" is currently $0-$8 million, on which ultimate outcome is dependent on the extent to which the Company is able to mitigate these potential risks, and obtain additional contract funding from the customer for work performed. Additionally, the customer has the ability to exercise a fixed price option for additional reclaimed quantities of the 6 and 8-inch projectiles. The Company believes that it is unlikely that these options will be exercised. The Company is currently working closely with the customer to resolve these matters on a mutually agreeable basis. Gross margin in fiscal 1997 was $159.6 million, a decrease of $26.7 million, compared to $186.3 million for fiscal 1996. The decreased margin in fiscal 1997 was primarily attributable to the $17.4 million charge associated with the Company's adoption of SOP 96-1, as well as the $4.7 million nonrecurring costs associated with moving contract-specific production lines as a result of the Company's sale of MSG, as described above. Additionally, the decrease was also attributable to cost growth on certain tactical propulsion, fuzing, ammunition, and ordnance reclamation contracts, offset by $12 million of non-recurring income due to negotiated settlements on two propulsion contracts that the U.S. Government customer had terminated in prior years. Fiscal 1999 gross margin is expected to be in the 17.5 to 18.5 percent range. 27 Research and Development -- The Company's research and development expenditures were $12.4 million or 1.2 percent of sales in fiscal 1998, compared with $16.2 million or 1.5 percent of sales in fiscal 1997 and $14.1 million or 1.4 percent of sales in fiscal 1996. The decrease in research and development expenditures in fiscal 1998 compared to fiscal 1997 was driven primarily by the absence in fiscal 1998 of costs incurred in the prior year of $3.0 million on the EELV program. Fiscal 1997 expenditures, 1.5 percent of sales, represented a slight increase compared to fiscal 1996 expenditures, 1.4 percent of sales, due primarily to EELV expenditures in fiscal 1997. The Company also spent $241.6 million on U.S. Government-customer funded research and development contracts in fiscal 1998, an increase of $10.3 million when compared to expenditures of $231.3 million in fiscal 1997 and $281.8 million in fiscal 1996. The decrease in fiscal 1997 compared to fiscal 1996 primarily represents the completion of a rocket motor development program. Selling -- The Company's selling expenses totaled $37.8 million or 3.5 percent of sales in fiscal 1998, compared with $35.8 million or 3.3 percent of sales in fiscal 1997. Fiscal 1998 selling costs include approximately $7 million of expenditures, compared to $3.4 million in fiscal 1997, on the Company's pursuit of the U.S. Government's Inter-Continental Ballistic Missile (ICBM) prime integration program which was ultimately awarded to a competitor in fiscal 1998. Fiscal 1997 selling costs, 3.3 percent as a percentage of sales, increased slightly compared to fiscal 1996 levels of 3.2 percent. The fiscal 1997 increase is attributed to early spending on ICBM in fiscal 1997. General and Administrative -- General and administrative costs for fiscal 1998 totaled $52.0 million or 4.8 percent of sales, compared with $41.9 million or 3.8 percent of sales in fiscal 1997, and $40.2 million or 3.9 percent of sales in fiscal 1996. Fiscal 1998 general and administrative costs, as a percent of sales, increased from fiscal 1997 levels. This increase primarily reflected increased legal costs compared to the prior year, and the absence in fiscal 1998 of a $2 million restructure reserve reversal in fiscal 1997, due to cost underruns identified relative to the originally reserved amounts. Operating expenses for fiscal 1999, stated as a percentage of sales, are expected to be approximately one percent lower than fiscal 1998 expenses, which were 9.5 percent of sales. This expected decrease is primarily due to the absence of fiscal 1998 spending on ICBM. Restructuring and Facility Closure Charges -- The Company initiated a restructuring program in fiscal 1995 which resulted in a fiscal 1995 fourth- quarter pre-tax charge of $35.6 million of which approximately $12 million was a non-cash charge associated with accruals for certain pension-related liabilities in accordance with Statement of Financial Accounting Standards (SFAS) No. 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." In mid-fiscal 1996, various executive management changes were made within the Defense Systems Group. As a result of these changes, new management re-evaluated business strategies for the Group, including its restructure plans and as a result, the anticipated timing of certain severance and facility closure costs pushed into fiscal 1997. Cash expenditures under this completed restructuring program, primarily for employee-related costs, totaled approximately $3 million, $8 million, and $11 million in fiscal 1998, 1997, and 1996, respectively. In the fourth quarter of fiscal 1997, the Company reversed approximately $2 million of this reserve against general and administrative costs, due to cost underruns relative to the originally reserved amounts. See also Discontinued Operations discussion, below, regarding Marine Systems Group facility closure costs incurred in fiscal 1998. Interest Expense -- Interest expense was $27.6 million in fiscal 1998, a decrease of $7.5 million, when compared to $35.1 million in fiscal 1997. Fiscal 1997 interest expense decreased $4.2 million from $39.3 million in fiscal 1996. The decrease in fiscal 1998 interest expense, as compared to fiscal 1997, reflects reduced average borrowings outstanding, due to regularly scheduled paydowns, as well as long-term debt prepayments of $88.6 million in March 1997, and $40 million in December 1997, with portions of the sale proceeds generated by the February 1997 sale of the Marine Systems Group. The decrease in interest expense in fiscal 1997 as compared to fiscal 1996 reflects decreased borrowings due to regularly scheduled paydowns. During fiscal 1998, the Company entered into treasury rate-lock agreements to hedge against increases in market interest rates on the anticipated refinancing of its senior subordinated notes, which are callable on March 1, 1999. These agreements provide rate locks between 6.04 and 6.25 percent on the most recently issued U.S. 10-year treasury note through March 1, 1999, on a notional amount totaling $100 million. The Company's actual refinancing rate will depend on its credit rating and respective borrowing margin over the treasury rate at that time. In January 1998, the Company entered into a swap agreement relating to $50 million face amount (approximately $48.7 million of accreted value) of its 11.75 percent senior subordinated notes. The agreement locks in the price at which the Company can pre-pay $50 million of its senior subordinated notes, which the Company currently anticipates doing in March 1999. The agreement provides for the Company to receive 11.75 percent interest on a notional amount of $50 million and to pay interest at one month London Interbank Offering Rate (LIBOR), plus 1 percent (approximately 6.7 percent at March 31, 1998), on a notional amount of $55 million. Additionally, the agreement provides that during the term of the swap, which expires in February 1999, any increases (decreases) in the market value of the notes will be received (paid), respectively, by the Company. The Company has provided a cash deposit of $2.4 million to the financial intermediary to collateralize the swap agreement. The 28 Company simultaneously entered into an additional swap agreement to hedge against increases in the one-month LIBOR interest rate relating to the above swap. Under the agreement, the Company pays a fixed rate of 5.54 percent, and receives interest at a rate of one-month LIBOR (approximately 5.7 percent at March 31, 1998) on a notional amount of $55 million. Both swap agreements expire February 1, 1999, and have certain cancellation options. Income Taxes -- Taxes on income from continuing operations in fiscal years 1998 and 1997 reflect a zero percent tax rate, compared to a 22 percent tax rate in fiscal 1996. These rates vary from statutory tax rates principally due to partial utilization of available tax loss carryforwards. The fiscal 1997 income tax provision includes a $12.1 million tax expense on income from discontinued operations. The fiscal 1996 income tax provision includes a tax benefit of $4.7 million for discontinued operations. Discontinued Operations Marine Systems Group -- On December 22, 1996, the Company entered into an agreement to sell its Marine Systems Group, including substantially all of the assets of that business, to Hughes Aircraft Co. (Hughes) for $141.0 million in cash. The sale was completed on February 28, 1997, resulting in a pretax gain to the Company (after restatement) of approximately $31.9 million ($22.4 million, after tax expense of $9.5 million), which the Company recognized in the fourth quarter of fiscal 1997. In connection with the sale, the Company began actions during fiscal 1998 to close certain facilities (not sold to Hughes) that had previously been utilized for Marine Systems Group contracts. As a direct result of the sale, the Company booked closure reserves of approximately $16 million in March 1997 (by a charge to the gain on disposal of discontinued operations) primarily for the estimated costs of facility closure, severance costs, and anticipated litigation costs associated with these activities. The Company has spent approximately $6 million to date on these facility closure and severance costs. As these facility closure activities are now substantially complete, the Company reversed $10.1 million of these liabilities during the fourth quarter of fiscal 1998, resulting in an additional gain on the disposal of the Marine business. Demilitarization Operations -- During fiscal 1994, the Company entered into two joint ventures in Belarus and Ukraine, for the purpose of establishing demilitarization operations in those countries. In March 1996, Company management, after evaluating its strategic plans for the future, elected to discontinue its ownership of its foreign demilitarization businesses (Demilitarization operations). Accordingly, the Company began actions to transfer ownership of the joint ventures to the host country governments, or their agents, and in the fourth quarter of fiscal 1996, the Company estimated and recorded a $6.2 million loss on disposal of discontinued operations (net of tax benefit of $4.2 million). During fiscal 1997, the Company stopped production efforts, and completed its withdrawal from the Belarus operation. In the fourth quarter of fiscal 1997, the Company reached agreement with the Ukrainian government to transfer the Company's interests in the operation to the Ukrainian Government after payment of a $19.8 million non-interest bearing long-term note receivable. In March 1998, as a result of the Company's continued consideration and evaluation of the status of the underlying operations, as well as newly imposed export restrictions in the Ukraine and the apparently increasing political instability in the region, Company management wrote off approximately $9.9 million, representing the remaining recorded value of the Company's investment in that operation. The Company maintains a letter of credit to support approximately $2.5 million of bank borrowings of the Demilitarization operations. Management continues to work with the Ukrainian Government to complete the Company's exit from this business. However, given the political instability in the region and the lack of economic reforms, the Company believes, absent substantial improvements in these conditions in fiscal 1999, that it will not be able to continue to pursue an exit by sale of its interest in the operation. In that case, the Company would currently anticipate removing and salvaging what assets it can in fiscal 1999. The salvage value of the assets is believed to be deminimus. Net Income -- The Company recorded net income of $68.2 million in fiscal 1998, an increase of $9.0 million, or 15.3 percent, over net income of $59.2 million in fiscal 1997. The fiscal 1998 increase in net income was driven by reduced interest expense due to debt paydowns, and improvements in operating margins, driven by cost underruns on space propulsion and composite structures programs, as well as the absence of the fiscal 1997 charges for the Company's adoption of SOP 96-1 ($17.4 million) and for non-recurring costs to move contract production lines ($4.7 million). Fiscal 1997 net income also included $27.2 million of income from discontinued operations, which is reflective of the Company's sale of the Marine Systems Group on February 28, 1997. The Company's fiscal 1997 net income of $59.2 million represented an increase of $11.4 million, or 23.8 percent, over fiscal 1996 net income of $47.8 million. Fiscal 1997 net income benefited from the Company's ability to more fully utilize previous tax loss carryforwards to reduce tax expense on continuing operations in fiscal 1997 to zero percent, compared to 22 percent in fiscal 1996. Fiscal 1996 included a $.6 million loss from discontinued operations. 29 Liquidity, Capital Resources, and Financial Condition Cash provided by operations during fiscal 1998 totaled $63.0 million, compared with $92.1 million for fiscal 1997. Cash provided by operations for fiscal 1998 reflects increased net income offset by increased use of cash for working capital purposes during fiscal 1998, primarily due to the receipt of $24 million more in customer advances in fiscal 1997. Fiscal 1998 cash flow from operations was also decreased by an increased use of cash for accounts payable. These decreases in cash flow were partially offset by the fiscal 1998 decrease in cash used in the Company's discontinued operations. During fiscal 1998, approximately $13 million was expended under the Company's restructure and facility consolidation activities, primarily for nonrecurring move and employee related costs associated with the closure of a facility previously used by the Company's former Marine Systems Group, sold in February, 1997. Cash provided by operations during fiscal 1997 totaled $92.1 million, compared with cash provided by operations of $89.1 million for fiscal 1996. Cash provided by operations for fiscal 1997 reflects increased net income and improved working capital management, partially offset by the decrease in net operating cash flow from the Company's discontinued operations. Approximately $8 million was expended during fiscal 1997 under the Company's Defense Systems Group restructure plan, primarily for employee-related costs. Additional restructure expenditures of approximately $12 million were made in fiscal 1997, in connection with the Company's closure plan for certain facilities acquired in the March 15, 1995, acquisition of the Hercules Aerospace Company (Aerospace operations) from Hercules, Incorporated (Hercules). As these closure activities were anticipated and planned for at the acquisition date, the Company had estimated and recorded these costs as part of the March, 1995 acquisition purchase price. The actual costs incurred did not vary significantly from those estimated and recorded. As a result of the Accudyne "qui tam" litigation settlement recorded as of the fourth quarter of fiscal 1995, the Company spent approximately $4.0, $3.0, and $3.5 million in fiscal 1998, 1997, and 1996, respectively. The final payment, $4.5 million, plus interest, will be paid during fiscal 1999. As a result of operating losses incurred in prior years, primarily resulting from restructuring charges, as well as one-time charges incurred in fiscal 1995, the Company has tax loss carryforwards of approximately $37.6 million, which are available to reduce future tax payments. Realization of the net deferred tax asset (net of recorded valuation allowance) is dependent upon profitable operations and future reversals of existing taxable temporary differences. Although realization is not assured, the Company believes that it is more likely than not that such net recorded benefits will be realized through the reduction of future taxable income. It is currently expected that required payments for taxes in fiscal 1999 will continue to be reduced due to the aforementioned tax loss carryforwards. However, the Company may be subject to the provisions of the Alternative Minimum Tax (AMT), in which case tax payments could be required. To the extent that AMT is required to be paid currently, the resulting deferred tax asset can be carried forward indefinitely, and can be recovered through reductions in tax payments on future taxable income. During fiscal 1998, the Company paid net AMT of approximately $1 million. In December 1997, the Company completed its acquisition of certain assets from a division of Motorola, Inc., including patent and technology rights related to military fuze production, for approximately $8.5 million. Up to $9.0 million in additional consideration may be required to be paid to the seller in the future, based on the magnitude of certain future program wins. Results from the proposed acquisition did not have a material impact on the Company's fiscal year 1998 results. On February 28, 1997, the Company completed the sale of its Marine Systems Group to Hughes for $141.0 million in cash. In accordance with the terms of its debt agreements, the Company used $88.6 million of the sale proceeds to pre-pay a portion of its long-term debt in March, 1997. In fiscal 1995, the Company acquired the Aerospace operations from Hercules for $306.0 million in cash and 3.86 million shares of Company common stock, valued at $112.0 million. During fiscal 1996, the Company received a net amount of $29.1 million from Hercules as an adjustment to the purchase price. The adjustment was primarily the result of receivable collections just prior to the closing of the acquisition, which reduced assets and lowered the final purchase price. On October 24, 1997, the Company entered into an agreement with Hercules providing for the disposition of the 3.86 million shares of Company common stock held by Hercules. The shares represent the stock issued by the Company in connection with the March 15, 1995, acquisition of the Hercules Aerospace Company operations from Hercules. Under the agreement with Hercules, during the quarter ended December 28, 1997, the Company registered for public offering approximately 2.78 million of the shares (previously unregistered) held by Hercules. The offering was completed on November 21, 1997. No new shares were issued in the offering nor did the Company receive any proceeds from the offering. The remaining 1.1 million shares then held by Hercules became subject to a put/call arrangement under which Hercules can require the Company to purchase the shares in four equal installments of 271,000 shares during each of the four calendar quarters of 1998. The Company can likewise require Hercules to sell the shares to the Company in four equal installments during each of the four calendar quarters of 1998. The price for shares purchased under the put/call arrangement is equal to the per share net proceeds realized by Hercules in the secondary public offering, $55.32. During February 1998, the Company did repurchase the first installment of 271,000 shares, for approximately $15 million, which is reflected accordingly in these financial statements. In May 1998, the company repurchased the second installment of 271,000 shares, for approximately $15 million. The Company's present intention is to purchase the remaining shares covered by the put/call arrangement, although no definitive decision has been made to do so. 30 During early fiscal 1998, the Company completed a $50 million stock repurchase program started in fiscal 1996. In connection with that program, the Company made repurchases in fiscal 1998 of approximately 140,000 shares, for approximately $6.0 million. Since 1996, repurchases of 1.3 million shares were made under this buyback program, at an average cost per share of $39.12. On October 22, 1997, the Company's Board of Directors authorized the Company to repurchase up to an additional 1.0 million shares of its common stock. It is currently expected that any purchases made under this buy-back plan would be subject to market conditions and the Company's compliance with its debt covenants. Effective November 10, 1997, the Company entered into an agreement to amend its Credit Agreement that provides the Company expanded flexibility with respect to certain restricted payments, including payments for stock repurchases. As of March 31, 1998, the Company's revised debt covenants permit it to expend up to an additional $66.5 million in total, in connection with all share repurchases. In connection with this new repurchase program, the Company has repurchased 165,300 shares through March 31, 1998, at a cumulative cost of $10.0 million, or an average cost per share of $60.34. While it is currently the Company's intention to continue stock repurchases under the program, there can be no assurance that the Company will repurchase all or any portion of the remaining shares or as to the timing or terms thereof. Net outlays for capital expenditures during fiscal 1998 were $20.4 million, or 1.9 percent of sales, compared with fiscal 1997 outlays of $28.5 million, or 2.6 percent of sales, and fiscal 1996 outlays of $25.6 million, or 2.5 percent of sales. Management expects total capital expenditures for fiscal 1999 to increase significantly, due in large part to capital investments the Company will make to facilitate expected growth in the Company's space propulsion business. This increase is primarily associated with orders the Company received from Boeing in May 1998, aggregating $750 million for the production of solid rocket boosters for Delta space launch vehicles. While these orders are not expected to have a material impact on fiscal 1999 sales, outlays for capital expenditures are expected to increase significantly, as the Company prepares its facilities for this contract. Principal payments made on the Company's long-term debt during fiscal 1998 totaled $67.4 million, which include prepayments made of approximately $41.5 million. As of March 31, 1998, no borrowings were outstanding against the Company's $275.0 million revolving line of credit. Letters of credit totaling $39.9 million at that date reduced the borrowings available under this credit line to $235.1 million. The Company's total debt (current portion of long-term debt, notes payable and long-term debt) as a percentage of total capitalization decreased to 43 percent at March 31, 1998, compared with 55 percent at March 31, 1997, which primarily reflects continued profitable operations and strong cash flow from operations, as well as proceeds from the sale of the Marine Systems Group, which were used largely for debt repayment. The Company satisfied all of its needs for cash in fiscal 1998, primarily used for operating capital, capital expenditures, scheduled debt repayments, and share repurchases, entirely from cash balances on hand, including current year operating cash flows. Based on the financial condition of the Company at March 31, 1998, management believes the internal cash flows of the Company, combined with the availability of funding, if needed, under its line of credit, will be adequate to fund the future growth of the Company as well as to service its long-term debt obligations. Contingencies -- Environmental Matters The Company is subject to various local and national laws relating to protection of the environment and is in various stages of investigation or remediation of potential, alleged, or acknowledged contamination. In March 1997, the Company adopted the provisions of SOP 96-1, which required a change in, and provided clarification to, the manner in which companies measure and recognize costs associated with environmental remediation liabilities. Under the provisions of the SOP, all future anticipated ongoing monitoring and maintenance costs associated with known remediation sites are required to be accrued. Such costs were previously expensed as incurred. The Company's adoption of the provisions of the SOP resulted in a non-cash charge of $17.4 million in the fourth quarter of fiscal 1997. The charge was classified in cost of sales expenses in the Company's consolidated income statement for the quarter ending March 31, 1997. At March 31, 1998, the accrued liability for environmental remediation of $31.9 million represents management's best estimate of the present value of the probable and reasonably estimable costs related to the Company's known remediation obligations. It is expected that a significant portion of the Company's environmental costs will be reimbursed to the Company. As collection of those reimbursements is estimated to be probable, the Company has recorded a receivable of $9.6 million, representing the present value of those reimbursements at March 31, 1998. Such receivable primarily represents the expected reimbursement of costs associated with the Aerospace operations, acquired from Hercules in March, 1995 (Aerospace acquisition), whereby the Company generally assumed responsibility for environmental compliance at Aerospace facilities. It is expected that much of the compliance and remediation costs associated with these facilities will be reimbursable under U.S. Government contracts, and that those environmental remediation costs not covered through such contracts will be covered by Hercules under various indemnification agreements. At March 31, 1998, the Company's accrual for environmental remediation liabilities and the associated receivable for reimbursement thereof, have been discounted to reflect 31 the present value of the expected future cash flows, using a discount rate, net of estimated inflation, of 4.5 percent. The following is a summary of the Company's amounts recorded for environmental remediation at March 31, 1998: - -------------------------------------------------------------------------------- Accrued Environmental Costs - Environmental Liability Reimbursement Receivable - -------------------------------------------------------------------------------- Amounts (Payable)/Receivable $(40,929) $12,482 Unamortized Discount 9,043 (2,860) - -------------------------------------------------------------------------------- Present Value Amounts (Payable)/Receivable $(31,886) $ 9,622 - -------------------------------------------------------------------------------- At March 31, 1998, the aggregate undiscounted amounts payable for environmental remediation costs, net of expected reimbursements, are estimated to be $3.4, $5.9, $1.5, $1.4, and $1.6 million for the fiscal years ending March 31, 1999, 2000, 2001, 2002, and 2003, respectively; estimated amounts payable thereafter total $14.5 million. Amounts payable/receivable in periods beyond fiscal 1999 have been classified as non-current on the Company's March 31, 1998, balance sheet. At March 31, 1998, the estimated discounted range of reasonably possible costs of environmental remediation is between $31.9 and $56.2 million. The Company does not anticipate that resolution of the environmental contingencies in excess of amounts accrued, net of recoveries, will materially affect future operating results. There were no material insurance recoveries related to environmental remediations during fiscal 1998, 1997, or 1996. In future periods, new laws or regulations, advances in technologies, outcomes of negotiations/litigations with regulatory authorities and other parties, additional information about the ultimate remedy selected at new and existing sites, the Company's share of the cost of such remedies, changes in the extent and type of site utilization, the number of parties found liable at each site, and their ability to pay are all factors that could significantly change the Company's estimates. It is reasonably possible that management's current estimates of liabilities for the above contingencies could change in the near term, as more definitive information becomes available. Contingencies - Litigation As a U.S. Government contractor, the Company is subjected to defective pricing and cost accounting standards non-compliance claims by the Government. Additionally, the Company has substantial Government contracts and subcontracts, the prices of which are subject to adjustment. The Company believes that resolution of such claims and price adjustments made or to be made by the Government for open fiscal years (1987 through 1998) will not materially exceed the amount provided in the accompanying balance sheets. The Company is a defendant in numerous lawsuits that arise out of, and are incidental to, the conduct of its business. Such matters arise out of the normal course of business and relate to product liability, intellectual property, government regulations, including environmental issues, and other issues. Certain of the lawsuits and claims seek damages in large amounts. In these legal proceedings, no director, officer, or affiliate is a party or a named defendant. The Company is involved in three "qui tam" lawsuits brought by former employees of the Aerospace operations acquired from Hercules in March 1995. The first involves allegations relating to submission of false claims and records, delivery of defective products, and a deficient quality control program. The second involves allegations of mischarging of work performed under government contracts, misuse of government equipment, other acts of financial mismanagement and wrongful termination claims. The Government did not join in either of these lawsuits. Under the terms of the agreements relating to the Aerospace acquisition, all litigation and legal disputes arising in the ordinary course of the acquired operations will be assumed by the Company except for a few specific lawsuits and disputes including the two qui tam lawsuits referred to above. On May 15, 1998, Hercules announced that it had agreed to a settlement in the first qui tam lawsuit, subject to approval by the court. Under terms of the purchase agreement with Hercules, the Company's maximum combined settlement liability for both of these qui tam matters is approximately $4 million, for which the Company has fully reserved. The Company also agreed to reimburse Hercules for 40 percent of all legal costs incurred after March 15, 1995, relating to these two actions. In the third qui tam lawsuit, the Company received a partially unsealed complaint in March, 1997 alleging labor mischarging to the Intermediate Nuclear Force (INF) contract, and other contracts. Damages are not specified in this civil suit. The Company and Hercules have agreed to share equally the external attorney's fees and investigative fees and related costs and expenses of this action until such time as a determination is made as to the applicability of the indemnification provisions of the purchase agreement. In March 1998, the Company and Hercules settled with the Department of Justice on the portion of the complaint alleging labor mischarging to the INF contract and agreed to pay $2.25 million each, together with relator's attorney's fees of $150 thousand each, which was paid in April 1998. As a result of this settlement, the Department of Justice will not intervene in the remaining portion of the complaint. The Company has accrued for such settlement costs in these financial statements. The Company has also been served with a complaint in a civil action alleging violation of the False Claims Act and the Truth in Negotiations Act. The complaint alleges defective pricing on a government contract. Based upon documents provided to the Company in connection with the action, the Company believes that the U.S. Government may seek damages and penalties of approximately $5 million. 32 The Company is a defendant in a patent infringement case brought by Cordant Technologies (formerly Thiokol Corporation), which the Company believes is without merit. The complaint does not quantify the amount of damages sought. Through its analysis of an October 27, 1997, court filing, the Company now believes that, based on an economist's expert testimony, Cordant Technologies may seek lost profits, interest and costs of approximately $240 million. Even if the Company is found liable, it believes that damages should be based upon a reasonable royalty of less than $5 million. The court has bifurcated the trial, with the liability issue being tried first and, if liability is found, the damages issue being tried second. The liability issue was tried in January 1998, after which the court requested, and the parties submitted, post-trial briefs. A decision on the liability issue is not expected until several months after submission of the parties' post-trial briefs. In the judgment of management, the case will not have a material adverse effect upon the Company's future financial condition or results of operations. However, there can be no assurance that the outcome of the case will not have a material adverse effect on the Company. During fiscal 1998, the Company has substantially completed the requirements of the M117 Bomb reclamation contract. The contract contained a priced option, having approximate contract value less than $5 million, whereby the customer could require the reclamation of additional quantities, given that such option be exercised within the terms and conditions of the contract. On August 4, 1997, the customer informed the Company that it was exercising the option. The Company, based on advice from its counsel, maintains that the option exercise was invalid and has therefore not performed on the option. The Company is currently appealing the validity of the option to the United States Court of Appeals, based on the Company's continued belief that such exercise was invalid. In late December 1997, the Company was informed by the customer that the Company was being terminated for default on the contract. The Company expects the appeals process to conclude in calendar 1998. Depending on the outcome of the appeal, which will drive the outcome of the termination for default, management currently estimates that the range of possible adverse impact to the Company's operating earnings is from $0-$4 million. While the results of litigation cannot be predicted with certainty, management believes, based upon the advice of counsel, that the actions seeking to recover damages against the Company either are without merit, are covered by insurance and reserves, do not support any grounds for cancellation of any contract, or are not likely to materially affect the financial condition or results of operations of the Company, although the resolution of any such matters during a specific period could have a material adverse effect on the quarterly or annual operating results for that period. Year 2000 The Company utilizes a significant amount of computer hardware and software programs and operating systems across the entire organization, including applications used in manufacturing, product development, financial business systems, and various administrative functions. To the extent that this hardware and software contains source code that is unable to appropriately interpret the upcoming calendar year 2000, some level of modification, or even replacements of such applications will be necessary. The Company's process for becoming "Year 2000" compliant includes activities to increase awareness of the issue across the Company, assess where the Company has issues, determine proposed resolutions, validate those proposed resolutions, and finally, implement the agreed-upon resolutions. The Company has substantially completed its assessment of applications within the Company that are not Year 2000 compliant and is in varying stages of determining appropriate resolutions to the issues identified. The Company currently expects to complete all relevant internal hardware and software modification and testing by early calendar 1999. In addition, the Company has initiated formal communications with all of its significant suppliers and customers to determine their Year 2000 compliance readiness and the extent to which the Company is vulnerable to any third party Year 2000 issues. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be converted to Year 2000 compliant systems in a timely manner, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. Given information known at this time about the Company's systems having such issues, coupled with the Company's ongoing, normal course-of-business efforts to upgrade or replace business critical systems and software applications as necessary, it is currently expected that Year 2000 costs, the majority of which are expected to be incurred in fiscal 1999, will not have an impact exceeding a range of $5-$10 million on the Company's liquidity or its results of operations. These costs include incremental personnel costs, consulting costs, and costs for the modification of existing hardware and software. These costs will be funded through cash flows from operations and are expensed as incurred. Purchased hardware and software will be capitalized in accordance with normal policy. The costs of the project and the timing in which the Company believes it will complete the necessary Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans, and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the success of the Company in identifying systems 33 and programs having Year 2000 issues, the nature and amount of programming required to upgrade or replace the affected programs, the availability and cost of personnel trained in this area, and the extent to which the Company might be adversely impacted by third party (suppliers, customers, etc.) failure to remediate their own Year 2000 issues. Failure by the Company and/or its suppliers and customers (in particular, the U.S. Government, on which the Company is materially dependent) to complete Year 2000 compliance work in a timely manner could have a material adverse effect on the Company's operations. New Accounting Rules In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which requires companies to present basic earnings per share (EPS) and diluted EPS, instead of the primary and fully diluted EPS that were previously required. The Company adopted the provisions of SFAS 128 during fiscal 1998, as required under the Statement. Accordingly, the financial statements for the period ended March 31, 1998, and all periods prior, have been reported consistent with the requirements of SFAS 128. In January 1998, the FASB issued SFAS No. 132 "Employers Disclosures About Pensions and Other Post-retirement Benefits." The Statement requires certain changes in disclosure requirements for pension and post-retirement benefits. The Company adopted SFAS 132 in March 1998. In October 1996, the AICPA issued SOP 96-1, which required change in, and provided clarification to, the manner in which companies measure and recognize costs associated with environmental remediation liabilities. Under the provisions of the SOP, the most significant change in accounting for the Company was that all future anticipated ongoing monitoring and maintenance costs associated with known remediation sites is required to be accrued. Such costs were previously expensed as incurred. The Company elected to adopt the provisions of the new rule early, as is permitted under the SOP, which resulted in a non-cash charge of $17.4 million in the fourth quarter of fiscal 1997. The charge is classified in cost of sales expenses in the Company's consolidated income statement for the period ending March 31, 1997. In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income," which requires businesses to disclose comprehensive income and its components in the Company's general-purpose financial statements. Additionally, the FASB also issued SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information." Both Statements require additional disclosure only, and as such, are expected to have no financial impacts to the Company. The Statements are effective for the Company's fiscal year ended March 31, 1999. In March, 1998, the AICPA issued SOP 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP provides guidance on when costs incurred for internal use computer software are to be capitalized. The SOP is currently not expected to have a material impact to the Company's results of operations or its financial position. The SOP is effective for the Company's fiscal year beginning April 1, 1999. Inflation In the opinion of management, inflation has not had a significant impact upon the results of the Company's operations. The selling prices under contracts, the majority of which are long-term, generally include estimated costs to be incurred in future periods. These cost projections can generally be negotiated into new buys under fixed-price government contracts, while actual cost increases are recoverable in cost-type contracts. Risk Factors Certain of the statements made and information contained in this report, excluding historical information, are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include those relating to fiscal 1999 sales, gross margin, operating expenses, facility closure costs, senior subordinated debt prepayment, tax payments and capital expenditures. Also included are statements relating to cost growth and reimbursement prospects for the Explosive "D" contract and the likelihood that the contract's option will be exercised; the realization of net deferred tax benefits; the repurchase of Company common stock generally, and from Hercules in particular; the funding of future growth and long-term debt repayment; environmental remediation costs and reimbursement prospects; the financial and operating impact of the resolution of environmental and litigation contingencies in general, resolution of the Cordant Technologies matter and M117 contract termination for default in particular; the ultimate cost and impact of the Company's Year 2000 compliance effort; and the financial and operating impact of FASB Statements and AICPA SOPs. Such forward-looking statements involve risks and uncertainties that could cause actual results or outcomes to differ materially. Some of these risks and uncertainties are set forth in connection with the applicable statements. Additional risks and uncertainties include, but are not limited to, changes in governmental spending and budgetary policies, governmental laws and other rules and regulations surrounding various matters such as environmental remediation, contract pricing, changing economic and political conditions in the United States and in other countries, international trading restrictions, outcome of union negotiations, customer product acceptance, the Company's success in program pursuits, program performance, continued access to technical and capital resources, supply and availability of raw materials and components, timely compliance with the technical requirements of the Year 2000 issue, including timely compliance by the Company's vendors and customers, and merger and acquisition activity within the industry. All forecasts and projections in this report are "forward-looking statements," and are based on management's current expectations of the Company's near-term results, based on current information available pertaining to the Company, including the aforementioned risk factors. Actual results could differ materially. 34 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ---------------------------- Financial Highlights ----------------------------
Amounts in thousands except per share data (Years Ended March 31) 1998 1997/3/ - --------------------------------------------------------------------------------------------------------------------------- Sales $1,075,506 $1,089,397 Change in accounting estimate - Environmental liabilities/1/ - 17,442 Nonrecurring contract move costs/3/ - 4,700 Income from continuing operations 67,958 31,959 Income from discontinued operations, net of income tax/2/ - 4,819 Gain on disposal of discontinued operations, net of income tax/2/ 225 22,381 Net income 68,183 59,159 - --------------------------------------------------------------------------------------------------------------------------- Basic earnings per common share: Continuing operations excluding nonrecurring costs /1,3/ 5.21 4.12 Nonrecurring costs /1,3/ - (1.66) Continuing operations 5.21 2.46 Discontinued operations .02 2.09 Basic earnings per common share 5.23 4.55 - --------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share: Continuing operations excluding nonrecurring costs /1,3/ 5.08 4.03 Nonrecurring costs /1,3/ - (1.65) Continuing operations 5.08 2.38 Discontinued operations .02 2.03 Diluted earnings per common share 5.10 4.41 - --------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization 47,517 52,721 Cash provided by operations 62,969 92,110 Capital expenditures 20,406 28,522 - --------------------------------------------------------------------------------------------------------------------------- Total assets 932,180 1,000,588 Total debt to total capitalization 43% 55% - --------------------------------------------------------------------------------------------------------------------------- Common shares outstanding 12,855,511 13,081,538 Number of employees 6,550 6,800 - ---------------------------------------------------------------------------------------------------------------------------
/1/Reflects the impact of the adoption in fiscal 1997 of the Statement of Position 96-1 "Environmental Remediation Liabilities." See Note 16 to the consolidated financial statements. /2/Reflects the results of discontinued operations and the related gain (loss) on disposition of those operations. See Note 15 to the consolidated financial statements. /3/ Reflects the nonrecurring costs of moving contract production lines out of a facility previously used by the Company's former Marine Systems business, which was sold on February 28, 1997. As restated; see Note 20 to the consolidated financial statements included herein. 35 ------------------------------ Report of Independent Auditors ------------------------------ To the Stockholders of Alliant Techsystems: We have audited the accompanying consolidated balance sheets of Alliant Techsystems Inc. and subsidiaries as of March 31, 1998, and 1997, and the related consolidated statements of income and of cash flows for each of the years ended March 31, 1998, 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, such financial statements present fairly, in all material respects, the consolidated financial position of Alliant Techsystems Inc. and subsidiaries at March 31, 1998, and 1997, and the consolidated results of its operations and its cash flows for each of the years ended March 31, 1998, 1997, and 1996, in conformity with generally accepted accounting principles. As discussed in Note 20, the accompanying 1997 financial statements have been restated. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Minneapolis, Minnesota May 11, 1998 (November 23, 1998 with respect to Note 20) -------------------- Report of Management -------------------- The management of Alliant Techsystems Inc. is responsible for the integrity, objectivity, and consistency of the financial information presented in this report. The financial statements have been prepared in accordance with generally accepted accounting principles, and necessarily include some amounts based on management's judgments and best estimates. To meet its responsibilities, management relies on a comprehensive system of internal controls designed to provide reasonable assurance that assets are safeguarded and that transactions are appropriately recorded and reported. The system is supported by the employment of qualified personnel and by an effective internal audit function. Our independent auditors provide an objective, independent review of management's discharge of its responsibilities as they relate to the financial statements. Their report is presented separately. The Audit Committee of the Board of Directors, consisting solely of outside directors, recommends the independent auditors for appointment by the Board subject to ratification by shareholders. The Committee also meets periodically with the independent auditors, internal auditors, and representatives of management to discuss audit results, the adequacy of internal controls, and the quality of our financial accounting and reporting. The independent auditors and the internal auditors have access to the Committee without the presence of management. /s/ Richard Schwartz Richard Schwartz Chairman and Chief Executive Officer /s/ Scott S. Meyers Scott S. Meyers Vice President and Chief Financial Officer 36 ------------------------------ Consolidated Income Statements ------------------------------
Amounts in thousands except per share data (Years Ended March 31) 1998 1997 1996 (As restated- see Note 20) - --------------------------------------------------------------------------------------------------------------------------- Sales $1,075,506 $1,089,397 $1,020,605 Cost of sales 881,237 907,695 834,298 Change in accounting estimate - environmental liabilities - 17,442 - Nonrecurring contract move costs - 4,700 - - --------------------------------------------------------------------------------------------------------------------------- Gross margin 194,269 159,560 186,307 Operating expenses: Research and development 12,447 16,207 14,126 Selling 37,757 35,778 33,143 General and administrative 52,011 41,881 40,186 - --------------------------------------------------------------------------------------------------------------------------- Total operating expenses 102,215 93,866 87,455 - --------------------------------------------------------------------------------------------------------------------------- Income from operations 92,054 65,694 98,852 - --------------------------------------------------------------------------------------------------------------------------- Other income (expense): Interest expense (27,621) (35,102) (39,279) Interest income 3,090 716 1,852 Other, net 435 651 657 - --------------------------------------------------------------------------------------------------------------------------- Total other expense (24,096) (33,735) (36,770) - --------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 67,958 31,959 62,082 Income tax provision - - 13,658 - --------------------------------------------------------------------------------------------------------------------------- Income from continuing operations 67,958 31,959 48,424 Discontinued operations: Income from discontinued operations, net of income taxes - 4,819 5,617 Gain (loss) on disposal of discontinued operations, net of income taxes 225 22,381 (6,240) - --------------------------------------------------------------------------------------------------------------------------- Net income $ 68,183 $ 59,159 $ 47,801 - --------------------------------------------------------------------------------------------------------------------------- Basic earnings per common share: Continuing operations $ 5.21 $ 2.46 $ 3.72 Discontinued operations .02 2.09 (.05) - --------------------------------------------------------------------------------------------------------------------------- Net income $ 5.23 $ 4.55 $ 3.67 - --------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share: Continuing operations $ 5.08 $ 2.38 $ 3.61 Discontinued operations .02 2.03 (.05) - --------------------------------------------------------------------------------------------------------------------------- Net income $ 5.10 $ 4.41 $ 3.56 - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 37 --------------------------- Consolidated Balance Sheets ---------------------------
- --------------------------------------------------------------------------------------------------------------------------- Amounts in thousands except share data (Years Ended March 31) 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 68,960 $ 122,491 Receivables 209,915 190,675 Net inventory 49,072 68,125 Deferred income tax asset 38,280 40,259 Other current assets 6,803 5,707 - --------------------------------------------------------------------------------------------------------------------------- Total current assets 373,030 427,257 - --------------------------------------------------------------------------------------------------------------------------- Net property, plant, and equipment 333,181 358,103 Goodwill 131,600 123,618 Prepaid and intangible pension assets 85,539 80,569 Deferred charges and other 8,830 11,041 - --------------------------------------------------------------------------------------------------------------------------- Total assets $932,180 $1,000,588 - --------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 17,838 $ 29,024 Notes payable - 2,302 Accounts payable 80,071 85,451 Contract advances and allowances 64,318 64,500 Accrued compensation 32,275 28,392 Accrued income taxes 8,049 9,156 Accrued restructuring and facility consolidation 2,637 15,856 Other accrued liabilities 72,214 84,385 - --------------------------------------------------------------------------------------------------------------------------- Total current liabilities 277,402 319,066 - --------------------------------------------------------------------------------------------------------------------------- Long-term debt 180,810 237,071 Post-retirement and post-employment benefits liability 136,889 143,373 Pension liability 33,991 37,079 Other long-term liabilities 37,334 45,207 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities $666,426 $ 781,796 - --------------------------------------------------------------------------------------------------------------------------- Contingencies (see Notes 14 and 16) Redeemable common shares (813,000 shares, par value $8, redeemable at prescribed prices totaling $44,979. Shares are redeemable in three equal lots of 271,000 shares each during each of the last three calendar quarters of 1998.) $ 44,979 $ - Stockholders' equity: Common stock - $.01 par value Authorized - 20,000,000 shares Issued and outstanding 12,855,511 and 13,081,538 shares at March 31, 1998 and 1997, respectively 121 131 Additional paid-in-capital 201,728 248,612 Retained earnings 72,544 4,361 Unearned compensation (1,251) (1,324) Pension liability adjustment (4,743) (2,304) Common stock in treasury, at cost (1,008,102 and 782,075 shares held at March 31, 1998 and 1997, respectively) (47,624) (30,684) - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $932,180 $1,000,588 - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 38 ------------------------------------- Consolidated Statements of Cash Flows -------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------- Amounts in thousands (Years Ended March 31) 1998 1997 1996 (As restated-- see Note 20) - -------------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 68,183 $ 59,159 $ 47,801 Adjustments to net income to arrive at cash provided by operations: Depreciation 41,416 45,114 49,855 Amortization of intangible assets and unearned compensation 6,101 7,607 8,768 (Gain) loss on disposition of discontinued operations, net of taxes (225) (22,381) 6,240 Loss (gain) on disposition of property 330 (72) (135) Changes in assets and liabilities: Receivables (19,240) (13,201) (409) Inventories 19,053 19,349 11,947 Accounts payable (5,380) 7,726 29,564 Contract advances and allowances (182) 23,863 (21,409) Accrued compensation 3,883 (280) 3,382 Accrued income taxes (1,107) (154) (115) Accrued restructuring and facility consolidation (13,219) (18,246) (35,471) Accrued environmental liability (1,905) 13,180 (178) Pension and post-retirement benefits (11,397) (7,293) (4,205) Other assets and liabilities (23,342) (17,621) (24,962) Operating activities of discontinued operations - (4,640) 18,408 - --------------------------------------------------------------------------------------------------------------------------- Cash provided by operations 62,969 92,110 89,081 - --------------------------------------------------------------------------------------------------------------------------- Investing Activities Capital expenditures (20,406) (28,522) (25,593) Acquisition of business (8,466) - - Business acquisition purchase price finalization - - 29,115 Accrued transaction fees paid - - (6,000) Proceeds from sale of discontinued operations - 141,000 - Proceeds from the disposition of property 2,021 2,835 929 Investing activities of discontinued operations - (2,483) (2,306) Other investing activities, net - - 414 - --------------------------------------------------------------------------------------------------------------------------- Cash (used for) provided by investing activities (26,851) 112,830 (3,441) - --------------------------------------------------------------------------------------------------------------------------- Financing Activities Payments made on long-term debt and notes payable (67,447) (128,905) (30,000) Net purchase of treasury shares (28,952) (2,616) (36,859) Proceeds from exercised stock options 9,052 3,995 1,773 Other financing activities, net (2,302) (455) (686) - --------------------------------------------------------------------------------------------------------------------------- Cash used for financing activities (89,649) (127,981) (65,772) - --------------------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (53,531) 76,959 19,868 Cash and cash equivalents at beginning of period 122,491 45,532 25,664 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 68,960 $ 122,491 $45,532 - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 39 ---------------------------------------------- Notes to the Consolidated Financial Statements - -------------------------------------------------------------------------------- (Amounts in thousands except share and per share data and unless otherwise indicated) 1 Basis of Presentation and Significant Accounting Policies Basis of Presentation - The consolidated financial statements of the Company include all wholly owned subsidiaries. Intercompany balances and transactions between entities included in these financial statements have been eliminated. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ from those estimates. Long-Term Contracts - Sales under long-term contracts are accounted for under the percentage of completion method and include cost reimbursement and fixed-price contracts. Sales under cost reimbursement contracts are recognized as costs are incurred. Sales under fixed-price contracts are either recognized as the actual cost of work performed relates to the estimate at completion (cost-to-cost) or based on results achieved, which usually coincides with customer acceptance (units-of-delivery). Profits expected to be realized on contracts are based on the Company's estimates of total contract sales value and costs at completion. Estimated amounts for contract changes and claims are included in contract sales only when realization is estimated to be probable. Assumptions used for recording sales and earnings are adjusted in the period of change to reflect revisions in contract value and estimated costs. In the period in which it is determined that a loss will be incurred on a contract, the entire amount of the estimated loss is charged to income. Research and development, selling, and general and administrative costs are expensed in the year incurred. Environmental Remediation and Compliance - Costs associated with environmental compliance and preventing future contamination that are estimable and probable are accrued and expensed, or capitalized as appropriate. Expected remediation and monitoring costs relating to the remediation of an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are accrued and expensed in the period that such costs become estimable. Liabilities are recognized for remedial activities when they are probable and the remediation cost can be reasonably estimated. The cost of each environmental liability is estimated by engineering, financial, and legal specialists within the Company based on current law and existing technologies. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that other potentially responsible parties (PRPs) will be able to fulfill their commitments at the sites where the Company may be jointly and severally liable. The Company's estimates for environmental obligations are dependent on, and affected by, changes in environmental laws and regulations, the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, methods of remediation available, the technology that will be required, the outcome of discussions with regulatory agencies and other PRPs at multi-party sites, the number and financial viability of other PRPs, future technological developments, and the timing of expenditures; accordingly, such estimates could change materially as the Company periodically evaluates and revises such estimates based on expenditures against established reserves and the availability of additional information. Cash Equivalents - Cash equivalents are all highly liquid temporary cash investments purchased with original maturities of three months or less. The fair market value of such investments at March 31, 1998 approximates cost. Inventories - Inventoried costs relating to long-term contracts and programs are stated at actual production costs, including factory overhead, initial tooling, and other related nonrecurring costs incurred to date, reduced by amounts identified with sales recognized on units delivered or progress completed. Inventoried costs relating to long-term contracts and programs are reduced by charging any amounts in excess of estimated realizable value to cost of sales. Progress payments received from customers relating to the uncompleted portions of contracts are offset first against unbilled receivable balances, then against applicable inventories. Any remaining progress payment balances are classified as contract advances. Property and Depreciation - Property, plant, and equipment is stated at cost and depreciated over estimated useful lives. Machinery and test equipment is depreciated using the double declining balance method, converting to straight-line depreciation for the last third of the asset's life. All other depreciable property is depreciated using the straight-line method. 40 Goodwill - Goodwill represents the excess of the cost of purchased businesses over the fair value of their net assets at date of acquisition and is being amortized on a straight-line basis over periods of 25 to 40 years. The recoverability of the carrying value of goodwill is periodically evaluated by comparison of the carrying value of the underlying assets which gave rise to the goodwill (including the carrying value of the goodwill itself) with the estimated future undiscounted cash flows from the related operations. An impairment loss would be measured as the amount by which the carrying value of the asset exceeds the fair value of the asset based on discounted estimated future cash flows. To date, management has determined that no impairment exists. Income Taxes - Deferred income taxes result from temporary differences between the basis of assets and liabilities recognized for differences between the financial statement and tax basis thereon, and for the expected future tax benefits to be derived from tax losses and tax credit carryforwards. A valuation allowance is recorded to reflect the likelihood of realization of deferred tax assets. Financial Instruments and Hedging - The Company uses interest rate swap and forward rate lock agreements to manage interest costs and the risk associated with changing interest rates. As interest rates change, the differential paid or received is recognized in interest expense of the period. Earnings Per Share Data - In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings Per Share," which requires companies to present basic earnings per share (EPS) and diluted EPS, instead of the primary and fully diluted EPS that were previously required. The Company adopted the provisions of SFAS 128 during fiscal 1998, as required under the Statement. Accordingly, the financial statements for the year ended March 31, 1998, and all periods prior, have been reported consistent with the requirements of SFAS 128. Basic EPS is computed based upon the weighted average number of common shares outstanding for each period presented. Diluted EPS is computed based on the weighted average number of common shares and potential dilutive common shares. Potential dilutive common shares represent the effect of redeemable common stock (see Note 13) and stock options outstanding during each period presented, which, if exercised, would have a dilutive effect on earnings per share for fiscal 1998, 1997, and 1996. The diluted EPS calculation results in the same EPS that the Company has historically reported as fully diluted. In computing EPS from continuing operations for the years ended March 31, 1998, 1997, and 1996, income from continuing operations, as reported for each respective period, is divided by (in thousands): - -------------------------------------------------------------------------------- Years Ended March 31 1998 1997 1996 - -------------------------------------------------------------------------------- Basic EPS: Average shares outstanding 13,048 13,015 13,034 - -------------------------------------------------------------------------------- Diluted EPS: Average shares outstanding 13,048 13,015 13,034 Dilutive effect of options and redeemable common shares 323 387 397 - -------------------------------------------------------------------------------- Diluted EPS shares outstanding 13,371 13,402 13,431 - -------------------------------------------------------------------------------- For the year ended March 31, 1998, the 813,000 common shares redeemable under the put/call agreement with Hercules (see Note 13) were not included in the calculation of diluted EPS, as inclusion of those redeemable shares would have been anti-dilutive. There were no other significant issuable securities (i.e., options to purchase common shares) outstanding during the above periods indicated, not included in the computation of diluted EPS, due to the option price being greater than the average market price of the common shares. Reclassifications - Certain reclassifications have been made to the fiscal 1997 and 1996 financial statements to conform to the fiscal 1998 classification. 41 2 Receivables Receivables, including amounts due under long-term contracts (contract receivables), are summarized as follows: - -------------------------------------------------------------------------------- Years Ended March 31 1998 1997 - -------------------------------------------------------------------------------- Contract receivables Billed receivables $ 80,408 $ 74,062 Unbilled receivables 127,231 113,802 Other receivables 2,276 2,811 - -------------------------------------------------------------------------------- $209,915 $190,675 - -------------------------------------------------------------------------------- Receivable balances are shown net of reductions of $207,200 and $301,385 as of March 31, 1998 and 1997, respectively, for customer progress payments received on completed portions of contracts. Unbilled receivables represent the balance of recoverable costs and accrued profit comprised principally of revenue recognized on contracts for which billings have not been presented to the customer because the amounts were earned but not contractually billable as of the balance sheet date. These amounts also include expected additional billable general overhead costs and fees on flexibly priced contracts awaiting final rate negotiations, and are generally billable and collectible within one year. 3 Inventories Inventory balances are shown net of reductions of $13,254 and $18,933 as of March 31, 1998 and 1997, respectively, for customer progress payments received on uncompleted portions of contracts. 4 Property, Plant, and Equipment The major categories of property consist of the following: - -------------------------------------------------------------------------------- Years Ended March 31 1998 1997 - -------------------------------------------------------------------------------- Land $ 22,901 $ 23,624 Buildings and improvements 163,821 164,225 Machinery and equipment 327,453 322,168 Property not yet in service 6,173 10,701 - -------------------------------------------------------------------------------- 520,348 520,718 - -------------------------------------------------------------------------------- Less accumulated depreciation (187,167) (162,615) - -------------------------------------------------------------------------------- $333,181 $358,103 - -------------------------------------------------------------------------------- 5 Goodwill and Deferred Charges Goodwill and deferred charges consist of the following: - -------------------------------------------------------------------------------- Years Ended March 31 1998 1997 - -------------------------------------------------------------------------------- Goodwill, net of accumulated amortization: 1998 - $10,769, 1997 - $7,255 $ 131,600 $ 123,618 ================================================================================ Debt issuance costs, net of accumulated amortization: 1998 - $8,569, 1997 - $7,100 $ 6,280 $ 7,721 Other 2,550 3,320 - -------------------------------------------------------------------------------- $ 8,830 $ 11,041 - -------------------------------------------------------------------------------- The increase in goodwill in fiscal 1998 reflects goodwill associated with the December 1997 $8.5 million acquisition of the assets of the Motorola fuze business. 42 6 Other Accrued Liabilities The major categories of other current and long-term accrued liabilities are as follows: - -------------------------------------------------------------------------------- Years Ended March 31 1998 1997 - -------------------------------------------------------------------------------- Employee benefits and insurance $29,313 $34,927 Legal accruals 21,495 26,138 Other accruals 21,406 23,320 - -------------------------------------------------------------------------------- Other accrued liabilities - current $72,214 $84,385 ================================================================================ Litigation settlement - long-term $ - $ 4,500 Environmental remediation liability 17,264 19,169 Deferred tax liability 19,498 21,477 Other long-term 572 61 - -------------------------------------------------------------------------------- Other long-term liabilities $37,334 $45,207 ================================================================================ 7 Long-Term Debt The components of the Company's long-term debt are as follows: - -------------------------------------------------------------------------------- Years Ended March 31 1998 1997 - -------------------------------------------------------------------------------- Bank Term Loan with quarterly principal and interest payments through March 2001 $ 48,648 $116,095 11.75% Senior Subordinated Notes with semi-annual interest payments, maturing 2003 150,000 150,000 - -------------------------------------------------------------------------------- Total long-term debt 198,648 266,095 Less current portion (17,838) (29,024) ================================================================================ Long-term portion $180,810 $237,071 ================================================================================ In fiscal 1995, the Company entered into a six-year bank credit facility which is comprised of a $275,000 term loan and a $275,000 revolving working capital (revolver) and letter of credit facility. Outstanding letters of credit totaling $39,889 reduced the available line of credit to $235,111 at March 31, 1998. The Company is required to pay a commitment fee (0.275 percent at March 31, 1998) on the $275,000 revolver. The revolver fees are subject to adjustment based on the Company's long-term debt rating. The interest rate charged for borrowings under the bank credit facility is at the option of the Company, either a floating rate based on a defined prime rate or a fixed rate related to the London Interbank Offering Rate (LIBOR) plus a margin based on the Company's debt rating. As of March 31, 1998, the unhedged interest rate on outstanding borrowings under this facility was approximately 6.6 percent. Borrowings are secured by substantially all of the assets of the Company. Amounts outstanding under this agreement at March 31, 1998, based on current rates for similar instruments with the same maturities, approximate fair market value. There were no outstanding borrowings against the revolving line of credit at March 31, 1998. In addition to the bank credit facility, the Company has $150,000 of 11.75 percent senior subordinated notes outstanding. The senior subordinated notes are redeemable at the option of the Company, in whole or in part, at any time on or after March 1, 1999, at certain defined redemption prices. The estimated fair value of the Company's senior subordinated notes, based on bank quotes, is approximately $163.9 million at March 31, 1998. The Company's bank credit facility and senior subordinated notes limit the payment of dividends and contain certain covenants with respect to the Company's consolidated net worth, leverage, and debt and interest coverage. Additionally, the Company's debt agreements impose certain restrictions on the incurrence of additional indebtedness, sale of assets, mergers and consolidations, payments for stock repurchases, transactions with affiliates, creation of liens, and certain other matters. Effective November 10, 1997, the Company entered into an agreement to amend its Credit Agreement that provides the Company expanded flexibility with respect to certain restricted payments, including payments for stock repurchases. In connection with the sale of its Marine Systems Group in February 1997 (see Note 15), the Company prepaid $88.6 million of its long-term debt, in accordance with the terms of the bank credit facility. During fiscal 1998, the Company made additional long-term debt prepayments of $41.5 million. At March 31, 1998, the Company was in compliance with all covenants and restrictions specified in its debt agreements. 43 At March 31, 1998, the aggregate maturities due over the next five fiscal years under the bank term loan and the senior subordinated notes are $17,838 in 1999, $17,838 in 2000, $12,972 in 2001, $0 in 2002, and $150,000 in 2003. No amounts are due thereafter. The company's weighted average interest rate on short-term borrowings during fiscal 1998 and 1997 was 7.4 percent and 7.2 percent, respectively. During fiscal 1998, the Company entered into treasury rate-lock agreements to hedge against increases in market interest rates on the anticipated refinancing of its senior subordinated notes, which are callable on March 1, 1999. These agreements provide rate locks between 6.04 and 6.25 percent on the most recently issued U.S. 10-year treasury note through March 1, 1999, on a notional amount totaling $100 million. The Company's actual refinancing rate will depend on its credit rating and respective borrowing margin over the treasury rate at that time. The fair market value of the treasury rate-lock agreements at March 31, 1998, is $(3.1) million. In January, 1998, the Company entered into a swap agreement relating to $50 million face amount (approximately $48.7 million of accreted value) of its 11.75 percent senior subordinated notes. The agreement locks in the price at which the Company can pre-pay $50 million of its senior subordinated notes, which the Company currently anticipates doing in March 1999. The agreement provides for the Company to receive 11.75 percent interest on a notional amount of $50 million and to pay interest at one month LIBOR plus 1 percent (approximately 6.7 percent at March 31, 1998) on a notional amount of $55 million. Additionally, the agreement provides that during the term of the swap, which expires in February 1999, any increases (decreases) in the market value of the notes will be received (paid), respectively, by the Company. The Company has provided a cash deposit of $2.4 million to the financial intermediary to collateralize the swap agreement. The fair market value of the swap agreement at March 31, 1998, is $1.3 million. The Company simultaneously entered into an additional swap agreement to hedge against increases in the one-month LIBOR interest rate relating to the above swap. Under the agreement, the Company pays a fixed rate of 5.54 percent, and receives interest at a rate of one-month LIBOR (approximately 5.7 percent at March 31, 1998) on a notional amount of $55 million. The fair market value of the additional swap agreement at March 31, 1998, is $.1 million. Both swap agreements expire February 1, 1999, and have certain cancellation options. Counter parties to the interest rate swap and rate lock agreements are major financial institutions who also participate in the Company's bank credit facilities. Credit loss from counterparty non-performance is not anticipated. The estimated fair market value amounts have been determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value; therefore, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair value amounts. 8 Employee Benefit Plans The Company's noncontributory defined benefit pension plans cover substantially all employees. Plans provide either pension benefits of stated amounts for each year of credited service, or pension benefits based on employee yearly pay levels and years of credited service. The Company funds the plans in accordance with federal requirements calculated using appropriate actuarial methods. Plan assets for the Company are held in a trust and are invested in a diversified portfolio of equity securities and fixed income investments. The sale of the Marine Systems Group resulted in a curtailment as defined by SFAS No. 88, "Employer's Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." The net impact of the curtailment was a credit to the fiscal 1997 gain on disposal of discontinued operations of $304 thousand. 44 The following illustrates the change in the Company's projected pension benefit obligation for fiscal years 1998 and 1997:
- ------------------------------------------------------------------------------------ Years Ended March 31 1998 1997 - ------------------------------------------------------------------------------------ Projected benefit obligation at beginning of year $ 838,107 $ 837,202 Service cost of benefits earned during the period 15,008 16,636 Interest cost of projected benefit obligation 60,354 61,563 Plan amendments 2,593 4,214 Sale of Marine Systems Group/1/ -- (30,475) Actuarial loss 39,779 33,439 Benefits paid (75,719) (84,472) - ------------------------------------------------------------------------------------ Projected benefit obligation at end of year $ 880,122 $ 838,107 ====================================================================================
/1/Refer to footnote 15 Changes in the Company's pension plan assets are summarized as follows for fiscal years 1998 and 1997:
- ------------------------------------------------------------------------------------ Years Ended March 31 1998 1997 - ------------------------------------------------------------------------------------ Fair value of plan assets at beginning of year $ 915,574 $ 901,305 Actual return on plan assets 163,528 107,965 Company contributions 12,604 14,776 Benefits paid (75,089) (84,472) Sale of Marine Systems Group/1/ -- (24,000) - ------------------------------------------------------------------------------------ Fair value of plan assets at end of year $ 1,016,617 $ 915,574 ====================================================================================
/1/Refer to footnote 15 The components of prepaid pension cost and the amounts recognized in the Company's balance sheet for its pension plans are as follows for fiscal years 1998 and 1997:
- ----------------------------------------------------------------------------------------- Years Ended March 31 1998 1997 - ----------------------------------------------------------------------------------------- Funded status $ 136,495 $ 77,467 Accrued contribution 2,990 2,861 Unrecognized net actuarial gain (94,452) (43,239) Unrecognized prior service cost 13,267 12,125 Unrecognized net asset (2,009) (2,624) - ----------------------------------------------------------------------------------------- Prepaid pension cost $ 56,291 $ 46,590 ========================================================================================= Prepaid benefit cost $ 80,427 $ 75,627 Accrued benefit liability (33,991) (37,079) Intangible asset 5,112 5,738 Accumulated other comprehensive income 4,743 2,304 - ----------------------------------------------------------------------------------------- Total prepaid pension cost recognized in balance sheet $ 56,291 $ 46,590 =========================================================================================
45 The change in the additional minimum pension liability recognized (see Note 13) was as follows for fiscal years 1998 and 1997:
- ----------------------------------------------------------------------------------------- Years Ended March 31 1998 1997 - ----------------------------------------------------------------------------------------- Change in: Intangible assets $ (626) $(1,202) Accrued pension benefit costs (1,813) 87 - ----------------------------------------------------------------------------------------- Total change in additional minimum pension liability $(2,439) $(1,115) =========================================================================================
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefits in excess of plan assets were $72,188, $70,512, and $42,907, respectively as of March 31, 1998, and $318,356, $302,285, and $272,111, respectively, as of March 31, 1997. The components of the Company's net periodic pension costs are as follows for fiscal years 1998, 1997, and 1996:
- ----------------------------------------------------------------------------------------- Years Ended March 31 1998 1997 1996 - ----------------------------------------------------------------------------------------- Service cost of benefits earned during the period $ 15,008 $ 16,636 $ 15,662 Interest costs of projected benefit obligation 60,354 61,563 60,871 Expected return on plan assets (73,098) (68,834) (63,857) Amortization of unrecognized net loss (gain) 132 121 (585) Amortization of unrecognized prior service cost 1,452 1,753 1,693 Amortization of unrecognized net asset (615) (596) (546) - ----------------------------------------------------------------------------------------- Net periodic pension cost $ 3,233 $ 10,643 $ 13,238 =========================================================================================
The weighted-average assumptions used in the accounting for defined benefit plans were:
- ----------------------------------------------------------------------------------------- Years Ended March 31 1998 1997 1996 - ----------------------------------------------------------------------------------------- Discount rate used in determining present values 7.25% 7.50% 7.50% - ----------------------------------------------------------------------------------------- Annual increase in future compensation levels: Union 3.25% 3.25% 3.25% Salaried 4.25% 4.25% 4.25% - ----------------------------------------------------------------------------------------- Expected long-term rate of return on plan assets 8.75% 8.75% 8.75% =========================================================================================
The Company also sponsors a number of defined contribution plans. Participation in one of these plans is available to substantially all employees. The two principal defined contribution plans are Company-sponsored 401(k) plans to which employees may contribute up to 18 percent of their pay. The Company contributes in Company common stock or cash, amounts equal to 50 percent of employee contributions up to 4 or 6 percent of the employee's pay. The amount expensed for the Company match provision of the plans was $5,538, $5,881, and $5,780 in fiscal 1998, 1997, and 1996, respectively. The Company employs approximately 2,150 employees (33 percent of its total employees) covered by collective bargaining agreements, 1,274 of whom are covered under agreements expected to be renegotiated during fiscal 1999, due to current agreement expirations. 46 9 Post-Retirement Benefits Generally, employees retiring from the Company after attaining age 55 who have had at least five years of service are entitled to post-retirement health care benefits and life insurance coverage until the retiree reaches age 65 or later, depending on plan provisions. The portion of the premium cost borne by the Company for such benefits is dependent on the employee's years of service. Further contributions from retirees are also required based on plan deductibles and co-payment provisions. The following illustrates the change in the Company's accumulated nonpension post-retirement benefit obligation for fiscal years 1998 and 1997:
- ----------------------------------------------------------------------------------------- Years Ended March 31 1998 1997 - ----------------------------------------------------------------------------------------- Accumulated benefit obligation at beginning of year $ 142,675 $ 149,808 Service cost of benefits earned during the period 1,203 899 Interest cost on accumulated obligation 9,649 7,341 Plan amendments (5,885) -- Actuarial loss 13,524 656 Net benefits paid (15,947) (16,029) - ----------------------------------------------------------------------------------------- Accumulated benefit obligation at end of year $ 145,219 $ 142,675 =========================================================================================
Changes in the Company's post-retirement plan assets are summarized as follows for fiscal year 1998 and 1997:
- ------------------------------------------------------------------------------------------- Years Ended March 31 1998 1997 - ------------------------------------------------------------------------------------------- Fair value of plan assets at beginning of year $ 4,797 $ 1,394 Actual return on plan assets (260) 181 Retiree contributions 4,279 4,500 Company contributions 16,875 19,251 Gross benefits paid (17,073) (20,529) - ------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 8,618 $ 4,797 ===========================================================================================
The Company's nonpension post-retirement benefit obligations are generally not prefunded. The following table illustrates the status of retiree benefit obligations as of March 31, 1998 and 1997.
- ------------------------------------------------------------------------------------------- Years Ended March 31 1998 1997 - ------------------------------------------------------------------------------------------- Funded status $(136,601) $(137,878) Accrued contribution 1,504 -- Unrecognized net actuarial loss (gain) 7,966 (2,980) Unrecognized prior service cost (5,747) (180) - ------------------------------------------------------------------------------------------- Post-retirement benefit liability recognized in balance sheet $(132,878) $(141,038) ===========================================================================================
47 The components of the Company's net periodic post-retirement benefit costs are as follows for fiscal years 1998, 1997, and 1996:
- ------------------------------------------------------------------------------------------- Years Ended March 31 1998 1997 1996 - ------------------------------------------------------------------------------------------- Service cost of benefits earned during the period $ 1,204 $ 899 $ 842 Interest costs of accumulated post-retirement benefit obligation 9,649 7,506 7,603 Expected return on plan assets (315) (165) -- Amortization of unrecognized net loss -- 399 -- Amortization of unrecognized prior service cost (318) (21) (25) Curtailment gain -- -- (1,120) - ------------------------------------------------------------------------------------------- Net post-retirement periodic benefit cost $ 10,220 $ 8,618 $ 7,300 ===========================================================================================
The curtailment gain recognized in fiscal 1996 was the result of a reduction in employment associated with restructuring programs. The weighted-average assumptions used in the accounting for nonpension post-retirement benefits were as follows:
- ------------------------------------------------------------------------------------------- Years Ended March 31 1998 1997 1996 - ------------------------------------------------------------------------------------------- Discount rate used in determining present values 7.25% 7.50% 7.50% - ------------------------------------------------------------------------------------------- Expected long-term rate of return on plan assets 6.00% 6.00% 6.00% - ------------------------------------------------------------------------------------------- Medical trend rate 5.00% 5.00% 5.00% ===========================================================================================
For measurement purposes, a weighted average annual rate of increase of approximately 5 percent in the per capital cost of covered health care benefits was assumed for fiscal year 1999. The rate was assumed to remain at that level thereafter. The following illustrates the effect of a one-percentage point increase or decrease in the assumed health care cost trend rate, as of March 31, 1998:
- ------------------------------------------------------------------------------------------- One Percentage One Percentage Point Increase Point Decrease - ------------------------------------------------------------------------------------------- Effect on service and interest cost components $ 882 $ (815) Effect on accumulated post-retirement benefit obligation $ 8,019 $ (7,596) ===========================================================================================
48 10 Income Taxes The components of the Company's income tax provision consist of:
- ------------------------------------------------------------------------------------------- Years Ended March 31 1998 1997 1996 - ------------------------------------------------------------------------------------------- Current: Federal $ - $ - $ - State - - - Deferred - 12,115 16,801 - ------------------------------------------------------------------------------------------- Income tax provision $ - $12,115 $16,801 ===========================================================================================
The items responsible for the differences between the federal statutory rate and the Company's effective rate are shown as follows:
- ------------------------------------------------------------------------------------------- Years Ended March 31 1998 1997 1996 - ------------------------------------------------------------------------------------------- Income taxes computed at statutory federal rate $23,864 $24,946 $26,729 State income taxes-net of federal impact 3,409 3,564 2,838 Permanent non-deductible costs 1,361 1,462 4,450 Unrecorded tax benefits (28,634) (17,857) (17,216) - ------------------------------------------------------------------------------------------- Income tax provision $ - $12,115 $16,801 ===========================================================================================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss and tax credit carryforwards. Significant items comprising the net deferred tax asset shown on the statement of financial position are: - ------------------------------------------------------------------------------- Years Ended March 31 1998 1997 - ------------------------------------------------------------------------------- Deferred sales $ (29,243) $ (33,843) Accelerated depreciation (60,417) (55,817) - ------------------------------------------------------------------------------- Deferred income tax liabilities (89,660) (89,660) - ------------------------------------------------------------------------------- Reserves for employee benefits 50,594 49,967 Restructuring and environmental reserves 9,960 21,108 Research tax credits 25,228 22,400 Net operating loss carryforwards 37,634 50,891 Other reserves 16,943 37,994 - ------------------------------------------------------------------------------- Deferred income tax assets 140,359 182,360 Valuation allowance (31,917) (73,918) - ------------------------------------------------------------------------------- Net deferred income tax asset $ 18,782 $ 18,782 - ------------------------------------------------------------------------------- Current deferred income tax asset 38,280 40,259 Noncurrent deferred income tax liability (19,498) (21,477) - ------------------------------------------------------------------------------- Net deferred income tax asset $ 18,782 $ 18,782 =============================================================================== During fiscal 1998, the deferred tax asset valuation allowance decreased by $42,001. This decrease is primarily the result of the Company's analysis of the likelihood of realizing the future tax benefit of tax loss carryforwards and additional temporary differences. Realization of the net deferred tax asset (net of recorded valuation allowance) is dependent upon profitable operations and future reversals of existing taxable temporary differences. Although realization is not assured, the Company believes it is more likely than not that the net recorded benefits will be realized through the reduction of future taxable income. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if actual future taxable income is lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable temporary differences. Federal and state operating loss carryforwards for tax purposes, available to offset future taxable income, are $94,085 at March 31, 1998. These carryforwards begin to expire in 2008. Research tax credits available to offset future tax payments are $25,228, and begin to expire in 2006. 49 11 Leases The Company leases land, buildings, and equipment under various operating leases which generally have renewal options of one to five years. Rental expense for the years ended March 31, 1998, 1997, and 1996 was $10,538, $11,830, and $11,580, respectively. Minimum rental commitments payable under noncancellable lease commitments outstanding at March 31, 1998 are $9,120, $6,852, $5,365, $3,201, and $2,393, respectively, for the fiscal years ending March 31, 1999, 2000, 2001, 2002, and 2003. 12 Restructuring Charges The Company initiated a restructuring program in fiscal 1995 which resulted in a fiscal 1995 fourth-quarter pre-tax charge of $35.6 million of which approximately $12 million was a non-cash charge associated with accruals for certain pension-related liabilities in accordance with Statement of Financial Accounting Standards (SFAS) No. 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." In mid-fiscal 1996, various executive management changes were made within the Defense Systems Group. As a result of these changes, new management re-evaluated business strategies for the Group, including its restructure plans and as a result, the anticipated timing of certain severance and facility closure costs pushed into fiscal 1997. Cash expenditures under this completed restructuring program, primarily for employee-related costs, totaled approximately $3 million, $8 million, and $11 million in fiscal 1998, 1997, and 1996, respectively. In the fourth quarter of fiscal 1997, the Company reversed approximately $2 million of this reserve against general and administrative costs, due to cost underruns relative to the originally reserved amounts. See Note 15 for discussion of Marine Systems Group facility closure costs incurred in fiscal 1998. Additional restructure expenditures of approximately $12 million were made in fiscal 1997, in connection with the Company's closure plan for certain facilities acquired in the March 15, 1995, acquisition of the Aerospace operations. As these closure activities were anticipated and planned for at the acquisition date, the Company had estimated and recorded these costs as part of the March, 1995 acquisition purchase price. The actual costs incurred did not vary significantly from those estimated and recorded. 13 Stockholders' Equity and Redeemable Common Shares Changes in stockholders' equity and redeemable common shares are summarized below: - --------------------------------------------------------------------------------
Redeemable Common Stock Additional Retained Pension Unearned Cost (Amounts in thousands Common $.01 Par Paid-In Earnings Liability Compen- Treasury except share data) Shares Shares Amount Capital (Deficit) Adjustment sation Shares Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 1995 $ -- 13,849,452 $ 139 $250,188 $(102,599)$ (2,566) $(4,792) $ -- $140,370 Net income 47,801 47,801 Treasury shares received (983,333) (10) 43 (37,080) (37,047) Pension liability adjustment 1,377 1,377 Exercise of stock options 80,223 1 (759) 2,701 1,943 Restricted stock grants 19,200 385 (836) 451 Amortization of restricted stock 3,033 3,033 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 1996 -- 12,965,542 130 249,814 (54,798) (1,189) (2,552) (33,928) 157,477 Net income 59,159 59,159 Treasury shares received (158,387) (2) (7,195) (7,197) Pension liability adjustment (1,115) (1,115) Exercise of stock options 157,023 2 (1,985) 5,978 3,995 Restricted stock grants 27,000 247 (1,246) 999 Amortization of restricted stock 1,894 1,894 Other net issuances 90,360 1 536 580 3,462 4,579 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 1997 -- 13,081,538 131 248,612 4,361 (2,304) (1,324) (30,684) 218,792 Net income 68,183 68,183 Treasury shares received (589,363) (6) (195) (31,687) (31,888) Pension liability adjustment (2,439) (2,439) Exercise of stock options 281,455 3 (2,316) 11,368 9,055 Restricted stock grants 25,675 294 (1,332) 1,038 Amortization of restricted stock 1,118 1,118 Redeemable common shares 44,979 (8) (44,971) Other net issuances 56,206 1 304 287 2,341 2,933 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 1998 $ 44,979 12,855,511 $121 $201,728 $72,544 $(4,743) $(1,251) $(47,624) $265,754 - ------------------------------------------------------------------------------------------------------------------------------------
50 The Company has authorized 5,000,000 shares of preferred stock, par value $1.00, none of which has been issued. The Company has authorized up to 2,620,679 shares to be granted under the 1990 Equity Incentive Plan of which 156,302 were available at March 31, 1998, for future grants. Stock options are granted periodically, at the fair market value of the Company's common stock on the date of grant, and are generally exercisable from one to three years from the date of grant. Restricted stock issued to non-employee directors and certain key employees totaled 25,675, 27,000, and 19,200 for the fiscal years ended March 31, 1998, 1997, and 1996, respectively. Restricted shares vest over periods of one to four years from the date of award. As of March 31, 1998, net restricted shares of up to 15,700 shares were reserved for certain key officers which will vest upon achievement of certain financial performance goals through fiscal 2000. In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS 123, the Company has elected to continue following the guidance of APB 25 for measurement and recognition of stock-based transactions with employees. Accordingly, compensation cost has not been recognized for the awards made to employees in the form of stock options. If compensation cost for the Company's stock-based compensation plan had been determined based on the fair value at the grant dates for awards under the plan (consistent with the method provided in SFAS 123), the Company's net income and earnings per share would have been reduced to the proforma amounts indicated below: - -------------------------------------------------------------- Years Ended March 31 1998 1997 1996 - -------------------------------------------------------------- Net income As reported $68,183 $59,159 $47,801 Proforma $65,434 $57,032 $47,057 Basic EPS As reported $ 5.23 $ 4.55 $ 3.67 Proforma $ 5.01 $ 4.38 $ 3.61 Diluted EPS As reported $ 5.10 $ 4.41 $ 3.56 Proforma $ 4.89 $ 4.26 $ 3.50 ================================================================================ 51 A summary of the company's stock option activity is as follows:
- ------------------------------------------------------------------------------------------------------------------------------- Years Ended March 31 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 896,333 $33.49 991,210 $30.23 852,433 $27.36 Granted 150,850 44.61 150,650 46.28 232,340 39.08 Exercised (281,455) 32.16 (157,023) 25.43 (80,223) 24.21 Canceled (33,946) 44.70 (88,504) 32.77 (13,340) 37.38 - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 731,782 $35.74 896,333 $33.49 991,210 $30.23 Options exercisable at year end 440,964 30.34 532,815 29.64 482,210 25.80 - ------------------------------------------------------------------------------------------------------------------------------- Weighted average fair value of options granted during the year $20.18 $21.88 $18.29 - -------------------------------------------------------------------------------------------------------------------------------
The weighted average fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model and represents the difference between fair market value on the date of grant and the estimated market value on the expected exercise date. The following weighted average assumptions were used for grants in fiscal 1998, 1997, and 1996 respectively: - -------------------------------------------------------------------------------- Years Ended March 31 1998 1997 1996 - -------------------------------------------------------------------------------- Risk-free rate 6.1% 6.5% 6.1% Expected volatility 30.4 31.5 31.5 Expected option life 7 years 7 years 7 years ================================================================================ 52 A summary of stock options outstanding at March 31, 1998 is as follows: - -------------------------------------------------------------------------------- Options Outstanding Options Exercisable - -------------------------------------------------------------------------------- Weighted Weighted Range of Remaining Average Average Exercise Contractual Exercise Exercise Prices Shares Life Price Shares Price - -------------------------------------------------------------------------------- $10-$24 102,043 4.8 yrs $18.44 102,043 $18.44 $25-$30 215,000 12.0 yrs 30.00 215,000 30.00 $31-$40 131,534 6.8 yrs 37.47 79,680 37.49 $41-$52 279,205 8.5 yrs 45.54 44,241 46.55 $53-$63 4,000 10.0 yrs 61.17 -- -- ================================================================================ On October 24, 1997, the Company entered into an agreement with Hercules Incorporated (Hercules) providing for the disposition of the 3.86 million shares of Company common stock held by Hercules. The shares represent the stock issued by the Company in connection with the March 15, 1995, acquisition of the Hercules Aerospace Company operations (Aerospace operations) from Hercules. Under the agreement with Hercules, during the quarter ended December 28, 1997, the Company registered for public offering approximately 2.78 million of the shares (previously unregistered) held by Hercules. The offering was completed on November 21, 1997. No new shares were issued in the offering nor did the Company receive any proceeds from the offering. The remaining 1.1 million shares then held by Hercules became subject to a put/call arrangement under which Hercules can require the Company to purchase the shares in four equal installments of 271,000 shares during each of the four calendar quarters of 1998. The Company can likewise require Hercules to sell the shares to the Company in four equal installments during each of the four calendar quarters of 1998. The prices for shares purchased under the put/call arrangement is equal to the per share net proceeds realized by Hercules in the secondary public offering, $55.32. During February 1998, the Company did repurchase the first installment of 271,000 shares, for approximately $15 million, which is reflected accordingly in these financial statements. In May, 1998, the Company repurchased the second installment of 271,000 shares, for approximately $15 million. The Company's present intention is to purchase the remaining shares covered by the put/call arrangement although no definitive decision has been made to do so. During early fiscal 1998, the Company completed a $50 million stock repurchase program started in fiscal 1996. In connection with that program, the Company made repurchases in fiscal 1998 of approximately 140,000 shares, for approximately $6.0 million. Since 1996, repurchases of 1.3 million shares were made under this buyback program, at an average cost per share of $39.12. On October 22, 1997, the Company's Board of Directors authorized the Company to repurchase up to an additional 1.0 million shares of its common stock. It is currently expected that any purchases made under this buy-back plan would be subject to market conditions and the Company's compliance with its debt covenants. Effective November 10, 1997, the Company entered into an agreement to amend its Credit Agreement that provides the Company expanded flexibility with respect to certain restricted payments, including payments for stock repurchases. As of March 31, 1998, the Company's revised debt covenants permit it to expend up to an additional $66.5 million in total, in connection with all share repurchases. In connection with this new repurchase program, the Company has repurchased 165,300 shares through March 31, 1998, at a cumulative cost of $10.0 million, or an average cost per share of $60.34. While it is currently the Company's intention to continue stock repurchases under the program, there can be no assurance that the Company will repurchase all or any portion of the remaining shares or as to the timing or terms thereof. In accordance with SFAS No. 87, "Employer's Accounting for Pensions," the Company has recognized the minimum liability for underfunded pension plans equal to the excess of the accumulated benefit obligation over plan assets. A corresponding amount is recognized as an intangible asset to the extent of any unrecognized prior service cost, with the remaining balance recorded as reduction to equity. As of March 31, 1998, the minimum pension liability in excess of the unrecognized prior service cost was $4,743. 53 14 Contingencies As a U.S. Government contractor, the Company is subjected to defective pricing and cost accounting standards non-compliance claims by the U.S. Government. Additionally, the Company has substantial Government contracts and subcontracts, the prices of which are subject to adjustment. The Company believes that resolution of such claims and price adjustments made or to be made by the Government for open fiscal years (1987 through 1998) will not materially exceed the amount provided in the accompanying balance sheets. The Company is a defendant in numerous lawsuits that arise out of, and are incidental to, the conduct of its business. Such matters arise out of the normal course of business and relate to product liability, intellectual property, government regulations, including environmental issues, and other issues. Certain of the lawsuits and claims seek damages in very large amounts. In these legal proceedings, no director, officer, or affiliate is a party or a named defendant. The Company is involved in three "qui tam" lawsuits brought by former employees of the Aerospace operations acquired from Hercules (Aerospace acquisition) in March 1995. The first involves allegations relating to submission of false claims and records, delivery of defective products, and a deficient quality control program. The second involves allegations of mischarging of work performed under government contracts, misuse of government equipment, other acts of financial mismanagement and wrongful termination claims. The Government did not join in either of these lawsuits. Under the terms of the agreements relating to the Aerospace acquisition, all litigation and legal disputes arising in the ordinary course of the acquired operations will be assumed by the Company except for a few specific lawsuits and disputes including the two qui tam lawsuits referred to above. On May 15, 1998 Hercules announced that it had agreed to a settlement in the first qui tam lawsuit, subject to approval by the court. Under terms of the purchase agreement with Hercules, the Company's maximum combined settlement liability for both qui tam matters is approximately $4 million, for which the Company has fully reserved. The Company also agreed to reimburse Hercules for 40 percent of all legal costs incurred after March 15, 1995, relating to these two actions. In the third qui tam lawsuit, the Company received a partially unsealed complaint in March, 1997 alleging labor mischarging to the Intermediate Nuclear Force (INF) contract, and other contracts. Damages are not specified in this civil suit. The Company and Hercules have agreed to share equally the external attorney's fees and investigative fees and related costs and expenses of this action until such time as a determination is made as to the applicability of the indemnification provisions of the purchase agreement. In March 1998, the Company and Hercules settled with the Department of Justice on the portion of the complaint alleging labor mischarging to the INF contract and agreed to pay $2.25 million each, together with realtor's attorney's fees of $150 thousand, which was paid in April 1998. As a result of this settlement, the Department of Justice will not intervene in the remaining portion of the complaint. The Company has accrued for such settlement costs in these financial statements. The Company has also been served with a complaint in a civil action alleging violation of the False Claims Act and the Truth in Negotiations Act. The complaint alleges defective pricing on a government contract. Based upon documents provided to the Company in connection with the action, the Company believes that the U.S. Government may seek damages and penalties of approximately $5 million. The Company is a defendant in a patent infringement case brought by Cordant Technologies (formerly Thiokol Corporation), which the Company believes is without merit. The complaint does not quantify the amount of damages sought. Through its analysis of an October 27, 1997, court filing, the Company now believes that, based on an economist's expert testimony, Cordant Technologies may seek lost profits, interest and costs of approximately $240 million. Even if the Company is found liable, it believes that damages should be based upon a reasonable royalty of less than $5 million. The court has bifurcated the trial, with the liability issue being tried first and, if liability is found, the damages issue being tried second. The liability issue was tried in January 1998, after which the court requested, and the parties submitted, post-trial briefs. A decision on the liability issue is not expected until several months after submission of the parties' post-trial briefs. In the judgment of management, the case will not have a material adverse effect upon the Company's future financial condition or results of operations. However, there can be no assurance that the outcome of the case will not have a material adverse effect on the Company. During fiscal 1998, the Company has substantially completed the requirements of the M117 Bomb reclamation contract. The contract contained a priced option, having approximate contract value less than $5 million, whereby the customer could require the reclamation of additional quantities, given that such option be exercised within the terms and conditions of the contract. On August 4, 1997, the customer informed the Company that it was exercising the option. The Company, based on advise from its counsel, maintains that the option exercise was invalid and has therefore not performed on the option. The Company is currently appealing the validity of the option to the United States Court of Appeals, based on the Company's continued belief that such exercise was invalid. In late December 1997, the Company was informed by the customer that the Company was being terminated for default on the contract. The Company expects the appeals process to conclude in calendar 1998. Depending on the outcome of the appeal, which will drive the outcome of the termination for default, management currently estimates that the range of possible adverse impact to the Company's operating earnings is from $0-$4 million. While the results of litigation cannot be predicted with certainty, management believes, based upon the advice of counsel, that the actions seeking to recover damages against the Company either are without merit, are covered by insurance and reserves, do not support any grounds for cancellation of any contract, or are not likely to materially affect the financial condition or results of operations of the Company, although the resolution of any such matters during a specific period could have a material adverse effect on the quarterly or annual operating results for that period. 54 15 Discontinued Operations Marine Systems Group - On December 22, 1996, the Company entered into an agreement to sell its Marine Systems Group, including substantially all of the assets of that business, to Hughes Aircraft Co. (Hughes) for $141.0 million in cash. The sale was completed on February 28, 1997, resulting in a pretax gain to the Company (after restatement - see Note 20) of approximately $31.9 million ($22.4 million, after tax expense of $9.5 million), which the Company recognized in the fourth quarter of fiscal 1997. In connection with the sale, the Company began actions during fiscal 1998 to close certain facilities (not sold to Hughes) that had previously been utilized for Marine Systems Group contracts. As a direct result of the sale, the Company booked closure reserves of approximately $16 million in March 1997 (by a charge to the gain on disposal of discontinued operations) primarily for the estimated costs of facility closure, severance costs, and anticipated litigation costs associated with these activities. The Company has spent approximately $6 million to date on these facility closure and severance costs. As these facility closure activities are now substantially complete, the Company reversed $10.1 million of these liabilities during the fourth quarter of fiscal 1998, resulting in an additional gain on the disposal of the Marine business. Demilitarization Operations - During fiscal 1994, the Company entered into two joint ventures in Belarus and Ukraine, for the purpose of establishing demilitarization operations in those countries. In March 1996, Company management, after evaluating its strategic plans for the future, elected to discontinue its ownership of its foreign demilitarization businesses (Demilitarization operations). Accordingly, the Company began actions to transfer ownership of the joint ventures to the host country governments, or their agents, and in the fourth quarter of fiscal 1996, the Company estimated and recorded a $6.2 million loss on disposal of discontinued operations (net of tax benefit of $4.2 million). During fiscal 1997, the Company stopped production efforts, and completed its withdrawal from the Belarus operation. In the fourth quarter of fiscal 1997, the Company reached agreement with the Ukrainian government to transfer the Company's interests in the operation to the Ukrainian Government after payment of a $19.8 million non-interest bearing long-term note receivable. In March 1998, as a result of the Company's continued consideration and evaluation of the status of the underlying operations, as well as newly imposed export restrictions in the Ukraine and the apparently increasing political instability in the region, Company management wrote off approximately $9.9 million, representing the remaining recorded value of the Company's investment in that operation. The Company maintains a letter of credit to support approximately $2.5 million of bank borrowings of the Demilitarization operations. Management continues to work with the Ukrainian Government to complete the Company's exit from this business. However, given the political instability in the region and the lack of economic reforms, the Company believes, absent substantial improvements in these conditions in fiscal 1999, that it will not be able to continue to pursue an exit by sale of its interest in the operation. In that case, the Company would currently anticipate removing and salvaging what assets it can in fiscal 1999. The salvage value of the assets is believed to be deminimus. The consolidated income statements of the Company reflect the operating results and the gain (loss) on disposal of discontinued operations separately from continuing operations. The components of the gain (loss) from the Company's two discontinued operations are summarized as follows:
Marine Systems Group Demilitarization Operations - ------------------------------------------------------------------------------- ------------------------------------- Years Ended March 31 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------- ------------------------------------- Sales $ -- $ 107,746 $ 173,241 $ -- $ -- $ 13,436 Income from discontinued operations -- 7,415 14,288 -- -- (9,217) Gain (loss) on disposal of assets 10,125 31,900 -- (9,900) -- (10,400) Income tax (expense) benefit -- (12,115) (3,144) -- -- 7,850 - ------------------------------------------------------------------------------- ------------------------------------- Gain (loss) from discontinued operations $10,125 $ 27,200 $ 11,144 $(9,900) $ -- $ (11,767) - ------------------------------------------------------------------------------- -------------------------------------
55 16 Environmental Remediation Liabilities The Company is subject to various local and national laws relating to protection of the environment and is in various stages of investigation or remediation of potential, alleged, or acknowledged contamination. In March 1997, the Company adopted the provisions of SOP 96-1 "Environmental Remediation Liabilities," which required a change in, and provided clarification to, the manner in which companies measure and recognize costs associated with environmental remediation liabilities. Under the provisions of the SOP, all future anticipated ongoing monitoring and maintenance costs associated with known remediation sites are required to be accrued. Such costs were previously expensed as incurred. The Company's adoption of the provisions of the SOP resulted in a non-cash charge of $17.4 million in the fourth quarter of fiscal 1997. The charge was classified in cost of sales expenses in the Company's consolidated income statement for the fourth quarter ending March 31, 1997. At March 31, 1998, the accrued liability for environmental remediation of $31.9 million represents management's best estimate of the present value of the probable and reasonably estimable costs related to the Company's known remediation obligations. It is expected that a significant portion of the Company's environmental costs will be reimbursed to the Company. As collection of those reimbursements is estimated to be probable, the Company has recorded a receivable of $9.6 million, representing the present value of those reimbursements at March 31, 1998. Such receivable primarily represents the expected reimbursement of costs associated with the Aerospace operations, acquired from Hercules in March 1995 (Aerospace acquisition), whereby the Company generally assumed responsibility for environmental compliance at Aerospace facilities. It is expected that much of the compliance and remediation costs associated with these facilities will be reimbursable under U.S. Government contracts, and that those environmental remediation costs not covered through such contracts will be covered by Hercules under various indemnification agreements. At March 31, 1998, the Company's accrual for environmental remediation liabilities and the associated receivable for reimbursement thereof, have been discounted to reflect the present value of the expected future cash flows, using a discount rate, net of estimated inflation, of 4.5 percent. The following is a summary of the Company's amounts recorded for environmental remediation at March 31, 1998: - -------------------------------------------------------------------------------- Accrued Environmental Costs - Environmental Liability Reimbursement Receivable - -------------------------------------------------------------------------------- Amounts (Payable)/Receivable $(40,929) $ 12,482 Unamortized Discount 9,043 (2,860) Present Value of Amounts (Payable)/Receivable $(31,886) $ 9,622 - -------------------------------------------------------------------------------- At March 31, 1998, the aggregate undiscounted amounts payable for environmental remediation costs, net of expected reimbursements, are estimated to be $3.4, $5.9, $1.5, $1.4, and $1.6 million for the fiscal years ending March 31, 1999, 2000, 2001, 2002, and 2003, respectively; estimated amounts payable thereafter total $14.5 million. Amounts payable/receivable in periods beyond fiscal 1999 have been classified as non-current on the Company's March 31, 1998 balance sheet. At March 31, 1998, the estimated discounted range of reasonably possible environmental remediation costs is between $31.9 and $56.2 million. The Company does not anticipate that resolution of the environmental contingencies in excess of amounts accrued, net of recoveries, will materially affect future operating results. 56 17 Supplemental Cash Flow Information Net income taxes paid in the fiscal years ended March 31, 1998, 1997, and 1996, totaled $1,107, $107, and $56, respectively. Amounts paid for interest were $27,400, $39,015, and $40,736 for fiscal 1998, 1997, and 1996, respectively. Amounts received for interest in those same periods were $3,090, $716, and $1,852, respectively. The significant decrease in interest paid during fiscal 1998 compared to fiscal 1997, reflects a reduction in long-term debt due to the $88.6 million loan prepayment made in March 1997 with proceeds received from the sale of the Marine Systems Group. The increase in interest received in fiscal 1998 compared to fiscal 1997 reflects increased average cash balances also due to the proceeds received from the sale of the Marine Systems Group. In fiscal 1995, the Company acquired the Aerospace operations from Hercules for $306.0 million in cash and 3.86 million shares of stock, valued at $112.0 million. During fiscal 1996, the Company received a net amount of $29.1 million from Hercules as an adjustment to the purchase price. The adjustment was primarily the result of receivables collected just prior to the closing of the acquisition, which reduced assets and lowered the final purchase price. 18 Business Segment Information The Company operates one business segment which is involved in the production of various types of defense systems. The Conventional Munitions Group designs, develops, and manufactures medium-caliber and tank ammunition, munitions propellants, solid rocket propulsion systems, warheads, composite structures for weapons systems, infrared decoy flares, and commercial gun powder. The Space and Strategic Systems Group designs, develops, and manufactures solid rocket propulsion systems for space launch vehicles, strategic missile systems, and provides reinforced composite structures and components for military and commercial aircraft and spacecraft. The Space and Strategic Systems Group also provides operations and technical support for space launches. The Defense Systems Group designs, develops, and manufactures smart munitions, fuzes, electronic systems, and unmanned aerial vehicles. The Emerging Business Group consisted of three primary business units during fiscal year 1998: Global Environmental Solutions, Power Sources Center, and Advanced Technology Applications. Effective April 1, 1998, certain of the Emerging Business Group business pursuits were consolidated into other Company business groups. Certain other non-core operations were phased out. The Company's sales are predominantly derived from contracts with agencies of, and prime contractors to, the U.S. Government. The various U.S. Government customers exercise independent purchasing decisions, and sales to the U.S. Government generally are not regarded as constituting sales to one customer, but instead, each contracting entity is considered to be a separate customer. During fiscal 1998, approximately 82 percent of the Company's sales were derived from contracts with the U.S. Government or U.S. Government prime contractors. The Company's sales to U.S. Government prime contractors include sales to two contractors, Lockheed Martin and Boeing, which comprise greater than 10 percent of the Company's total revenues. During fiscal 1998, sales to Lockheed Martin and Boeing, respectively, represented approximately 20 percent and 11 percent of the Company's total revenues. Export sales to customers were $33.2 million, $58.0 million, and $58.5 million in fiscal years 1998, 1997, and 1996, respectively. The decrease in export sales in fiscal year 1998 compared to fiscal 1997 primarily reflects reduced sales of medium caliber ammunition. The following summarizes the Company's sales to the U.S. Government and total sales by business group. - ------------------------------------------------------------------------------- Years Ended March 31 1998 1997 1996 - ------------------------------------------------------------------------------- U.S. Government contract sales $ 879,056 $ 884,707 $ 887,502 - ------------------------------------------------------------------------------- Sales by business group: Conventional Munitions $ 460,321 $ 483,044 $ 438,227 Space and Strategic Systems 369,996 339,510 316,629 Defense Systems 227,452 243,410 250,959 Emerging Business 27,206 41,448 30,985 Intercompany sales eliminations (9,469) (18,015) (16,195) Total $1,075,506 $1,089,397 1,020,605 - ------------------------------------------------------------------------------- 57 19 Quarterly Financial Data (Unaudited) Quarterly financial data is summarized for the years ended March 31, 1998 and 1997 as follows:
- -------------------------------------------------------------------------------------------------------------------- Fiscal Year 1998 Quarter Ended June 29 Sep. 28 Dec. 28 Mar. 31 - -------------------------------------------------------------------------------------------------------------------- Sales $251,639 $266,954 $269,217 $287,696 Gross margin 43,720 45,829 48,065 56,655 Income from continuing operations 14,657 15,920 18,027 19,354 Basic earnings per share from continuing operations 1.13 1.22 1.37 1.49 Diluted earnings per share from continuing operations 1.10 1.18 1.33 1.45 - -------------------------------------------------------------------------------------------------------------------- Net income 14,657 15,920 18,027 19,579 Basic earnings per share 1.13 1.22 1.37 1.51 Diluted earnings per share 1.10 1.18 1.33 1.47 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Fiscal Year 1997 Quarter Ended (As restated) June 30 Sep. 29 Dec. 29 Mar. 31 - -------------------------------------------------------------------------------------------------------------------- Sales $230,173 $247,648 $300,785 $310,791 Gross margin 36,159 42,323 50,700 30,378 Income from continuing operations 7,614 11,323 16,200 (3,178) Basic earnings per share from continuing operations .58 .87 1.24 (.24) Diluted earnings per share from continuing operations .57 .85 1.20 (.24) - -------------------------------------------------------------------------------------------------------------------- Net income 9,904 12,827 17,225 19,203 Basic earnings per share .76 .99 1.32 1.47 Diluted earnings per share .74 .96 1.28 1.43 - ---------------------------------------------------------------------------------------------------------------------------
The adoption of SOP 96-1, which relates to accounting for environmental remediation liabilities, resulted in a charge to income from continuing operations of $17,442 in the fourth quarter of fiscal 1997 (see Note 16). The Company's fourth quarter of fiscal 1997 includes a $4.7 nonrecurring charge to move certain contract-specific production lines from a facility previously used by the Company's former Marine Systems Group business sold in February, 1997. The Company completed the sale of its Marine Systems Group to Hughes on February 28, 1997. As a result, the Company recorded a gain on the sale of discontinued operations, net of income taxes, of $22.4 million (after restatement) during the fourth quarter of fiscal 1997 (see Notes 15 and 20). Income from the results of discontinued operations, net of income taxes, was $2,290, $1,504, and $1,025 for the first, second, and third quarters of fiscal 1997, respectively (which results were generated entirely from the Company's Marine Systems Group discontinued operation). Fourth quarter fiscal 1997 net operating results of the Marine Systems Group are reflected as a component of the gain on the sale of the discontinued operations. Following is a summary of the Company's stock price for the past three years. - ------------------------------------------------------------------------------- Common Stock Price - ------------------------------------------------------------------------------- Quarter Ended High Low - ------------------------------------------------------------------------------- March 31, 1998 $65.00 $54.50 December 28, 1997 65.69 53.75 September 28, 1997 69.00 51.44 June 29, 1997 52.88 40.50 March 31, 1997 55.00 42.00 December 29, 1996 57.38 47.63 September 29, 1996 53.25 46.25 June 30, 1996 49.13 43.75 March 31, 1996 50.50 46.25 December 31, 1995 53.00 44.63 October 1, 1995 47.50 41.50 July 2, 1995 41.75 35.63 March 31, 1995 40.38 34.88 - ------------------------------------------------------------------------------- The Company does not currently pay dividends on its common stock. 20 Restatement Subsequent to the issuance of the Company's Consolidated Financial Statements in its Form 10-K filing for the year ended March 31, 1998, Company management determined that it had misclassified $4.7 million of continuing operations costs as discontinued operations costs. These costs represented the costs associated with moving the contract-specific production lines for certain minor contracts not sold as part of the Company's sale of the Marine Systems Group (MSG) in February, 1997. Production for these non-MSG contracts occurred in a facility used primarily for MSG production. As the purchaser of MSG planned to move the MSG operations out of this facility, it was no longer a cost-competitive facility for the non-MSG contracts. Therefore, concurrent with the decision to sell MSG, management began moving these production lines to alternative facilities. The costs accrued for the move were charged to the gain on sale of discontinued operations. Management now believes that it should classify those $4.7 million of costs against continuing operations in fiscal 1997. As a result, the Consolidated Income Statement for the year ended March 31, 1997 has been restated from the amounts previously reported to reflect these costs as costs of sales in continuing operations, as follows: Year ended March 31, 1997 -------------------------- As reported As restated ----------- ----------- Nonrecurring contract move costs $ -- $ 4,700 Income from continuing operations before income taxes 36,659 31,959 Income tax provision -- -- Income from continuing operations 36,659 31,959 Gain(loss) on disposal of discontinued operations, net of income taxes 17,681 22,381 Basic earnings per common share Continuing operations $ 2.82 $ 2.46 Discontinued operations 1.73 2.09 ----------- ----------- Basic earnings per common share $ 4.55 $ 4.55 =========== =========== Diluted earnings per common share Continuing operations $ 2.73 $ 2.38 Discontinued operations 1.68 2.03 ----------- ----------- Diluted earnings per common share $ 4.41 $ 4.41 =========== =========== 58 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT FORM 10-K/A PAGE NUMBER(S) 1. FINANCIAL STATEMENTS (included in this Report): Financial Highlights............................ 35 Report of Independent Auditors.................. 36 Consolidated Income Statements.................. 37 Consolidated Balance Sheets..................... 38 Consolidated Statements of Cash Flows........... 39 Notes to the Consolidated Financial Statements.. 40-58 2. FINANCIAL STATEMENT SCHEDULES (included in this Report): Independent Auditors' Report...................... 62 Schedules: II - Valuation Reserves.................... 63 All schedules, other than indicated above, are omitted because of the absence of the conditions under which they are required or because the information required is shown in the financial statements or notes thereto. 3. EXHIBITS. The exhibits listed below are filed with this Form 10-K/A if the applicable exhibit number is followed by a double asterisk (**). All other exhibits listed below were previously filed with the Form 10-K being amended by this Form 10-K/A. (If the applicable exhibit number is followed by an asterisk (*), the exhibit was incorporated by reference from the document indicated in parenthesis). The applicable Securities and Exchange Commission File Number is 1-10582 unless otherwise indicated. Exhibit numbers followed by a pound sign (#) identify exhibits that are either a management contract or compensatory plan or arrangement required to be filed as an exhibit. Excluded from this list of exhibits, pursuant to Paragraph (b) (4) (iii) (A) of Item 601 of Regulation S-K, may be one or more instruments defining the rights of holders of long-term debt of the Registrant. The Registrant hereby agrees that it will, upon request of the Securities and Exchange Commission, furnish to the Commission a copy of any such instrument. 59 EXHIBIT DESCRIPTION OF EXHIBIT (AND DOCUMENT FROM NUMBER WHICH INCORPORATED BY REFERENCE, IF APPLICABLE) 3(i).1* Restated Certificate of Incorporation, effective July 20, 1990 (Exhibit 3.1 to Amendment No. 1 to Form 10 Registration Statement filed with the Securities and Exchange Commission on July 20, 1990 (the "Form 10")). 3(i).2* Certificate of Correction, effective September 21, 1990 (Exhibit 3.1 to Registration Statement on Form S-4, File No. 33-91138, filed with the Securities and Exchange Commission on April 13, 1995 (the "Form S-4")). 3(i).3* Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant, effective September 28, 1990 (Exhibit 3.3 to the Form S-4). 3(ii)* By-Laws, as amended through May 27, 1992 (Exhibit 3.3 to Form 10-K for the fiscal year ended March 31, 1992 (the "FY92 Form 10-K")). 4.1* Form of Certificate for common stock, par value $.01 per share (Exhibit 4.1 to Amendment No. 1 to the Form 10). 4.2* Rights Agreement, dated as of September 24, 1990, between the Registrant and Manufacturers Hanover Trust Company (Exhibit 4.2 to Post-Effective Amendment No. 1 to the Form 10). 4.2.1* First Amendment to Rights Agreement, dated as of August 4, 1992, between the Registrant and Chemical Bank (successor to Manufacturers Hanover Trust Company) (Exhibit 4.2.1 to Form 10-K for the fiscal year ended March 31, 1993 (the "FY93 Form 10-K")). 4.2.2* Rescission Agreement, dated as of May 26, 1993, between the Registrant and Chemical Bank (Exhibit 4.2.2 to the FY93 Form 10-K). 4.2.3* Second Amendment to Rights Agreement, dated as of October 28, 1994, between the Registrant and Chemical Bank (Exhibit 4 to Form 8-K dated October 28, 1994 (the "October 1994 Form 8-K")). 4.3* Indenture, dated as of March 1, 1995, between the Registrant and First Bank National Association, as trustee (including a form of Initial Note) (Exhibit 4.1 to the Form S-4). 4.4* Form of Exchange Note (Exhibit 4.2 to the Form S-4). 4.5* Registration Rights Agreement, dated as of March 14, 1995, among the Registrant, the Lenders referred to therein, Morgan Guaranty Trust Company of New York, as Documentation Agent, and Chemical Bank, as Administrative Agent (Exhibit 4.3 to the Form S-4). 4.6* Amended and Restated Credit Agreement dated as of March 15, 1995 and amended and restated as of November 14, 1996 (the "Amended and Restated Credit Agreement") among the Registrant, the Lenders referred to therein, Morgan Guaranty Trust Company of New York, as Documentation Agent, and The Chase Manhattan Bank, as Administrative Agent (including forms of Note, Assignment and Assumption Agreement, and Amended and Restated Subsidiary Guaranty Agreement (Exhibit 4 to Form 8-K dated November 14, 1996). 4.6.1* Amendment dated as of November 7, 1997 to the Amended and Restated Credit Agreement (Exhibit 4 to Form 8-K dated October 27, 1997). 4.6.2 Waiver and Amendment No. 2 dated January 29, 1998 to the Amended and Restated Credit Agreement. 4.7* Security Agreement, dated as of March 15, 1995, between the Registrant and J.P. Morgan Delaware, as Collateral Agent (without exhibits) (Exhibit 10.4 to the Form S-4). 4.8* Patent Security Agreement, dated as of March 15, 1995, between the Registrant and J.P. Morgan Delaware, as Collateral Agent (without exhibits) (Exhibit 10.5 to the Form S-4). 4.9* Pledge Agreement, dated as of March 15, 1995, between the Registrant and J.P. Morgan Delaware, as Collateral Agent (Exhibit 10.6 to the Form S-4). 4.10* Purchase Agreement, dated March 7, 1995, among the Registrant and the Initial Purchasers (Exhibit 10.37 to the Form S-4). 10.1* Distribution Agreement, dated as of September 24, 1990, between Honeywell Inc. and the Registrant (Exhibit 10.1 to Amendment No. 2 to the Form 10). 10.2* Environmental Matters Agreement, dated as of September 24, 1990, between Honeywell Inc. and the Registrant (Exhibit 10.3 to Post-Effective Amendment No. 1 to the Form 10). 10.3* Intellectual Property Agreement, dated as of September 24, 1990, between Honeywell Inc. and the Registrant (Exhibit 10.4 to Amendment No. 2 to the Form 10). 10.3.1* Amendment No. 1 to Intellectual Property Agreement, dated as of September 24, 1990 (Exhibit 10.4.1 to the FY92 Form 10-K). 10.3.2* Amendment No. 2 to Intellectual Property Agreement, dated as of September 24, 1990 (Exhibit 10.4.2 to the FY92 Form 10-K). 10.3.3* Amendment No. 3 to Intellectual Property Agreement, dated July 30, 1992 (Exhibit 10.4.3 to Form 10-Q for the quarter ended October 3, 1993). 10.4* Tax Sharing Agreement, dated as of September 28, 1990, between Honeywell Inc. and the Registrant (Exhibit 10.5 to Amendment No. 2 to the Form 10). 10.5* Government Subpoena Agreement between Honeywell Inc. and the Registrant (Exhibit 10.11 to Amendment No. 2 to the Form 10). 10.6*# Form of Non-Qualified Stock Option Agreement (Exhibit 10.3 to Form 10-Q for the quarter ended October 2, 1994 (the "FY95 Second Quarter Form 10-Q")). 10.6.1*# Form of Non-Qualified Stock Option Agreement (Exhibit 10.1 to Form 10-Q for the quarter ended July 4, 1994). 10.6.2*# Form of Non-Qualified Stock Option Agreement (Exhibit 10.35 to Form 10-K for the fiscal year ended March 31, 1996 (the "FY96 Form 10-K")). 10.6.3*# Form of Non-Qualified Stock Option Agreement (Exhibit 10.3 to Form 10-Q for the quarter ended June 29, 1997 (the "FY98 First Quarter Form 10-Q")). 10.7*# Alliant Techsystems Inc. LSAR Option Loan Program (Exhibit 10.1 to Form 10-Q for the quarter ended December 28, 1997 (the "FY98 Third Quarter Form 10-Q")). 10.7.1*# Form of Promissory Note and Stock Pledge Agreement (Exhibit 10.2 to the FY98 Third Quarter Form 10-Q). 10.8*# Form of Indemnification Agreement between the Registrant and its directors and officers (Exhibit 10.6 to Amendment No. 1 to the Form 10). 10.9# Executive Split Dollar Life Insurance Plan. 10.9.1# Executive Life Insurance Agreement. 10.9.2# Split Dollar Life Insurance Agreement. 10.10*# Form of Retention Agreement between the Registrant and certain of its officers (Exhibit 10.18 to Amendment No. 1 to the Form 10). 10.11*# Amended and Restated Alliant Techsystems Inc. 1990 Equity Incentive Plan (Appendix D to Proxy Statement, dated February 11, 1995). 10.12*# Form of Non-Qualified Stock Option Agreement (Exhibit 10.12 to Form 10-K for the fiscal year ended December 31, 1990 (the "1990 Form 10-K")). 10.13*# Form of Employment Restrictions Agreement (Exhibit 10.13 to the 1990 Form 10-K). 10.14*# Hercules Supplementary Employee Retirement Plan (SERP) (assumed by the Registrant as to certain of its employees) (Exhibit 10.38 to the Form S-4). 10.15*# Management Compensation Plan (Exhibit 10.14 to Amendment No. 1 to the Form 10). 10.16*# Flexible Perquisite Account description. (Exhibit 10.1 to FY95 Second Quarter Form 10-Q). 10.17*# Restricted Stock Plan for Non-Employee Directors (Exhibit 10.13 to Amendment No. 1 to Form 10). 10.17.1*# Non-Employee Restricted Stock Plan (Appendix B to Proxy Statement dated July 3, 1996). 10.17.2*# Form of Restricted Stock Agreement (Exhibit 10.2 to Form 10-Q for the quarter ended September 29, 1996). 10.18*# Deferred Fee Plan for Non-Employee Directors (as amended and restated November 24, 1992) (Exhibit 10.18 to the FY93 Form 10-K). 10.19*# Non-employee director per diem arrangement (Exhibit 10.20 to the FY92 Form 10-K). 10.20*# Income Security Plan (Exhibit 10.23 to Form 10-K for the fiscal year ended March 31, 1997 (the "FY97 Form 10-K")). 10.20.1# Trust Under Income Security Plan, dated May 4, 1998 (effective March 2, 1998), by and between the Registrant and U.S. Bank National Association. 10.21*# Form of Employment Letter Agreement, dated October 27, 1994, between the Registrant and Richard Schwartz (Exhibit 10.1 to Form 10-Q for the quarter ended January 1, 1995 (the "FY95 Third Quarter Form 10-Q")). 10.21.1*# Indemnification Agreement, dated as of October 28, 1994, between the Registrant and Richard Schwartz (Exhibit 10.2 to the FY95 Third Quarter Form 10-Q). 10.22*# Compensation Arrangement between the Registrant and Scott S. Meyers (Exhibit 10.32 to the FY96 Form 10-K). 10.23*# Arrangements with Executive (Exhibit 10 to Form 10-Q for the quarter ended December 29, 1996). 10.23.1*# Arrangement with Executive (Exhibit 10 to Form 8-K dated February 28, 1997). 10.24*# Compensation Arrangement with Arlen D. Jameson (Exhibit 10.35 to the FY97 Form 10-K). 10.24.1*# Performance Share Agreement between the Registrant and Arlen D. Jameson (Exhibit 10.35.1 to the FY97 Form 10-K). 10.25*# Honeywell Supplementary Retirement Plan (SRP) (assumed by the Registrant as to certain of its employees) (Exhibit 10.22 to the FY92 Form 10-K). 10.26*# Honeywell Supplementary Executive Retirement Plan for Compensation in Excess of $200,000 (assumed by the Registrant as to certain of its employees (Exhibit 10.23 to FY92 Form 10-K). 10.27*# Honeywell Supplementary Executive Retirement Plan for CECP Participants (assumed by the Registrant as to certain of its employees formerly employed by Honeywell) (Exhibit 10.24 to the FY92 Form 10-K). 10.28* Purchase and Sale Agreement, dated as of October 28, 1994, between the Registrant and Hercules Incorporated (the "Purchase Agreement"), including certain exhibits and certain schedules and a list of schedules and exhibits omitted (Exhibit 2 to the October 1994 Form 8-K). 10.29* Master Amendment to Purchase Agreement, dated as of March 15, 1995, between the Registrant and Hercules Incorporated, including exhibits (Exhibit 2.2 to Form 8-K dated March 15, 1995). 10.29.1* Amendment No. 1 to Stockholder's Agreement, dated March 15, 1995, between the Registrant and Hercules Incorporated (Exhibit 10.1 to the FY98 First Quarter 10-Q). 10.30* Agreement and Confirmation Effective as of June 19, 1997 (Exhibit 10.2 to the FY98 First Quarter Form 10-Q). 10.31* Agreement dated October 24, 1997 between the Registrant and Hercules Incorporated (Exhibit 10.43 to Amendment No. 1 to Registration Statement on Form S-3, File No. 333-38775, filed with the Securities and Exchange Commission on October 31, 1997). 10.32* Asset Purchase Agreement dated as of December 22, 1996 by and between the Registrant and Hughes Aircraft Company (excluding schedules and exhibits) (Exhibit 2.1 to Form 8-K dated February 28, 1997). 10.32.1* Amendment to Asset Purchase Agreement dated February 28, 1997 by and between the Registrant and Hughes Aircraft Company (excluding schedules and exhibits) (Exhibit 2.2 to Form 8-K dated February 28, 1997). 13 Annual Report (only those portions specifically incorporated herein by reference shall be deemed filed with the Securities and Exchange Commission). 21 Subsidiaries of the Registrant. 23** Consent of Independent Auditors. 24** Powers of Attorney. 27** Financial Data Schedule. (b) REPORTS ON FORM 8-K During the quarter ended March 31, 1998, the Company filed no reports on Form 8-K. 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. ALLIANT TECHSYSTEMS INC. Date: November 24, 1998 By /s/ Charles H. Gauck ---------------------- Charles H. Gauck Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE /s/ Peter A. Bukowick Director, President, Chief Executive Officer and - ------------------------- Chief Operating Officer (Principal Executive Officer) Peter A. Bukowick /s/ Scott S. Meyers Vice President and Chief Financial Officer (Principal - ------------------------- Financial Officer) Scott S. Meyers /s/ Paula J. Patineau Vice President and Controller (Principal Accounting - ------------------------- Officer) Paula J. Patineau * Director - ------------------------- Gilbert F. Decker * Director - ------------------------- Thomas L. Gossage * Director - ------------------------- Joel M. Greenblatt * Director - ------------------------- Jonathan G. Guss * Director - ------------------------- David E. Jeremiah * Director - ------------------------- Gaynor N. Kelley * Director - ------------------------- Joseph F. Mazzella * Director - ------------------------- Daniel L. Nir * Director and Chairman of the Board - ------------------------- Richard Schwartz * Director - ------------------------- Michael T. Smith Date: November 24, 1998 *By /s/ Charles H. Gauck ------------------------------- Charles H. Gauck Attorney-in-Fact 61 INDEPENDENT AUDITORS' REPORT Alliant Techsystems Inc.: We have audited the consolidated financial statements of Alliant Techsystems Inc. and subsidiaries as of March 31, 1998 and 1997, and for each of the years ended March 31, 1998, March 31, 1997, and March 31, 1996 and have issued our report thereon dated May 11, 1998, (November 23, 1998 with respect to Note 20, which expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement described in Note 20). Our audit also included the financial statement schedule of Alliant Techsystems Inc., listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Minneapolis, Minnesota May 11, 1998 (November 23, 1998 with respect to Note 20) 62 SCHEDULE II ALLIANT TECHSYSTEMS INC. VALUATION RESERVES FOR THE YEARS ENDED MARCH 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)
BALANCE BALANCE BEGINNING PURCHASED ADDITIONS CHARGED DEDUCTIONS FROM AT CLOSE OF PERIOD COMPANY TO INCOME RESERVES OF PERIOD --------- ------- --------- -------- --------- Reserves deducted from assets to which they apply--reserve for estimated loss on disposal of discontinued operations: NET ASSETS OF DISCONTINUED OPERATIONS - ------------------------------------- Year ended March 31, 1998 ... $11,126 -- -- $11,126 (1) -- ======= ======= =========== =========== ======= Year ended March 31, 1997 ... $13,700 -- -- $2,574 (1) $11,126 ======= ======= =========== =========== ======= Year ended March 31, 1996 ... -- -- $ 13,700 -- $13,700 ======= ======= =========== =========== ======= Reserves deducted from assets to which they apply--allowance for amortization of intangibles: GOODWILL -------- Year ended March 31, 1998 ... $ 7,255 -- $3,514 (2) -- $10,769 ======= ======= =========== =========== ======= Year ended March 31, 1997 ... $ 3,940 -- $3,315 (2) -- $ 7,255 ======= ======= =========== =========== ======= Year ended March 31, 1996 ... $ 621 -- $3,319 (2) -- $ 3,940 ======= ======= =========== =========== ======= DEBT ISSUANCE COSTS ------------------- Year ended March 31, 1998 ... $ 7,100 -- $1,469 (3) -- $ 8,569 ======= ======= =========== =========== ======= Year ended March 31, 1997 ... $ 2,433 -- $4,667 (3) -- $ 7,100 ======= ======= =========== =========== ======= Year ended March 31, 1996 ... -- -- $2,433 (3) -- $ 2,433 ======= ======= =========== =========== =======
Notes: (1) Represents write-off of the associated assets. (2) Represents amounts included in cost of sales. (3) Represents amounts included in interest expense. 63 ALLIANT TECHSYSTEMS INC. FORM 10-K/A EXHIBIT INDEX The exhibits listed below are filed electronically with this Form 10-K/A if the applicable exhibit number is followed by a double asterisk (**). All other exhibits listed below were previously filed with the Form 10-K being amended by this Form 10-K/A. (If the applicable exhibit number is followed by an asterisk (*), the exhibit was incorporated by reference from the document indicated in parenthesis.) The applicable Securities and Exchange Commission File Number is 1-10582 unless otherwise indicated. EXHIBIT DESCRIPTION OF EXHIBIT (AND DOCUMENT FROM NUMBER WHICH INCORPORATED BY REFERENCE, IF APPLICABLE) 3(i).1* Restated Certificate of Incorporation, effective July 20, 1990 (Exhibit 3.1 to Amendment No. 1 to Form 10 Registration Statement filed with the Securities and Exchange Commission on July 20, 1990 (the "Form 10")). 3(i).2* Certificate of Correction, effective September 21, 1990 (Exhibit 3.1 to Registration Statement on Form S-4, File No. 33-91138, filed with the Securities and Exchange Commission on April 13, 1995 (the "Form S-4")). 3(i).3* Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant, effective September 28, 1990 (Exhibit 3.3 to the Form S-4). 3(ii)* By-Laws, as amended through May 27, 1992 (Exhibit 3.3 to Form 10-K for the fiscal year ended March 31, 1992 (the "FY92 Form 10-K")). 4.1* Form of Certificate for common stock, par value $.01 per share (Exhibit 4.1 to Amendment No. 1 to the Form 10). 4.2* Rights Agreement, dated as of September 24, 1990, between the Registrant and Manufacturers Hanover Trust Company (Exhibit 4.2 to Post-Effective Amendment No. 1 to the Form 10). 4.2.1* First Amendment to Rights Agreement, dated as of August 4, 1992, between the Registrant and Chemical Bank (successor to Manufacturers Hanover Trust Company) (Exhibit 4.2.1 to Form 10-K for the fiscal year ended March 31, 1993 (the "FY93 Form 10-K")). 4.2.2* Rescission Agreement, dated as of May 26, 1993, between the Registrant and Chemical Bank (Exhibit 4.2.2 to the FY93 Form 10-K). EXHIBIT DESCRIPTION OF EXHIBIT (AND DOCUMENT FROM NUMBER WHICH INCORPORATED BY REFERENCE, IF APPLICABLE) 4.2.3* Second Amendment to Rights Agreement, dated as of October 28, 1994, between the Registrant and Chemical Bank (Exhibit 4 to Form 8-K dated October 28, 1994 (the "October 1994 Form 8-K")). 4.3* Indenture, dated as of March 1, 1995, between the Registrant and First Bank National Association, as trustee (including a form of Initial Note) (Exhibit 4.1 to the Form S-4). 4.4* Form of Exchange Note (Exhibit 4.2 to the Form S-4). 4.5* Registration Rights Agreement, dated as of March 14, 1995, among the Registrant, the Lenders referred to therein, Morgan Guaranty Trust Company of New York, as Documentation Agent, and Chemical Bank, as Administrative Agent (Exhibit 4.3 to the Form S-4). 4.6* Amended and Restated Credit Agreement dated as of March 15, 1995 and amended and restated as of November 14, 1996 (the "Amended and Restated Credit Agreement") among the Registrant, the Lenders referred to therein, Morgan Guaranty Trust Company of New York, as Documentation Agent, and The Chase Manhattan Bank, as Administrative Agent (including forms of Note, Assignment and Assumption Agreement, and Amended and Restated Subsidiary Guaranty Agreement (Exhibit 4 to Form 8-K dated November 14, 1996). 4.6.1* Amendment dated as of November 7, 1997 to the Amended and Restated Credit Agreement (Exhibit 4 to Form 8-K dated October 27, 1997). 4.6.2 Waiver and Amendment No. 2 dated January 29, 1998 to the Amended and Restated Credit Agreement. 4.7* Security Agreement, dated as of March 15, 1995, between the Registrant and J.P. Morgan Delaware, as Collateral Agent (without exhibits) (Exhibit 10.4 to the Form S-4). 4.8* Patent Security Agreement, dated as of March 15, 1995, between the Registrant and J.P. Morgan Delaware, as Collateral Agent (without exhibits) (Exhibit 10.5 to the Form S-4). 4.9* Pledge Agreement, dated as of March 15, 1995, between the Registrant and J.P. Morgan Delaware, as Collateral Agent (Exhibit 10.6 to the Form S-4). 4.10* Purchase Agreement, dated March 7, 1995, among the Registrant and the Initial Purchasers (Exhibit 10.37 to the Form S-4). 10.1* Distribution Agreement, dated as of September 24, 1990, between Honeywell Inc. and the Registrant (Exhibit 10.1 to Amendment No. 2 to the Form 10). EXHIBIT DESCRIPTION OF EXHIBIT (AND DOCUMENT FROM NUMBER WHICH INCORPORATED BY REFERENCE, IF APPLICABLE) 10.2* Environmental Matters Agreement, dated as of September 24, 1990, between Honeywell Inc. and the Registrant (Exhibit 10.3 to Post-Effective Amendment No. 1 to the Form 10). 10.3* Intellectual Property Agreement, dated as of September 24, 1990, between Honeywell Inc. and the Registrant (Exhibit 10.4 to Amendment No. 2 to the Form 10). 10.3.1* Amendment No. 1 to Intellectual Property Agreement, dated as of September 24, 1990 (Exhibit 10.4.1 to the FY92 Form 10-K). 10.3.2* Amendment No. 2 to Intellectual Property Agreement, dated as of September 24, 1990 (Exhibit 10.4.2 to the FY92 Form 10-K). 10.3.3* Amendment No. 3 to Intellectual Property Agreement, dated July 30, 1992 (Exhibit 10.4.3 to Form 10-Q for the quarter ended October 3, 1993). 10.4* Tax Sharing Agreement, dated as of September 28, 1990, between Honeywell Inc. and the Registrant (Exhibit 10.5 to Amendment No. 2 to the Form 10). 10.5* Government Subpoena Agreement between Honeywell Inc. and the Registrant (Exhibit 10.11 to Amendment No. 2 to the Form 10). 10.6*# Form of Non-Qualified Stock Option Agreement (Exhibit 10.3 to Form 10-Q for the quarter ended October 2, 1994 (the "FY95 Second Quarter Form 10-Q")). 10.6.1*# Form of Non-Qualified Stock Option Agreement (Exhibit 10.1 to Form 10-Q for the quarter ended July 4, 1994). 10.6.2*# Form of Non-Qualified Stock Option Agreement (Exhibit 10.35 to Form 10-K for the fiscal year ended March 31, 1996 (the "FY96 Form 10-K")). 10.6.3*# Form of Non-Qualified Stock Option Agreement (Exhibit 10.3 to Form 10-Q for the quarter ended June 29, 1997 (the "FY98 First Quarter Form 10-Q")). 10.7*# Alliant Techsystems Inc. LSAR Option Loan Program (Exhibit 10.1 to Form 10-Q for the quarter ended December 28, 1997 (the "FY98 Third Quarter Form 10-Q")). 10.7.1*# Form of Promissory Note and Stock Pledge Agreement (Exhibit 10.2 to the FY98 Third Quarter Form 10-Q). 10.8*# Form of Indemnification Agreement between the Registrant and its directors and officers (Exhibit 10.6 to Amendment No. 1 to the Form 10). 10.9# Executive Split Dollar Life Insurance Plan. EXHIBIT DESCRIPTION OF EXHIBIT (AND DOCUMENT FROM NUMBER WHICH INCORPORATED BY REFERENCE, IF APPLICABLE) 10.9.1# Executive Life Insurance Agreement. 10.9.2# Split Dollar Life Insurance Agreement. 10.10*# Form of Retention Agreement between the Registrant and certain of its officers (Exhibit 10.18 to Amendment No. 1 to the Form 10). 10.11*# Amended and Restated Alliant Techsystems Inc. 1990 Equity Incentive Plan (Appendix D to Proxy Statement, dated February 11, 1995). 10.12*# Form of Non-Qualified Stock Option Agreement (Exhibit 10.12 to Form 10-K for the fiscal year ended December 31, 1990 (the "1990 Form 10-K")). 10.13*# Form of Employment Restrictions Agreement (Exhibit 10.13 to the 1990 Form 10-K). 10.14*# Hercules Supplementary Employee Retirement Plan (SERP) (assumed by the Registrant as to certain of its employees (Exhibit 10.38 to the Form S-4). 10.15*# Management Compensation Plan (Exhibit 10.14 to Amendment No. 1 to the Form 10). 10.16*# Flexible Perquisite Account description. (Exhibit 10.1 to the FY95 Second Quarter Form 10-Q). 10.17*# Restricted Stock Plan for Non-Employee Directors (Exhibit 10.13 to Amendment No. 1 to Form 10). 10.17.1*# Non-Employee Restricted Stock Plan (Appendix B to Proxy Statement dated July 3, 1996). 10.17.2*# Form of Restricted Stock Agreement (Exhibit 10.2 to Form 10-Q for the quarter ended September 29, 1996). 10.18*# Deferred Fee Plan for Non-Employee Directors (as amended and restated November 24, 1992) (Exhibit 10.18 to the FY93 Form 10-K). 10.19*# Non-employee director per diem arrangement (Exhibit 10.20 to the FY92 Form 10-K). 10.20*# Income Security Plan (Exhibit 10.23 to Form 10-K for the fiscal year ended March 31, 1997 (the "FY97 Form 10-K")). 10.20.1# Trust Under Income Security Plan, dated May 4, 1998 (effective March 2, 1998), by and between the Registrant and U.S. Bank National Association. EXHIBIT DESCRIPTION OF EXHIBIT (AND DOCUMENT FROM NUMBER WHICH INCORPORATED BY REFERENCE, IF APPLICABLE) 10.21*# Form of Employment Letter Agreement, dated October 27, 1994, between the Registrant and Richard Schwartz (Exhibit 10.1 to Form 10-Q for the quarter ended January 1, 1995 (the "FY95 Third Quarter Form 10-Q")). 10.21.1*# Indemnification Agreement, dated as of October 28, 1994, between the Registrant and Richard Schwartz (Exhibit 10.2 to the FY95 Third Quarter Form 10-Q). 10.22*# Compensation Arrangement between the Registrant and Scott S. Meyers (Exhibit 10.32 to the FY96 Form 10-K). 10.23*# Arrangements with Executive (Exhibit 10 to Form 10-Q for the quarter ended December 29, 1996). 10.23.1*# Arrangement with Executive (Exhibit 10 to Form 8-K dated February 28, 1997). 10.24*# Compensation Arrangement with Arlen D. Jameson (Exhibit 10.35 to the FY97 Form 10-K). 10.24.1*# Performance Share Agreement between the Registrant and Arlen D. Jameson (Exhibit 10.35.1 to the FY97 Form 10-K). 10.25*# Honeywell Supplementary Retirement Plan (SRP) (assumed by the Registrant as to certain of its employees) (Exhibit 10.22 to the FY92 Form 10-K). 10.26*# Honeywell Supplementary Executive Retirement Plan for Compensation in Excess of $200,000 (assumed by the Registrant as to certain of its employees (Exhibit 10.23 to the FY92 Form 10-K). 10.27*# Honeywell Supplementary Executive Retirement Plan for CECP Participants (assumed by the Registrant as to certain of its employees formerly employed by Honeywell) (Exhibit 10.24 to the FY92 Form 10-K). 10.28* Purchase and Sale Agreement, dated as of October 28, 1994, between the Registrant and Hercules Incorporated (the "Purchase Agreement"), including certain exhibits and certain schedules and a list of schedules and exhibits omitted (Exhibit 2 to the October 1994 Form 8-K). 10.29* Master Amendment to Purchase Agreement, dated as of March 15, 1995, between the Registrant and Hercules Incorporated, including exhibits (Exhibit 2.2 to Form 8-K dated March 15, 1995). 10.29.1* Amendment No. 1 to Stockholder's Agreement, dated March 15, 1995, between the Registrant and Hercules Incorporated (Exhibit 10.1 to the FY98 First Quarter 10-Q). EXHIBIT DESCRIPTION OF EXHIBIT (AND DOCUMENT FROM NUMBER WHICH INCORPORATED BY REFERENCE, IF APPLICABLE) 10.30* Agreement and Confirmation Effective as of June 19, 1997 (Exhibit 10.2 to the FY98 First Quarter Form 10-Q). 10.31* Agreement dated October 24, 1997 between the Registrant and Hercules Incorporated (Exhibit 10.43 to Amendment No. 1 to Registration Statement on Form S-3, File No. 333-38775, filed with the Securities and Exchange Commission on October 31, 1997). 10.32* Asset Purchase Agreement dated as of December 22, 1996 by and between the Registrant and Hughes Aircraft Company (excluding schedules and exhibits) (Exhibit 2.1 to Form 8-K dated February 28, 1997). 10.32.1* Amendment to Asset Purchase Agreement dated February 28, 1997 by and between the Registrant and Hughes Aircraft Company (excluding schedules and exhibits) (Exhibit 2.2 to Form 8-K dated February 28, 1997). 13 Annual Report (only those portions specifically incorporated herein by reference shall be deemed filed with the Securities and Exchange Commission). 21 Subsidiaries of the Registrant. 23** Consent of Independent Auditors. 24** Powers of Attorney. 27** Financial Data Schedule. EX-23 2 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS Alliant Techsystems Inc.: We hereby consent to the incorporation by reference in Registration Statements No. 33-36981, No. 33-48851, No. 33-91138, No. 33-91196, No. 333-33305, and 333- 38775 of our reports dated May 11, 1998 (November 23, 1998 with respect to Note 20, which expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement described in Note 20), appearing in this Annual Report on Form 10-K/A of Alliant Techsystems Inc. for the year ended March 31, 1998. DELOITTE & TOUCHE LLP Minneapolis, Minnesota November 23, 1998 EX-24 3 POWERS OF ATTORNEY Exhibit 24 ALLIANT TECHSYSTEMS INC. POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of ALLIANT TECHSYSTEMS INC., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Richard Schwartz, Scott S. Meyers, Daryl L. Zimmer and Charles H. Gauck, and each or any one of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of the Company to the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended March 31, 1998, or other applicable form, including any and all exhibits, schedules, supplements, amendments and supporting documents thereto, to be filed by the Company with the Securities and Exchange Commission, Washington, D.C., as required in connection with the Company's registration under the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand as of the 11th day of May, 1998. /s/ Gilbert F. Decker --------------------- 10KPOWER ALLIANT TECHSYSTEMS INC. POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of ALLIANT TECHSYSTEMS INC., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Richard Schwartz, Scott S. Meyers, Daryl L. Zimmer and Charles H. Gauck, and each or any one of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of the Company to the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended March 31, 1998, or other applicable form, including any and all exhibits, schedules, supplements, amendments and supporting documents thereto, to be filed by the Company with the Securities and Exchange Commission, Washington, D.C., as required in connection with the Company's registration under the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand as of the 11th day of May, 1998. /s/ T. L. Gossage ----------------- 10KPOWER ALLIANT TECHSYSTEMS INC. POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of ALLIANT TECHSYSTEMS INC., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Richard Schwartz, Scott S. Meyers, Daryl L. Zimmer and Charles H. Gauck, and each or any one of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of the Company to the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended March 31, 1998, or other applicable form, including any and all exhibits, schedules, supplements, amendments and supporting documents thereto, to be filed by the Company with the Securities and Exchange Commission, Washington, D.C., as required in connection with the Company's registration under the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand as of the 11th day of May, 1998. /s/ Joel M. Greenblatt ---------------------- 10KPOWER ALLIANT TECHSYSTEMS INC. POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of ALLIANT TECHSYSTEMS INC., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Richard Schwartz, Scott S. Meyers, Daryl L. Zimmer and Charles H. Gauck, and each or any one of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of the Company to the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended March 31, 1998, or other applicable form, including any and all exhibits, schedules, supplements, amendments and supporting documents thereto, to be filed by the Company with the Securities and Exchange Commission, Washington, D.C., as required in connection with the Company's registration under the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand as of the 11th day of May, 1998. /s/ Jonathan Guss ----------------- 10KPOWER ALLIANT TECHSYSTEMS INC. POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of ALLIANT TECHSYSTEMS INC., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Richard Schwartz, Scott S. Meyers, Daryl L. Zimmer and Charles H. Gauck, and each or any one of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of the Company to the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended March 31, 1998, or other applicable form, including any and all exhibits, schedules, supplements, amendments and supporting documents thereto, to be filed by the Company with the Securities and Exchange Commission, Washington, D.C., as required in connection with the Company's registration under the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand as of the 11th day of May, 1998. /s/ David E. Jeremiah --------------------- 10KPOWER ALLIANT TECHSYSTEMS INC. POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of ALLIANT TECHSYSTEMS INC., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Richard Schwartz, Scott S. Meyers, Daryl L. Zimmer and Charles H. Gauck, and each or any one of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of the Company to the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended March 31, 1998, or other applicable form, including any and all exhibits, schedules, supplements, amendments and supporting documents thereto, to be filed by the Company with the Securities and Exchange Commission, Washington, D.C., as required in connection with the Company's registration under the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand as of the 11th day of May, 1998. /s/ Gaynor N. Kelley -------------------- 10KPOWER ALLIANT TECHSYSTEMS INC. POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of ALLIANT TECHSYSTEMS INC., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Richard Schwartz, Scott S. Meyers, Daryl L. Zimmer and Charles H. Gauck, and each or any one of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of the Company to the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended March 31, 1998, or other applicable form, including any and all exhibits, schedules, supplements, amendments and supporting documents thereto, to be filed by the Company with the Securities and Exchange Commission, Washington, D.C., as required in connection with the Company's registration under the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand as of the 11th day of May, 1998. /s/ Joseph F. Mazzella ---------------------- 10KPOWER ALLIANT TECHSYSTEMS INC. POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of ALLIANT TECHSYSTEMS INC., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Richard Schwartz, Scott S. Meyers, Daryl L. Zimmer and Charles H. Gauck, and each or any one of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of the Company to the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended March 31, 1998, or other applicable form, including any and all exhibits, schedules, supplements, amendments and supporting documents thereto, to be filed by the Company with the Securities and Exchange Commission, Washington, D.C., as required in connection with the Company's registration under the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand as of the 11th day of May, 1998. /s/ Daniel L. Nir ----------------- 10KPOWER ALLIANT TECHSYSTEMS INC. POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of ALLIANT TECHSYSTEMS INC., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Richard Schwartz, Scott S. Meyers, Daryl L. Zimmer and Charles H. Gauck, and each or any one of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of the Company to the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended March 31, 1998, or other applicable form, including any and all exhibits, schedules, supplements, amendments and supporting documents thereto, to be filed by the Company with the Securities and Exchange Commission, Washington, D.C., as required in connection with the Company's registration under the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand as of the 11th day of May, 1998. /s/ Michael T. Smith -------------------- 10KPOWER Exhibit 24 ALLIANT TECHSYSTEMS INC. POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of ALLIANT TECHSYSTEMS INC., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Richard Schwartz, Scott S. Meyers, Daryl L. Zimmer and Charles H. Gauck, and each or any one of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of the Company to the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended March 31, 1998, or other applicable form, including any and all exhibits, schedules, supplements, amendments and supporting documents thereto, to be filed by the Company with the Securities and Exchange Commission, Washington, D.C., as required in connection with the Company's registration under the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand as of the 11th day of May, 1998. /s/ Richard Schwartz --------------------- 10KPOWER Exhibit 24 ALLIANT TECHSYSTEMS INC. POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of ALLIANT TECHSYSTEMS INC., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Richard Schwartz, Scott S. Meyers, Daryl L. Zimmer and Charles H. Gauck, and each or any one of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of the Company to the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended March 31, 1998, or other applicable form, including any and all exhibits, schedules, supplements, amendments and supporting documents thereto, to be filed by the Company with the Securities and Exchange Commission, Washington, D.C., as required in connection with the Company's registration under the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand as of the 11th day of May, 1998. /s/ Peter A. Bukowick --------------------- 10KPOWER Exhibit 24 ALLIANT TECHSYSTEMS INC. POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of ALLIANT TECHSYSTEMS INC., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Richard Schwartz, Scott S. Meyers, Daryl L. Zimmer and Charles H. Gauck, and each or any one of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of the Company to the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended March 31, 1998, or other applicable form, including any and all exhibits, schedules, supplements, amendments and supporting documents thereto, to be filed by the Company with the Securities and Exchange Commission, Washington, D.C., as required in connection with the Company's registration under the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand as of the 11th day of May, 1998. /s/ Scott S. Meyers --------------------- 10KPOWER Exhibit 24 ALLIANT TECHSYSTEMS INC. POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of ALLIANT TECHSYSTEMS INC., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Richard Schwartz, Scott S. Meyers, Daryl L. Zimmer and Charles H. Gauck, and each or any one of them, the undersigned's true and lawful attorneys-in-fact, with full power of substitution, for the undersigned and in the undersigned's name, place and stead, to sign and affix the undersigned's name as such director and/or officer of the Company to the Company's Form 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended March 31, 1998, or other applicable form, including any and all exhibits, schedules, supplements, amendments and supporting documents thereto, to be filed by the Company with the Securities and Exchange Commission, Washington, D.C., as required in connection with the Company's registration under the Securities Exchange Act of 1934, as amended, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform any and all acts necessary or incidental to the performance and execution of the powers herein expressly granted. IN WITNESS WHEREOF, the undersigned has hereunto set the undersigned's hand as of the 11th day of May, 1998. /s/ Paula J. Patineau --------------------- 10KPOWER EX-27 4 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-K FILING FOR YEAR ENDED 3/31/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR YEAR MAR-31-1998 MAR-31-1997 APR-01-1997 APR-01-1996 MAR-31-1998 MAR-31-1997 68,960 122,491 0 0 209,915 190,675 177 107 49,072 68,125 373,030 427,257 520,348 520,718 187,167 162,615 932,180 1,000,588 277,402 319,066 180,810 237,071 44,979 0 0 0 121 131 220,654 218,661 932,180 1,000,588 1,075,506 1,089,397 1,075,506 1,089,397 881,237 929,837 881,237 929,837 12,447 16,207 0 0 27,621 35,102 67,958 31,959 0 0 67,958 31,959 225 27,200 0 0 0 0 68,183 59,159 5.23 4.55 5.10 4.41 As restated; see Note 20 of Notes to the Consolidated Financial Statements.
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