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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: OCTOBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-19330
SPECIAL DEVICES, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-3008754
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
16830 WEST PLACERITA CANYON ROAD, 91321
NEWHALL, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 259-0753
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
Indicate by check mark whether the registrant: (l) 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.
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on January 21, 1997 based on the closing price
on The Nasdaq National Market of such stock on such date was $96,022,000.
Registrant's Common Stock outstanding at January 21, 1997 was 7,685,063
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 1997 Annual Stockholders
Meeting are incorporated by reference in Part III.
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SPECIAL DEVICES, INCORPORATED
INDEX TO ANNUAL REPORT ON FORM I0-K
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PART I
Item 1. Business................................................................. 1
Item 2. Properties............................................................... 11
Item 3. Legal Proceedings........................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders...................... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters...................................................... 12
Item 6. Selected Financial Data.................................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 14
Item 8. Financial Statements and Supplementary Data.............................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant....................... 36
Item 11. Executive Compensation................................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 36
Item 13. Certain Relationships and Related Transactions........................... 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 36
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PART I
ITEM 1. -- BUSINESS
The Company is a leader in the design and manufacture of highly reliable
pyrotechnic devices used by the automotive industry, as initiators in airbag
systems, and the aerospace industry, primarily in tactical missile systems,
propellants, explosives and military aircraft crew ejection systems. The Company
operates through two separate divisions, Automotive Products and Aerospace.
The Company was incorporated in California in 1976 as the successor to a
business begun in 1960 and was reincorporated in Delaware in May 1991. The
principal executives offices of the Company are located at 16830 West Placerita
Canyon Road, Newhall, California 91321, and its telephone number is (805)
259-0753.
AUTOMOTIVE PRODUCTS DIVISION
General
The Company's Automotive Products Division was created as a separate
division in fiscal 1989 to concentrate on the Company's strategic decision to
apply its expertise in pyrotechnic products beyond the defense-related markets
traditionally serviced by its Aerospace Division. The Automotive Products
Division's principal products are initiators, the pyrotechnic output of which is
used to ignite the inflation system in an automotive airbag system. During the
past several years, the Company has become one of the three principal
manufacturers of airbag system initiators in the United States.
The Automotive Products Division contributed 77%, 71% and 77% of the
Company's net sales during the fiscal years ended October 31, 1994, 1995 and
1996, respectively. The magnitude of this percentage is due primarily to a
Master Purchase Agreement with TRW, Inc. (the "TRW Agreement"). See
"-- Marketing" below. In addition, in the fourth quarter of 1996, the Company
began selling initiators to Morton International, Inc. ("Morton") under a
three-year supplier agreement with Morton, signed in December 1995 effective for
airbag production for model years 1997 through 1999. The Company's initiators
are sold to all four domestic manufacturers of airbag systems and incorporated
into driver and passenger-side airbag systems used in a wide variety of
automobile models manufactured by substantially all of the automobile
manufacturers that sell automobiles, light trucks and vans in the United States,
including the three major domestic manufacturers (Chrysler, Ford and GM), as
well as BMW, Fiat, Kia, Mazda, Mitsubishi, Nissan, Toyota and Volkswagen.
Industry Overview
One of the major reasons for the establishment of the Automotive Products
Division was the adoption by the National Highway Traffic Safety Administration
of regulations that initially required all passenger automobiles manufactured on
or after September l, 1989 for sale in the United States to have automatic
frontal crash protection systems for the driver and front passenger. Similar
requirements for light trucks and vans began being phased in on September l,
1994 and will become fully effective on September 1, 1997. Airbags and automatic
seat belts were the two means of compliance with the regulations.
On March 1, 1994, the regulations were amended to require that airbags be
the automatic frontal crash protection system used for both the driver and front
passenger in at least 95% of passenger automobiles manufactured from September
1, 1996 to August 31, 1997 for sale in the United States, and in 100% of
passenger automobiles manufactured on or after September l, 1997 for sale in the
United States. For light trucks and vans, the amended regulations require that
airbags be the automatic frontal crash protection system used for at least the
driver in no less than 80% of light trucks and vans manufactured from September
l, 1997 to August 31, 1998 for sale in the United States, and for both the
driver and front passenger in 100% of light trucks and vans manufactured on or
after September l, 1998 for sale in the United States.
In response to recent concerns over deaths caused by airbag deployment,
research is currently under way for a "smart" airbag system which has the
ability to sense the weight and position of passengers in automobiles. Current
research is directed toward deploying an airbag at different forces based upon
the weight
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and position of the occupant. Although not certain at this time, a smart airbag
may have inflators with "dual chambers" which would require more than one
initiator per airbag.
Although not mandated by law, pyrotechnically based safety systems are also
employed in automobiles produced and sold in Europe and Asia. These systems
include airbag systems similar to those in use in the United States and seat
belt retractors that employ initiators similar to the initiators produced by the
Company. A limited number of automobile manufacturers have begun using side
airbag systems and seat belt retractors as an additional means of protecting
automobile occupants. Research is also currently in process for rear seat airbag
systems.
Automotive airbag systems consist of six basic components: sensors, a
diagnostic and firing module, an initiator, a combustion chamber, gas generant
and a specially treated fabric bag. Once the sensors detect a frontal impact of
the vehicle of sufficient severity, the diagnostic and firing module transmits
an electrical charge to the initiator. The initiator then fires, igniting the
gas generant in the combustion chamber which burns very rapidly producing a gas
thus inflating the bag. The entire process takes approximately 40 milliseconds.
The diagnostic module also tests the initiator each time the automobile is
started.
Morton, TRW, Bendix Atlantic Inflator Company ("BAICO") and Breed
Technologies are the current domestic manufacturers and suppliers of automotive
airbag systems, each of whom incorporates the Company's initiators in certain of
its airbag systems. BAICO is a joint venture between Allied Signal Automotive's
Safety Restraint Systems and Sequa Corporation. Other companies have indicated
that they may enter the domestic automotive airbag market and reportedly are
working on the development of airbag systems. None of the current manufacturers
produces all of the components of an airbag system. Most components of the
system are purchased from suppliers such as the Company, and the manufacturers
concentrate on the design, assembly, testing and qualification of the airbag
systems.
The major non-U.S. manufacturers of airbag systems are Bayern Chemie
(Germany), Autoliv (Sweden), Diacel Chemical Industries (Japan) and Takata N.A.
Inc. (Japan). The Company is one of the three major suppliers of airbag
initiators in the United States. In addition, there are two major suppliers of
airbag initiators in Europe and one major supplier of initiators in Japan. See
"-- Competition."
Products
The Automotive Products Division currently produces over 50 different
airbag initiators for the four domestic manufacturers of airbag systems and has
a variety of other initiator products that are currently at various stages of
the qualification process. An initiator is a device that receives a low-energy
electrical signal from an electronic firing module and converts that signal to a
high-energy output by a thermal reaction of tightly compacted pyrotechnic
materials. Electrical systems and performance requirements differ among
automobile models and airbag systems. In addition, airbag systems differ between
passenger and driver-side applications. Therefore, the electrical and physical
characteristics of the different initiators are customized for the airbag system
in which they are used. Each of these versions is similar in design and utilizes
many of the same basic components and production techniques. However, each
initiator and airbag system must complete the design and process validation
requirements before it can be installed in automobiles. See "Manufacturing"
below.
The Company has focused its efforts on developing pyrotechnic initiators
that are electrically triggered, due to the Company's belief that airbag system
initiators that incorporate this technology are both reliable and
cost-effective. The Company's automotive initiators use high-temperature
pyrotechnic material that is formulated not to ignite below 800 degrees
Fahrenheit. This characteristic reduces the chance of accidental ignition from
stray electrical signals such as static electricity or radio waves. The
Company's initiator is protected from such radio waves by means of an RF filter.
In addition, the initiator is hermetically sealed using glass-metal seal
technology, which protects the initiator from environmental forces, such as
weather and dirt, and ensures that the life of the initiator exceeds the life of
the airbag system.
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Manufacturing
Production of the Company's initiators is accomplished using a combination
of automatic and semiautomatic production equipment and manual work stations
located at the Company's Newhall, California and Mesa, Arizona facilities. These
two facilities are presently producing at a combined annualized rate of over 25
million initiators per year, working approximately 3 shifts per day, 5 days a
week. The Company currently has two production lines in its Newhall facility and
four production lines in its Mesa facility. At the close of fiscal 1995, the
Company had only two production lines at the Mesa facility. The Company added
two additional lines in its Mesa facility in response to increased demand for
its automotive initiators. The two additional lines in the Mesa facility became
fully operational by the fourth quarter of 1996. The Company is presently
installing a third production line in its Newhall facility which is expected to
be operational by April 1997. In addition, fourth and fifth production lines are
on order for the Newhall facility. These two additional production lines are
expected to be operational by the end of 1997. The current production capacity
of 25,000,000 initiators annually is expected to increase to approximately
40,000,000 initiators annually once the new production lines are fully
operational. While the Company has ordered what it believes to be high-quality
equipment for its Newhall facility, no assurance can be given that the equipment
will perform as designed and produce the number of units stated above until the
new equipment has been operated at full rate for an extended period of time.
The Company is presently operating at close to full capacity by employing
three shifts daily. The Company expects to be able to meet anticipated
production requirements upon completion of the additional production lines noted
above, and by expanding production to seven days a week. The Company's Newhall
facility currently consists of several buildings that are configured in a manner
that is no longer conducive to achieving optimal manufacturing efficiencies. In
addition, under a conditional use permit, the Company may not expand on its
current Newhall location. The Company, therefore, believes that the construction
of a new consolidated manufacturing facility offers the potential of improved
operating efficiencies and space for potential growth. As a result, in October
1996, the Company purchased approximately 280 acres of land in the city of
Moorpark, located in Ventura County, north of Los Angeles, on which the Company
plans to build new facilities. Development of the land infrastructure, including
grading, began in January 1997, and is expected to be completed in late Spring
1997, at which time construction of the buildings is expected to begin. The
building construction is expected to be completed by the end of 1997, and the
Company expects to move its entire California-based operations including
Automotive Products, Aerospace and its administrative offices in early 1998 to
these new facilities.
Production of the Company's products consists of fabricating and assembling
the hardware components and separately preparing the pyrotechnic charge.
Production of the assemblies involves the purchase of machined components, seals
and other materials, the mechanical assembly of the components and the testing
of the completed units. Throughout the entire process, strict quality assurance
controls are maintained. After assembly, the products are functionally tested on
a sample basis as required by each customer.
The Company manufactures the pyrotechnic charge from raw generic chemicals
and has handled and processed these fuels and oxidizers for over 30 years. The
principal pyrotechnic fuels used by the Company are zirconium, titanium hydride
and boron. Some of the pyrotechnic fuels are delivered to the Company in bulk in
a wet and non-volatile form. The Company dries the pyrotechnic fuels before use.
These fuels are then mixed with oxidizers (usually potassium perchlorate or
potassium nitrate) and pressed in small quantities into the metal housings of
the specific product being made. Handling and processing pyrotechnic materials
requires extensive experience and expertise as well as the proper equipment and
facilities.
Each type of initiator must qualify for use by passing numerous tests
established by the automobile and airbag system manufacturers relating to its
design and its ability to work in the airbag unit in which it is installed. The
initial test phase is design validation ("DV"), which incorporates a number of
tests intended to demonstrate that the design of the initiator is capable of
performing the required function within the stated specifications. The second
test phase is process validation ("PV"), which is intended to demonstrate that
the manufacturer has the management, personnel, equipment and facilities to
produce the initiator to its design specifications. The DV and PV qualification
phases must be repeated for each new initiator design. The PV
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qualification phase must also be repeated for each facility at which initiators
are produced. The initial qualification procedures for new products or vendors
are very costly and time-consuming. The PV qualification phase, for example,
requires a supplier to have in place its management, personnel, equipment and
facilities prior to the time they would otherwise be required for production.
The Company has completed the DV and PV qualification phases for initiators
used in TRW airbags for certain models manufactured by several different
automobile manufacturers, for an Atlantic Research Corporation ("ARC") hybrid
inflator for certain Chrysler and General Motors applications, for several
initiators used in Morton airbags for several automobile manufacturer models and
for an initiator used in Breed Technologies' airbag systems used in certain
Ford, Opel and Fiat models. The Company is continually working on variations of
initiators in response to customer needs. In addition, the Company from time to
time is in the DV and PV process for new airbag system platforms for its
customers.
The Company purchases the components for its products from various
subcontractors. The Company does not believe that it is dependent upon any one
source for its supplies because alternative sources of supply are generally
available. The Company has a long-term supply contract with a company in which a
significant stockholder of the Company owned 40% of the outstanding stock of
that company during 1996. The contract involves header sub-assemblies used by
the Automotive Products Division for incorporation into initiators. This supply
contract was amended in 1994 to extend it through December 31, 1999. The amended
agreement significantly reduced the Company's price for the headers purchased
during 1995 and 1996 and provides that such prices will be further reduced at
the beginning of each calendar year through calendar year 1999. In return for
the extension and price reductions, the Company is required to purchase a
substantial majority of its requirements for sub-assemblies from the supplier.
The Company believes that the terms of this agreement are no less favorable to
the Company than could have been obtained from an unaffiliated third party, and
that alternative sources of the component are available in the event of any
disruption in delivery by the supplier.
Marketing
The Company's marketing efforts are coordinated by the President of its
Automotive Products Division. Different engineers and other personnel are
assigned responsibility for the design, development and manufacture of the
various initiator models. The Automotive Products Division's management,
engineers and personnel maintain close contact with each of the manufacturers of
airbag systems that incorporate the Company's initiators and monitor
developments in the automotive industry (particularly the status of products
such as side and rear seat airbag systems and seat belt retractors) and the
domestic and international airbag system markets in order to exploit marketing
opportunities as they become available.
In fiscal year 1995, The Company amended its TRW Agreement, which
originally expired in 1995, to extend the term through automotive model year
2000. The TRW Agreement obligates TRW to purchase a majority of its initiator
requirements from the Company at prices per unit that vary based on the type of
initiator purchased and the model year and requires that the Company have
certain specified minimum production capacities during the term of the TRW
Agreement. The prices for each model year have been negotiated as part of the
TRW Agreement. Prices may be increased through negotiation if TRW requests a
design change. The ultimate effect on the average unit selling price will be
determined by the mix of products ordered. The mix of products ordered in August
1995 for 1996 model year production resulted in a price reduction of over 12%;
the effect of the mix of products ordered in August 1996 for 1997 model year
production had an insignificant effect on prices to be paid by TRW as compared
to prices paid for model year 1996 purchases. The Company believes that the
price reductions for future model year production will be insignificant. The TRW
Agreement does not require TRW to purchase a minimum number of units nor is TRW
obligated to purchase the specified percentage of its requirements unless the
Company's prices are competitive with those offered by other suppliers and the
Company's technology and quality are equivalent or better than that of other
suppliers. In general, the TRW Agreement may be terminated by TRW if the Company
(i) breaches its obligations under the TRW Agreement, (ii) becomes insolvent,
bankrupt or dissolves or (iii) fails to provide TRW with reasonable assurances
of the Company's ability to perform the under the TRW Agreement. In addition,
TRW may terminate a particular purchase order or any part of it by written
notice to the Company, in which case TRW is obligated to pay the Company for all
goods that (i) are
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ready for shipment prior to the Company's receipt of the notice of termination,
(ii) conform to all requirements of the purchase order and (iii) are free and
clear of all encumbrances. The Company determines manufacturing schedules and
ships products to TRW based upon delivery orders, specifying the desired
quantities and delivery dates which are released several weeks in advance of
delivery.
In November 1995, the Company entered into a three-year Supplier Agreement
with Morton whereby Morton is required to purchase a substantial portion of its
airbag system initiators from the Company. The Company successfully completed
qualification requirements, and Morton began ordering substantial quantities of
initiators under this agreement in August 1996 for 1997 model year production.
The Morton agreement contains pricing for the 1997 model year. Prices may be
increased through negotiation if Morton requests a design change. The Company is
obligated to maintain pricing, terms, delivery, service and quality consistent
with industry standards. The agreement with Morton may be terminated by Morton
if, among other things, the Company commits a material breach of its obligations
or the Company is declared bankrupt or makes an assignment for the benefit of
creditors.
In addition, the Company has an agreement with ARC similar to the TRW
Agreement pursuant to which ARC has agreed to purchase a majority of its
initiator requirements from the Company through June 1997. The ARC Agreement
also contains a three-year renewal provision, the terms and conditions of which
must be agreed to by ARC and the Company to become effective.
The Company has been shipping initiators to Morton since June 1990 and
began shipments to TRW in November 1991. TRW accounted for approximately 67.9%,
59.9%, and 59.7% of the Company's net sales during fiscal years 1994, 1995 and
1996, respectively, while Morton accounted for approximately 2.4%, 1.9% and 6.1%
of the Company's net sales during the same periods.
Backlog
The majority of sales for the Automotive Products Division are achieved
under long-term agreements ranging from three to five years, specifying minimum
customer requirements to be supplied by the Company during the term of the
agreements. Purchase order releases against those agreements are updated weekly
by each customer and include "firm" shipping requirements for the next 12 to 16
weeks. The Automotive Products Division does not reflect an order in backlog
until it has received a purchase order from a customer that specifies the
quantity ordered and the delivery dates required. Since these orders are
generally shipped within 12 to 16 weeks of receipt of the order, the amount of
"firm" backlog for the Automotive Products Division at any given time is not
indicative of sales levels expected to be achieved over a 12-month period.
Competition
Currently there are three manufacturers of airbag initiators in the United
States: OEA, Inc., Imperial Chemical Industries, Inc. ("ICI") and the Company.
OEA currently holds the largest share of the domestic airbag initiator market
and has greater financial resources than the Company. Other companies may choose
to enter the automotive initiator market in the future. However, there are
substantial monetary and time costs associated with DV and PV qualifications as
well as development and start-up.
Currently, Davey Bickford Smith ("DBS") and Nouvelle Cartoucherie de
Survilliers are the major suppliers of airbag initiators in Europe. DBS has
entered into a technology license agreement with the Company to produce the
Company's initiators. Under the terms of that agreement, DBS may sell initiators
using the Company's technology to any manufacturer of airbags except TRW. Until
1999, DBS must pay royalties to the Company for airbag initiators sold using the
Company's technology. After January l, 1999, DBS may continue to use the
licensed technology royalty-free. The agreement also places limits upon the
Company's ability to license its technology to other companies or persons. To
date, DBS has not sold any initiators incorporating the Company's technology and
therefore has not paid royalties to the Company pursuant to this license.
Because DBS failed to satisfy certain minimum requirements relating to the
delivery of initiators, the Company is entitled to license the technology
licensed to DBS to other third parties. However, DBS is entitled to continue
using the licensed technology perpetually.
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The Company entered into the technology license agreement with DBS in
November 1990 in order to facilitate the introduction of its technology to the
European market without incurring the costs necessary if the Company established
its own facilities in Europe or attempted to manufacture and ship initiators to
Europe from the United States. European initiator manufacturers have
historically manufactured non-hermetically sealed, plastic initiators, which the
Company believes are less reliable than the hermetically sealed, glass-to-metal
initiators manufactured by the Company. The technology license agreement permits
DBS to incorporate the Company's technology in initiators produced by DBS and
sell such initiators to any person or entity other than to TRW in the United
States. Consequently, the Company may in the future face direct competition in
Europe, the United States or elsewhere from initiators sold by DBS incorporating
the Company's technology with no obligation on the part of DBS to pay royalties
after January l, 1999. In the event that DBS elects to incorporate the Company's
technology into DBS' initiators on a larger scale than DBS has to date, the
Company's ability to market and sell its initiators in the European market could
be adversely affected.
AEROSPACE DIVISION
General
The Company's Aerospace Division has been designing and manufacturing
products for the aerospace industry for over 30 years. Its customers are
primarily the United States government and its prime contractors. The Aerospace
Division contributed 23%, 29% and 23% of the Company's net sales during the
fiscal years ended October 31, 1994, 1995 and 1996, respectively. The decline in
percentage from 1995 to 1996 was the result of a) higher sales levels achieved
by the Automotive Products Division, and b) high sales levels of products used
in the TOW missile program in 1995 which did not repeat in 1996.
Industry Overview
The aerospace market is comprised of a large number of companies that
manufacture a wide variety of products and provide a diverse group of services.
The Aerospace Division has focused its efforts primarily on the design and
manufacture of highly reliable ordnance and pyrotechnic products incorporated in
tactical missiles and crew safety systems. The number of new and emerging
programs as well as the number of customers for the Company's products have been
shrinking due to consolidations within the aerospace industry. Similarly, the
number of the Company's competitors has also decreased through both attrition
and acquisitions by the remaining companies. The current trend of the Company's
customers is to reduce their supplier base to a few proven, reliable sources.
During the past several years, such determinations have been made based on
historical performance, audits and an analysis of the future viability of the
supplier.
The Company believes that the pyrotechnic technology used by the Company
performs functions that are not likely to be replaced in the foreseeable future.
The Company bases its belief on two factors. First, as the amount of funding for
new programs has been reduced, the amount of funding available for research and
development relating to new technologies has also been reduced, decreasing the
likelihood that alternative technologies will be discovered. Second, the other
existing technologies for the products manufactured by the Company -- solid
state electronics, fiber optics and laser energy sources -- have generally
proven to be unreliable under severe environmental conditions and are more
expensive than the conventional pyrotechnics employed by the Company. The
expertise required to design and manufacture products incorporating pyrotechnic
technology requires significant experience. Consequently, the Company does not
anticipate that the number of competitors who produce products incorporating
pyrotechnic technology will increase in any significant respect for the
foreseeable future.
Products
The Aerospace Division designs and manufactures highly reliable pyrotechnic
devices used primarily in tactical missile systems, spacecraft launch vehicles
and military aircraft crew ejection systems. In September 1994, the Company
acquired Scot, Inc., a manufacturer of propellant explosive and life support
devices for government and commercial purposes. Prior to the acquisition of
Scot, the Aerospace Division's primary products were state-of-the-art initiators
and mechanical devices that incorporate these initiators such as
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explosive bolts, cutters, actuators, valves, pin pullers and arm- fire devices
used in tactical missile systems. With the acquisition of the assets of Scot,
the Aerospace Division's product line has expanded to include cutters and gas
generators used in military aircraft escape systems employed by the F-15, F-16,
F-18, AV-8B, T-38, T-45, T-48 and B-lB aircraft, automatic parachute releases,
time delays, separation nuts, thrusters, valves, actuators and retractors used
to lock landing gear, jettison the manipulator arm on the Space Shuttle, and
deploy the drogue chute for the Space Shuttle upon landing.
Aerospace Division initiators are used to ignite larger pyrotechnic
charges, such as rocket propellant, or to activate mechanical devices. Missiles,
other weapon systems and aircraft incorporate initiators for several purposes,
such as igniting the fuel which propels the missile, releasing directional fins,
triggering automatic parachutes, ejecting crew members from military aircraft
and opening or closing valves. An arm-fire device is an electro-mechanical
device that prevents a rocket motor from being fired accidentally. This device
prevents the initiator from receiving the electric current or other signal
necessary to ignite the pyrotechnic material unless the system has been
intentionally armed. An arm-fire device also prevents the ignition of the rocket
motor if the initiator is accidentally fired by confining the high energy output
of the initiator. When intentionally armed, the initiator included in the
arm-fire device reliably ignites the rocket motor.
The proposal and development phases require the Company and its competitors
to respond to specification requirements by devoting significant engineering,
development and testing resources. Each of the devices manufactured by the
Aerospace Division is a component in a larger product of its customer. The
Company's products are rarely incorporated for the purpose of performing an end
function. With respect to certain products used for aircraft escape systems, the
military requires these parts to be replaced every three or more years as an
additional quality control measure implemented to protect the safety of crew
members relying on such systems, thus providing a source of recurring revenue
for the Company.
Major programs for the Aerospace Division in fiscal year 1997 include the
following: Crew Safety Systems, BRU-44, AMRAAM, Atlas, Delta, Hellfire Missile,
Sensor Fuse Weapon (SFW), and Tomahawk Missile.
Crew Safety Systems. The Company, through Scot, manufactures and sells a
variety of different devices used in crew safety systems and parachute releases
for various aircraft including, among others, the F-15, F-16, F-18, AV-8B, T-38,
T-45, T-48 and B-2. The Company is the sole source supplier of many of these
devices. Aggregate sales of these products were $3,179,000, $4,603,000 and
$7,266,000 during calendar year 1994 and fiscal years 1995 and 1996.
BRU-44. The Company, through Scot, is the sole supplier of, and owns the
rights to, the BRU-44 bomb rack which is in use on the B-1B rotary launcher. The
Company is currently under contract to redesign the rack for use with
conventional weapons and will commence production in 1997.
AMRAAM. The Company is the sole supplier of a Company-patented arm-fire
device, based upon a design patented by the Company, for the AMRAAM air -to-air
missile. This program contributed sales of $1,544,000, $1,752,000 and $1,238,000
during 1994, 1995 and 1996.
Atlas. The Company provides two versions of a safe and arm device and thru
Scot, supplies thrusters and separation nuts for the boosters. The Atlas missile
uses between two and ten safe and arm devices per missile, depending on the
Atlas configuration and each launch requires four fore and eight aft thrusters
and 32 separation nuts. The program contributed sales of $168,000, $2,001,000,
and $840,000 during 1994, 1995, and 1996.
Delta. The Company provides a safe and arm device for various functions in
the Delta II and III launch vehicle. This program contributed negligible sales
in 1994 and contributed sales of $378,000 and $471,000 during 1995 and 1996.
Hellfire. The Company provides the rocket motor arm-fire device for each
Hellfire missile. Production on U.S. requirements are scheduled to end in fiscal
year 1997, however, foreign military sales (FMS) are expected to extend
production several years. This program contributed $1,667,000, $2,119,000 and
$1,305,000 during 1994, 1995 and 1996.
7
<PAGE> 10
Sensor Fuse Weapon (SFW). The Company manufactures seven individual
pyrotechnic devices for the SFW which are sold to three separate customers. Full
rate production (FRP) began in fiscal year 1996 with deliveries in fiscal year
1997 and should continue until 2001. This program contributed negligible sales
in 1994, and contributed sales of $1,269,000 and $1,376,000 in 1995 and 1996.
Tomahawk. The Company is the sole supplier of 13 initiators (as well as
various devices incorporating certain of those initiators, such as an arm-fire
device, a three-way pyrotechnic valve, a cable cutter, a vertical launch
separation nut and a pressure switch) for the Tomahawk cruise missile, which can
be launched from land, air or sea (including submarines) and flies along a
preprogrammed flight path to its target. This program contributed $1,246,000 and
$1,784,000 and $1,167,000 to net sales during 1994, 1995 and 1996.
TOW. The Company is the sole supplier of the ignition safety mechanism
("ISM"), based upon a design patented by the Company, for the TOW
surface-to-surface missile system. This program contributed $2,091,000 and
$3,345,000 to net sales during 1994 and 1995. The contribution to net sales in
1996 was insignificant.
No program of the Aerospace Division accounted for more than 10% of the
Company's net sales during any of the three fiscal years ended October 31, 1996.
Manufacturing
The Company's manufacturing facilities for its Aerospace Division are
located in Newhall, California and Downers Grove, Illinois. Manufacture of the
division's products is accomplished by means of a variety of semiautomatic and
automatic production equipment and manual work stations.
For most contracts, the Aerospace Division receives a request for bid from
a customer that defines the task to be performed and the specifications and
requirements that the product must meet. The Company then designs a device or
product to accomplish the task and meet the stated specifications and
requirements. The design of new products requires substantial engineering, time,
know-how and expense. The Company maintains a staff of experienced engineers to
design and test new products.
Production of the Company's products consists of fabricating and assembling
the hardware components and separately preparing the pyrotechnic charge.
Production of the electro-mechanical assemblies involves the purchase of
machined components, electrical switches, connectors, seals and other materials,
the mechanical assembly of the components and the testing of the completed
units. Throughout the entire process, strict quality-assurance controls are
maintained including customer and government inspection. After assembly,
products are functionally tested on a sample basis as required by the contract.
The Company manufactures the pyrotechnic charge from raw generic chemicals.
The principal pyrotechnic fuels used by the Company are zirconium, titanium
hydride and boron. Handling and processing pyrotechnic materials require
extensive experience and expertise as well as the proper equipment and
facilities. The Company has been handling and processing these fuels and
oxidizers for over 30 years.
Products manufactured for government programs must meet rigorous standards
and specifications for workmanship, process, raw materials, procedures and
testing. Customers, and in some cases the United States Government as the end
user, perform periodic quality audits of the manufacturing process. Certain
customers and the United States Government maintain representatives at the
Company's facilities to monitor quality assurance.
The Company purchases the components for its products from various
subcontractors. While some of the components, such as flexible circuits,
mechanical parts, connectors, seals and certain chemicals are purchased from
single suppliers, they are generally available from several sources. Most
components are manufactured specifically for the Company to its specifications.
Marketing
The Company's marketing efforts for its Aerospace Division are focused on
identifying emerging new programs that have long-term production potential and
the customers who are likely to receive contracts for
8
<PAGE> 11
such programs. The end user of the Aerospace Division's products is generally
the United States Government. In most cases, the Company is a subcontractor to
the non-governmental prime contractor or other subcontractor of the project. The
Company responds to customer inquiries with firm quotations and extensive cost,
technical and management proposals. In some cases, the Company will provide
prototype hardware for the customer's evaluation prior to source selection. A
full-time Director of Marketing was added to the Aerospace Division staff in
fiscal year 1994. As part of his duties, he identifies and pursues new program
opportunities, customers, potential teaming arrangements and new business
development strategies. He prepares long-range forecasts and develops
promotional literature to be provided to customers and potential customers. Scot
also employs two full-time employees whose primary responsibilities are to
market Scot's products.
For new programs, the Aerospace Division generally receives a request for
bids from its customer. The Company believes that customers award contracts
based upon the technical proposals submitted, which include design innovation,
analysis and compliance with specifications, in addition to pricing. Once the
initial bid has been awarded to the Company, subsequent or follow-on contracts
for additional pyrotechnic devices are generally entered into on a negotiated
price basis between the Company and its customer and are subject to competitive
bidding as is the case with new programs.
A majority of the Company's present contracts are fixed-price contracts.
The Company's fixed-price contracts generally specify a fixed price per unit
which varies with different quantities. Fixed-price contracts carry certain
inherent risks, including underestimating costs, problems with new technologies
and economic and other changes that may occur over the contract period. However,
because of economies of scale that may be realized during the contract term,
fixed price contracts may offer significant profit potential.
All proposals with respect to United States Government programs involving
amounts in excess of $500,000 are subject to audit by the United States
Government. During the bid process for initial contracts, the Company must
substantiate the basis for its bid and, in the case of new products, the Company
must disclose the basis and rationale used to determine the bid price. In most
major projects, the bids of the Company are subject to negotiation prior to the
final awarding of the contract. For contracts relating to the order of
additional pyrotechnic devices, the Company generally must disclose the basis
for any price increases.
Most of the Company's contracts with respect to United States Government
programs are subject to unilateral termination at the Government's convenience.
Should a contract be so terminated, the Company would be entitled to be paid for
certain costs incurred to the date of termination plus a reasonable termination
amount. As a result of these contracts, the books and records of the Company are
subject to audit by various governmental agencies. Generally, the Company's
contracts do not require that the Company provide performance bonds.
The Company is performing classified work on a small number of programs.
The Company and certain of its employees have security clearances to the
"Secret" level.
The Aerospace Division did not have any customers that accounted for 10% or
more of the Company's total revenues in fiscal years 1994, 1995 or 1996.
Backlog
Aerospace Division backlog was $19,787,000 at October 31, 1996 (of which
$7,589,000 was attributable to Scot) as compared to $16,727,000 at October 31,
1995 (of which $6,052,000 was attributable to Scot). Aerospace Division backlog
includes the remaining contract amount for units yet to be shipped (excluding
renewals or extensions thereof which are at the discretion of the customer) for
signed contracts or contract award notifications with firm delivery dates and
prices. Backlog is calculated without regard to possible adjustments for scope
change or potential cancellations until such changes or cancellations occur. Of
the total Aerospace Division backlog at October 31, 1996, the Company expects
that approximately $3,600,000 will not be delivered until after fiscal year
1997.
For a further discussion of Aerospace Division backlog, see Item
7. -- "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
9
<PAGE> 12
Competition
During the bid process for the initial contracts for a program, the
Aerospace Division competes with several firms, some with greater financial
resources than the Company. Once the initial contract is awarded, contracts for
additional products of the Company are generally entered into on a negotiated
price basis and are not competitively bid.
Although the Company has very few patents, there are practical barriers to
entry for potential new competitors of the Company. Each of the Aerospace
Division's products is made to precise technical specifications and must be
thoroughly tested before being used in a customer's products. Testing and
approval is a costly and time-consuming process. Not only must each of the
Division's products be tested individually, but all such products must be tested
in conjunction with the larger product into which they are intended to be
placed. After commencement of a program, it is costly for the Aerospace
Division's competitors to design, and the customers to change suppliers of, the
components manufactured by the Company since the customer would be required to
re-qualify its products using a new subcontractor's components.
RISK MANAGEMENT AND INSURANCE
The drying, sifting, mixing and processing of pyrotechnic materials involve
certain risks and potential liabilities. The Company's safety and health
programs provide specialized training to employees working with pyrotechnic
materials. Pyrotechnic chemicals are generally delivered to the Company and are
stored by the Company in a non-volatile form. The pyrotechnic materials are then
dried, sifted and blended at a remote location. Work stations are designed to
shield employees from any accidental explosion. Furthermore, the Company's
machines are designed so that an accidental explosion will be contained in a
protective enclosure to minimize damage.
The Company maintains a liability insurance program covering a number of
risks. The Company's insurance program includes comprehensive general liability
and products liability coverage in the amount of $20 million for the Aerospace
Division and $10 million for the Automotive Products Division. Scot also
maintains a separate general liability and products liability policy in the
amount of $20 million. The Company also has casualty and fire insurance with
various coverage limits for damage to personal property and buildings, business
interruption, earthquakes, boilers and machinery and automobile liability.
Pollution liability is excluded from the Company's comprehensive general
liability insurance policy.
The Company is engaged in a business which could expose it to possible
claims for injury resulting from the failure of products sold by it, notably
initiators for airbag systems. Although the Company is not aware of any claims
for injury resulting from its airbag initiators, they have only been in use for
approximately five years. The Company maintains product liability insurance
coverage as described above. However, there can be no assurance that claims will
not arise in the future, that the proceeds of such policy will be sufficient to
pay future claims or that the Company will be able to maintain the same level of
insurance
REGULATION
As a contractor and subcontractor of the United States Government, the
Company is subject to various laws and regulations more restrictive than those
applicable to non-government contractors. The Company is subject to periodic
audits and investigations to confirm compliance with those laws. Violations can
result in civil and/or criminal liability as well as suspension or debarment
from eligibility for awards of new government contracts or contract renewals.
The Company uses various hazardous and toxic substances in its
manufacturing processes, including organic solvents, photochemical and
pyrotechnic material. The Company's operations are subject to numerous Federal,
state and local laws, regulations and permit requirements relating to the
handling, storage and disposal of those substances. In general, organic solvents
and photochemicals are recycled by a licensed disposal company and reused by the
Company. The pyrotechnic charge contained in products which are rejected in the
quality-control process is eliminated by discharge pursuant to government
regulations. The Company believes it is in substantial compliance with these
laws and regulations and has obtained all
10
<PAGE> 13
necessary permits. While compliance with these laws and regulations has the
effect of increasing the Company's costs of operations, these costs must also be
incurred by the Company's competitors and therefore do not materially adversely
affect the Company's business or competitive position.
To date, compliance by the Company with applicable environmental laws has
not had a material adverse effect on the Company's financial condition, results
of operations or competitive position and the Company does not believe that
compliance with presently existing environmental laws will have such a material
adverse effect in the future or require material capital expenditures, although
no assurances can be given.
From April 1981 to March 1991, the Company subleased certain of its
property in Newhall, California to an unrelated sublessee. In 1984, that
sublessee was charged with illegal dumping of hazardous wastes at the Newhall
site. After extensive testing by the Company and state and local authorities, a
comprehensive groundwater clean-up program was commenced in January 1988 and is
expected to continue for approximately 15 years. A water treatment facility and
27 monitoring wells were constructed at the Newhall facility. The total
groundwater clean-up costs were estimated to be $2.4 million. A state
arbitration panel allocated 82% of the clean-up costs to that sublessee, 7% to
the Company and the remainder to other parties. That sublessee has paid all the
costs of the groundwater clean-up to date. In January 1995, the partnership
which owns the Newhall property reached an agreement with the sublessee who
contaminated the property whereby approximately 70 acres of land, which include
the contaminated area, were sold to the sublessee. Under this agreement, the
Company believes it has no further continuing contingent liability for the
completion of the clean-up of the contaminated parcel.
The Company has a facility security clearance from the United States
Department of Defense. A portion of the Company's sales and other revenues
during the last three fiscal years was derived from work for which this
clearance was required. Continuation of this clearance requires that the Company
remain free from foreign ownership, control or influence ("FOCI"). Management
does not believe that there is presently any substantial risk of FOCI that will
cause its facility security clearance to be revoked. Loss of such security
clearance and related loss of contracts relating to the United States Government
could result in a decline in the Company's revenues.
EMPLOYEES
At October 31, 1996, the Company had approximately 515 full-time employees
in Newhall, California, approximately 575 full-time employees in Mesa, Arizona,
approximately 65 full-time employees in Downers Grove, Illinois and one
full-time employee in Ogden, Utah. None of the Company's employees is
represented by a collective bargaining unit. The Company considers its
relationship with its employees to be good.
ITEM 2. -- PROPERTIES
The Company's principal executive offices are located on approximately 140
acres of land in Newhall, California. This space is leased from a partnership
(consisting of certain stockholders of the Company) under a Master Lease
Agreement that expired on April 30, 1996. The Company is continuing on these
facilities on a month-to-month rental basis. The Company is operating under a
non-conforming use permit, issued by the Los Angeles County Regional Planning
Commission, which expires December 31, 2001. The Company's Newhall facility
consists of 30 buildings, modular units and other structures aggregating
approximately 60,000 square feet. The Company currently intends to relocate its
Newhall, California facility and corporate offices to a larger and more
site-efficient location. In October 1996, the Company purchased approximately
280 acres of land in the City of Moorpark, located in Ventura County, north of
Los Angeles, on which the Company plans to build new facilities. Development of
the land infrastructure, including grading, began in January 1997, and is
expected to be completed in late Spring 1997, at which time construction of the
buildings is expected to begin. The building construction is expected to be
completed by the end of 1997, and the Company expects to move its entire
California-based operations, including Automotive Products, Aerospace and its
administrative offices in early 1998 to the new facility.
The Company has an additional facility in Mesa, Arizona on approximately 21
acres of land used for its Automotive Products Division. The Mesa facility is
owned by the Company and consists of several buildings
11
<PAGE> 14
aggregating approximately 60,000 square feet. The Company currently has four
lines of production equipment in operation at the Mesa facility. As of the close
of fiscal 1995, the Company had two lines of production equipment in operation
at the Mesa facility. Two additional lines became fully operational by the
fourth fiscal quarter of 1996. In 1995, the Company also completed the
construction of a second blending facility and an approximately
12,000-square-foot warehouse. See Item l. -- "Business -- Automotive Products
Division -- Manufacturing."
Scot's manufacturing facilities and principal offices are located in
Downers Grove, Illinois and consist of approximately 47,000 square feet of
office and manufacturing facilities located on three and one-half acres of land
that are owned by Scot. Scot also owns 29 acres of land in Ogden, Utah, on which
Scot tests various products.
ITEM 3. -- LEGAL PROCEEDINGS
The Company is involved in various legal proceedings generally incidental
to its business. While the ultimate disposition of these proceedings is not
presently determinable, the Company does not believe that the outcome of these
proceedings will have a material adverse effect on the financial position or the
results of operations of the Company.
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1996.
PART II
ITEM 5. -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded in The Nasdaq National Market under
the symbol "SDII". The following table sets forth the high and low closing
prices of the Company's Common Stock on Nasdaq National Market for the two
fiscal years ended October 31, 1996.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1995
November 1 through January 30.......................... $20 1/4 $15
January 31 through April 30............................ 19 1/2 15
May 1 through July 31.................................. 25 1/4 18
August l through October 31............................ 22 1/8 15 1/4
1996
November 1 through January 28.......................... 18 13
January 29 through April 28............................ 21 3/4 14 1/2
April 29 through July 28............................... 24 14 1/8
July 29 through October 31............................. 18 1/4 12 1/2
</TABLE>
At January 21, 1996, there were approximately 213 holders of record of the
Company's Common Stock and approximately 2,750 beneficial owners. On January 21,
1997, the closing price of the Company's Common Stock on The Nasdaq National
Market was $20.
No dividend was declared by the Company during the two fiscal years ended
October 31, 1996. The Company does not currently anticipate declaring or paying
any cash dividends in the foreseeable future. The policy of the Company is to
retain earnings to provide funds for use in the operation and expansion of the
Company's business.
12
<PAGE> 15
ITEM 6. -- SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company as of
and for each of the five fiscal years ended October 31, 1996. The financial data
for the five years ended October 31, 1996 is derived from the Consolidated
Financial Statements of the Company, which consolidated statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
consolidated financial statements as of October 31, 1996 and 1995, and for each
of the years in the three-year period ended October 31, 1996, and the report of
KPMG Peat Marwick LLP thereon, are included elsewhere herein. The data set forth
below should be read in conjunction with the Financial Statements and related
Notes thereto appearing elsewhere herein and Item 7. -- "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------
1992 1993 1994(1) 1995 1996
------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales:
Automotive Products.......................... $12,625 $24,339 $49,460 $ 71,253 $ 80,235
Aerospace.................................... 17,513 13,112 15,049 29,339 24,247
------- ------- ------- -------- --------
Total................................ 30,138 37,451 64,509 100,592 104,482
Cost of sales:
Automotive Products.......................... 12,564 22,367 43,388 63,241 68,113
Aerospace.................................... 12,335 9,814 11,037 19,730 16,215
------- ------- ------- -------- --------
Total................................ 24,899 32,181 54,425 82,971 84,328
Gross profit:
Automotive Products.......................... 61 1,972 6,072 8,012 12,123
Aerospace.................................... 5,178 3,298 4,012 9,609 8,031
------- ------- ------- -------- --------
Total................................ 5,239 5,270 10,084 17,621 20,154
Operating expenses:
Automotive Products.......................... 1,507 1,564 2,914 3,412 3,878
Aerospace.................................... 1,364 1,139 1,438 4,270 4,232
------- ------- ------- -------- --------
Total................................ 2,871 2,703 4,352 7,682 8,110
Earnings (loss) from operations:
Automotive Products.......................... (1,446) 408 3,158 4,600 8,245
Aerospace.................................... 3,814 2,159 2,574 5,339 3,799
------- ------- ------- -------- --------
Total................................ 2,368 2,567 5,732 9,939 12,044
Other income (expense), net.................... 16 (315) (452) (639) 129
Earnings before income taxes................... 2,384 2,252 5,280 9,300 12,173
Provision for income taxes..................... 965 920 2,111 3,720 4,725
------- ------- ------- -------- --------
Net earnings................................... $ 1,419 $ 1,332 $ 3,169 $ 5,580 $ 7,448
Net earnings per share......................... $ .25 $ .23 $ .55 $ .82 $ .96
Weighted average common and common equivalent
shares outstanding........................... 5,758 5,764 5,786 6,832 7,763
</TABLE>
<TABLE>
<CAPTION>
AT OCTOBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................................. $10,570 $14,762 $25,154 $43,320 $45,326
Total assets................................... 29,216 33,939 51,689 78,621 86,159
Current liabilities............................ 4,543 6,221 10,613 10,150 10,369
Long-term debt, less current portion........... 2,282 3,608 12,568 4,027 3,320
Stockholders' equity........................... 21,890 23,222 26,659 62,054 69,701
</TABLE>
- ---------------
(1) Effective July 31, 1994, the Company acquired all of the assets of Scot,
Inc. Accordingly, the results of operations for the year ended October 31,
1994, and all subsequent years, include the results of Scot, Inc. from that
effective date. See Item 7. -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General -- Aerospace
Division."
13
<PAGE> 16
ITEM 7. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the information
contained in the Financial Statements and Notes thereto of the Company appearing
elsewhere herein. Unless otherwise stated, all references to years means the
Company's fiscal years ending October 31.
GENERAL
Automotive Products Division
The Automotive Products Division was formed in the beginning of 1989 as a
result of the Company's strategic decision to participate in the anticipated
demand for airbag systems arising from new federal regulations. Demand for
initiators produced by the division has grown steadily since 1992 as U.S.
automobile manufacturers have installed airbags in automobiles for both the
driver and front passenger. Even though installation of the front driver and
passenger airbags is now mostly implemented in the United States, demand appears
to be continuing to grow as U.S. automobile manufacturers are now installing
airbags for side-impact protection. In addition European and Pacific Rim
automobile manufacturers have, over the last few years, accelerated the rate of
airbag implementation for automobiles produced in these countries. The Company
has invested in, and continues to invest in, facilities and production equipment
to meet these increases in demand. Beginning in fiscal year 1992, gross profit
margins and operating income amounts achieved by the Company have improved as a
result of the Company's automation of the manufacturing process of initiators,
because of improvements in manufacturing techniques, and because of a larger
base of business to absorb its overhead costs. This trend has occurred despite
the average sales price for an initiator declining approximately 43% over the
four year period ended October 31, 1996.
No assurance can be given that the foregoing trends during fiscal years
1992 through 1996 will continue. The Company's future results of operations,
financial position and cash flows are dependent on a variety of factors that are
inherently difficult to predict including, by way of example only: (1) the
number of automobiles sold (particularly in North America); (2) continued
acceptance of airbags as the principal secondary restraint system incorporated
in automobiles; (3) the impact of pressure from the Company's customers and
actions by the Company's competitors on the Company's ability to sell its
initiators at acceptable average sales prices; (4) voluntary incorporation of
side and rear airbags by automobile manufacturers; and (5) the Company's ability
to continue increasing the automation of its manufacturing processes in a timely
and effective manner.
Aerospace Division
Demand for the Aerospace Division's products, including a wholly-owned
subsidiary, Scot, Inc., is driven primarily by the United States Government's
purchases of missiles and other weapon systems and commercial launch vehicles
for satellite communications that incorporate initiators, arm-fire devices and
other pyrotechnic components, and by demand for replacement parts used in
military crew safety systems. In most cases, the Company is a subcontractor to
the nongovernmental prime contractor or other subcontractor of the program. The
Aerospace Division's contracts provide for a specific number of deliveries over
a period of time. Revenue is recognized for these production contracts as
completed units are shipped. Cost of sales for units shipped is computed based
on the expected total unit cost of all units required to be produced under the
contract through completion, which amount includes all estimated costs to
complete the contract. Accordingly, the results of the Aerospace Division for
any particular accounting period, or period-to-period comparisons, may be
significantly affected by the timing of production deliveries and may not be
indicative of future operating results. Unlike most of the Company's products,
demand for certain of Scot's products is affected by the government's need to
purchase directly from Scot replacement components whose service life has
expired. The most significant factor affecting the gross profit margin for the
Aerospace Division is the mix of products being delivered during a particular
reporting period.
14
<PAGE> 17
RESULTS OF OPERATIONS
The following table is derived from the Company's statement of earnings
data and sets forth, for the periods indicated, certain statement of earnings
data as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
-----------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Automotive Products Division
Net sales..................................... 100.0% 100.0% 100.0%
Cost of sales................................. 87.7 88.8 84.9
----- ----- -----
Gross profit.................................. 12.3 11.2 15.1
Operating expenses............................ 5.9 4.8 4.8
----- ----- -----
Earnings from operations...................... 6.4% 6.4% 10.3%
===== ===== =====
Aerospace Division
Net sales..................................... 100.0% 100.0% 100.0%
Cost of sales................................. 73.3 67.3 66.9
----- ----- -----
Gross profit.................................. 26.7 32.7 33.1
Operating expenses............................ 9.6 14.5 17.4
----- ----- -----
Earnings from operations...................... 17.1% 18.2% 15.7%
===== ===== =====
</TABLE>
COMPARISON OF FISCAL YEARS 1994, 1995 AND 1996
Net Sales. Net sales for the Automotive Products Division increased by
$21,793,000, or 44.1%, between 1994 and 1995 and increased by $8,982,000, or
12.6%, between 1995 and 1996. The increases were due primarily to significant
increases throughout the three-year period in initiator shipments to TRW
pursuant to the TRW Agreement and, to a lesser extent, to increases in shipments
to ARC and Morton. In December 1995, the Company signed a three-year supplier
agreement with Morton whereby the Company is required to supply a substantial
portion of Morton's initiator requirements. The Morton agreement became
effective with model year 1997 production, approximately August 1996, and
therefore did not have a substantial impact on 1996 fiscal year operations.
Increases in initiator unit sales during the three-year period were partially
offset by decreases in initiator prices pursuant to the TRW Agreement. During
1994, 1995, and 1996, sales to TRW accounted for 86.8%, 80.1%, and 77.7%,
respectively, of the Automotive Products Division's sales and 67.9%, 59.9%, and
59.7%, respectively, of the combined sales of the Company. The Company expects
TRW and Morton to be the Automotive Products Division's largest customers for
the foreseeable future.
Net sales for the Aerospace Division increased $14,290,000, or 95.0%,
between 1994 and 1995, and decreased $5,092,000, or 17.4%, between 1995 and
1996. The inclusion of the operating results of Scot contributed $8,825,000 of
the increase between 1994 and 1995 (Scot's results were included for three
months in 1994 and 12 months in 1995). Without the inclusion of Scot's results,
sales would have increased by $5,465,000, or 39.5%, between 1994 and 1995. The
increase in sales between 1994 and 1995 reflects successful marketing efforts by
the Company coupled with fewer companies with whom the Aerospace Division is in
competition for the remaining defense program contracts. The decrease in sales
between 1995 and 1996 resulted because the TOW missile program produced
substantial "one-time buy" revenues in 1995 which were not repeated in 1996, and
because sales of products for the Hellfire missile program declined in 1996 as
this missile program nears completion of its production life cycle.
During 1993, revenues and new orders for the Aerospace Division were
adversely affected by reduced levels of spending for defense programs in the
United States. To date, no production program from which the Company has
received any significant revenues during the past three fiscal years has been
canceled. It is unclear whether the programs in which the Company is involved or
would propose to become involved will be significantly affected by any future
decrease in defense spending and if so, to what extent. Accordingly, the effect,
if any, on the future results of operations of the Company from possible future
decreases in defense spending cannot be determined at this time.
15
<PAGE> 18
Cost of Sales. Cost of sales for the Automotive Products Division increased
$19,853,000, or 45.8%, between 1994 and 1995, and increased by $4,872,000, or
7.7%, between 1995 and 1996. The increases throughout the three-year period were
related primarily to the increased volume of initiators shipped. Automotive
Products Division gross profit margins declined from 12.3% in 1994 to 11.2% in
1995, and improved to 15.1% in 1996. In 1994, 1995 and 1996, the Company
achieved greater recovery of overhead costs from the increases in levels of
production and also achieved an increase in production machine utilization and a
higher level of automation of manufacturing operations, all of which contributed
to improved gross margins. These improvements were fully offset in 1995, due to
decreases in the sales price of initiators by over 12% between 1994 and 1995.
Although the Company experienced a reduction in the sales price of initiators of
over 18% in 1996 compared to 1995, the improvements in machine utilization and
the absorption of overhead over a larger base more than offset the price
reduction, resulting in a higher gross profit percent in 1996. Second production
lines were installed in the Mesa, Arizona facility and the Newhall, California
facility during fiscal year 1995, and two additional production lines were
installed in the Mesa facility during fiscal year 1996. See Item
2. "-- Business -- Properties." The installation of these additional production
lines has resulted in an increase in depreciation expense for the Company.
The Company amended, effective January 1, 1995, the Automotive Products
Division's only long-term supply contract with the supplier of a key component
for the Company's initiators. The contract relates to a primary component used
in the production of initiators and this amendment significantly reduces the
unit prices paid by the Company effective January 1, 1995. The amendment also
extends the term of the contract through the end of calendar year 1999 and
provides that such prices will be further reduced at the beginning of each
calendar year through the end of such term. See Item
1. "-- Business -- Automotive Products Division -- Manufacturing."
Cost of sales for the Aerospace Division increased $8,693,000, or 78.8%,
between 1994 and 1995, and decreased $3,515,000, or 17.8%, between 1995 and
1996. Cost of sales as a percentage of the Aerospace Division's sales decreased
in 1995 and 1996, resulting in an increase in the gross profit margin for the
Aerospace Division from 26.7% in 1994 to 32.7% in 1995, and to 33.1% in 1996.
Of the $11,037,000 of cost of sales incurred by the Aerospace Division in
1994, $554,000 resulted from the inclusion of the operating results of Scot for
the three months ended October 31, 1994. Without the inclusion of Scot's
results, cost of sales would have increased by $669,000, or 6.8%, in 1994. Cost
of sales decreased as a percentage of net sales between 1994 and 1995, and
between 1995 and 1996, as a result of the inclusion of the results of operations
of Scot for the three months ended October 31, 1994 and for the entire year in
1995 and 1996. Scot's gross profit margin has historically been higher than the
Aerospace Division's gross profit margin. Without the inclusion of Scot, the
gross profit margin for the Aerospace Division, which was 24.0% in 1994, would
have been 24.4% in 1995 and 20.5% in 1996. The fluctuation in gross margin is
the result of product mix sold during the respective years and, in 1996, because
of start-up costs incurred on several new programs.
Operating Expenses. Operating expenses, in total, increased $3,330,000, or
76.5%, between 1994 and 1995, and increased $428,000, or 5.6%, between 1995 and
1996. Of the increase in 1995, $2,154,000 is attributable to the inclusion of
the operations of Scot for the year ended October 31, 1995. Without Scot,
operating expenses would have increased by $1,176,000, or 30.3%, for 1995. A
certain level of operating expenses is incurred by the Company to support
operations within ranges of sales levels, and accordingly, these expenses do not
increase or decrease ratably as sales increase or decrease. The operating
expenses for each division (Automotive Products and Aerospace) are comprised of
two components. First, each division is charged those operating expenses
directly incurred by that division. Second, each division is allocated
administrative operating expenses incurred by the Company (which are not
attributable to a particular division) on an equitable basis to fairly reflect
the benefit received by each operating division. For fiscal year 1994, the
allocation was based on each Division's sales as a percent of total sales. In
fiscal years 1995 and 1996, the allocation was made approximately equally to
each Division. Administrative operating expenses amounted to $1,967,000,
$2,550,000, and $2,704,000, in fiscal years 1994, 1995, and 1996, respectively.
16
<PAGE> 19
The increase in total operating expenses in 1995 compared to 1994, and in
1996 compared to 1995, without the inclusion of Scot, was due to increases in
most operating expense categories incurred to support the increase in sales. The
categories of operating expenses in which the Company experienced the largest
increases were administrative salaries, outside professional services,
transportation costs and public relations costs.
Operating expenses for the Automotive Products Division increased $498,000,
or 17.1%, between 1994 and 1995, and increased $466,000, or 13.7%, between 1995
and 1996. As a percentage of the Automotive Products Division net sales, these
expenses have decreased from 5.9% in 1994 to 4.8% in 1995 and 1996.
Operating expenses for the Aerospace Division increased $2,832,000, or
196.9%, between 1994 and 1995, and decreased $38,000, or .9%, between 1995 and
1996. Of the increase in 1995, $2,154,000 resulted from the inclusion of the
operating results of Scot for the year ended October 31, 1995. Without the
inclusion of such results, operating expenses would have increased by $678,000,
or 70.0%, between 1994 and 1995. As a percentage of sales, operating expenses
for the Aerospace Division increased from 9.6% in 1994 to 14.5% in 1995, and
increased to 17.4% in 1996. The increase in 1995 resulted from (a) the inclusion
of Scot for the year ended October 31, 1995; (b) the higher level of expenses
incurred to support the large increase in sales in 1995; and (c) the higher
percentage of expenses allocated to the Aerospace Division as a result of a
change in the method of allocating administrative operating expenses. The
increase in operating expenses as a percentage of sales in 1996 resulted from
the reduction in sales in 1996 compared to 1995 without a corresponding
reduction in operating expenses. Sales for the Aerospace Division as a
percentage of total Company sales increased from 23% in 1994 to 29% in 1995, and
decreased to 23% in 1996.
Other Income and Expense. Other income (expense), net consists primarily of
interest income and interest expense. In May 1995, the Company received
approximately $29,400,000 (before offering-related expenses) from the sale of
1,770,000 shares of its Common Stock in an underwritten public offering.
Approximately $14,000,000 of the proceeds were used to pay debt incurred under
the Company's bank revolving line of credit and approximately $11,400,000 were
invested in short-term, interest-bearing, marketable securities. In 1994, other
(expense), net was $452,000, which consisted primarily of interest on bank
borrowings. In 1995, other (expense), net was $639,000, which consisted
primarily of interest expense of $964,000, offset partially by interest income
of $297,000 earned on short-term investments and by $28,000 of other income. In
1996, other income, net was $129,000, which consisted primarily of interest
income earned on short-term investments of $485,000, and other income of $9,000,
offset partially by interest expense of $365,000. The increase in interest
income in 1996, compared to 1995, was the result of interest earned for a
full-year on short-term investments in 1996 compared to approximately five
months on interest income in 1995. The decrease in interest expense in 1996 was
the result of no outstanding short-term borrowings in 1996, and because of lower
average outstanding balances on long-term debt in 1996 due to scheduled
reductions of principal balances.
SEASONALITY
The airbag manufacturers' requirements for the Company's initiators are
dependent on the requirements of automobile manufacturers. The Company expects
that the airbag initiator market in the United States will continue to become
more closely tied with the seasonal fluctuations of the automotive market during
the next several years as the phase-in of driver and passenger-side airbag
systems is fully implemented. This trend may be offset partially as new
applications for airbags, such as airbags for side-impact protection, are
installed by automobile manufacturers. In addition, research is currently being
conducted for "smart" airbags which will have the ability to sense the weight
and position of an automobile occupant, and then deploy the airbag at
corresponding different speeds. Although not determined at this time, the
initiator content per airbag could increase in response to "smart" airbag
technology.
The Aerospace Division recognizes sales upon the shipment of units or
completion of a task. While there is no identifiable seasonality to the
aerospace business, there can be quarter-to-quarter changes in shipment volume
that result from customer requirements or other factors beyond the Company's
control. The general
17
<PAGE> 20
trend has been that customer shipment requirements are greater in the second
half of the Company's fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital since its initial public offering
in 1991 have been cash from operations and bank borrowings and, in fiscal year
1995, an additional public offering of its common stock.
During the fiscal year ended October 31, 1996, the Company maintained a
credit agreement (the "Credit Agreement") with a bank under which the Company
had in place a revolving credit facility (the "Revolver") and a $5,000,000,
five-year term loan (the "Term Loan"). Under the terms of the Revolver (as
amended in October 1995), the Company could borrow up to a maximum of $6,500,000
in advances from November 1, 1995 through March 1, 1997. There were no amounts
outstanding under the Revolver during 1996. Proceeds advanced under the Revolver
could be used to support working capital needs and capital expenditures. The
Revolver would have expired and become due on March 1, 1997.
The Term Loan, the principal balance of which was being amortized on a
monthly basis, bore interest at a fixed rate per annum of 7.30% and had an
outstanding principal balance of $1,583,000 at October 31, 1996. Proceeds from
the term loan were applied to repay a prior credit facility with a different
bank. The Term Loan was required to be fully amortized by May 1, 1998.
In December 1996, the Company signed a new credit agreement (the "New
Agreement") with a different bank. The balance of the Term Loan was paid at that
time. The New Agreement expires May 1, 1998, and any borrowings under the New
Agreement bear interest at the bank's Reference Rate less .25 percentage point,
or at the Company's option, at LIBOR plus .75 percentage point. The New
Agreement contains two revolving credit facilities. The Company may borrow up to
$10,000,000 under Facility No. 1, and may borrow up to $12,000,000 under
Facility No. 2. Borrowings under both facilities may be used for general and
other corporate purposes. In addition, the Company has the option of converting
outstanding borrowings, in increments of not less than $1,000,000, under
Facility No. 2 to a 5-year term loan. Any amounts converted to term debt under
Facility No. 2 will bear interest at the bank's long-term interest rate in
effect at the time of such conversion.
Substantially all of the Company's assets were pledged as collateral under
the former Credit Agreement, and are also pledged as collateral under the New
Agreement. In addition, the New Agreement contains covenants that include
requirements to meet certain financial tests and ratios (including minimum
current ratio, debt service ratio, minimum tangible net worth, maximum debt
ratio and maintenance of profitable annual operations) and restrictions and
limitations on the sale of assets, new borrowings, mergers and purchases of
stock. As of December 31, 1996, $1,454,000 was outstanding under Facility No. 2,
and no amounts were outstanding under Facility No. 1.
The Company's wholly owned subsidiary, Scot, Inc., has a term loan with a
bank, which was renewed in August 1996, secured by certain real property of
Scot. The principal balance outstanding under the renewed loan at October 31,
1996, was $581,500. The loan is being amortized with monthly payments of
approximately $7,800, including interest, adjusted monthly, at 1.9% over the
bank's LIBOR rate. Any unpaid principal is due on August 1, 2001.
In November 1994, the Company purchased a new airplane from United
Beechcraft, Inc. for $2,210,000. The Company made an initial payment of $110,500
for the plane and delivered a promissory note with Beech Acceptance Corporation,
Inc. to finance the remaining balance of $2,099,500 over a 12-year period. The
unpaid balance of this note at October 31, 1996 was $1,832,700. In December
1994, the Company purchased a second airplane from United Beechcraft, Inc. for
$669,419. The Company entered into a promissory note with Beech Acceptance, Inc.
to finance the purchase over a 10-year period. The unpaid balance of this note
at October 31, 1996 was $559,600. The planes are being used primarily to
transport Company officials between its Newhall, California and Mesa, Arizona
facilities. In addition, the Company leases the first airplane for use by third
parties when not in use by the Company in order to defray a portion of the
costs.
During 1996, the Company generated cash flow from operations of
$12,857,000. Capital expenditures for payments related to automated
manufacturing equipment amounted to approximately $7,406,000 and for payments
related to the purchase of 280 acres of land in the City of Moorpark (see
below), amounted to
18
<PAGE> 21
approximately $3,712,000. Principal payments of long-term bank debt aggregated
$1,275,000. These net cash outflows were funded by cash flow from operations. At
October 31, 1996, the Company had cash and marketable securities on hand of
$13,293,000 and, at December 31, 1996, had additional borrowing capacity of
$20,546,000 available under the New Agreement.
On May 1, 1995, the Company sold 1,770,000 shares of its Common Stock in an
underwritten public offering. The proceeds of the offering (approximately
$29,400,000 before offering related expenses) were used to liquidate all amounts
outstanding under the Revolver and to fund certain working capital increases,
with the balance (approximately $11,400,000) being invested in short-term
marketable securities and cash equivalents.
At October 31, 1996, the Company had working capital of $34,957,000 as
compared to working capital of $33,170,000 at October 31, 1995. The increase of
$1,787,000 is due primarily to an increase in cash and marketable securities of
$664,000, an increase in inventory of $1,059,000, a decrease in the current
portion of long-term debt of $568,000, and a decrease into accounts payable and
accrued expenses of $1,077,000, offset partially by an increase in income taxes
payable of $1,864,000. The increase in inventories was due primarily to higher
levels of raw material purchases and workin-process required to support the
increasing production and shipping volumes of the Automotive Products Division
in 1996.
The Company anticipates that working capital requirements will increase in
1997 as compared to 1996 to support the investment in inventories and accounts
receivable related to the anticipated increased demand for initiators
manufactured by the Company, although future demand is inherently difficult to
predict and affected by a variety of factors, including the factors discussed in
the second paragraph under "General -- Automotive Products Division". The
Company believes that it can meet its expected working capital requirements for
the foreseeable future from existing cash on hand, cash flow from operations and
borrowings under its existing Credit Agreement. The Company had commitments to
acquire capital equipment at October 31, 1996 aggregating approximately
$6,500,000 related primarily to additional production equipment, and other
support equipment required for the increased operations of the Automotive
Products Division.
In order to improve manufacturing efficiencies and to provide facilities
for growth, the Company purchased approximately 280 acres of land in the City of
Moorpark, located in Ventura County, north of Los Angeles, in October 1996, on
which the Company plans to build new facilities. Development of the land
infrastructure, including grading, began in January 1997, and is expected to be
completed in late Spring 1997, at which time construction of the buildings is
expected to begin. The building construction is expected to be completed by the
end of 1997, and the Company expects to move its entire California-based
operations, including Automotive Products, Aerospace and the administrative
offices in early 1998 to these new facilities. Total cost of the project is
estimated at $18,000,000 of which approximately $3,700,000 had been spent by
October 31, 1996. The Company anticipates spending approximately $10,000,000 in
fiscal 1997, and approximately $4,300,000 in fiscal 1998 to complete this
project. The Company believes it has adequate cash and marketable securities
available from the net proceeds of the May 1995 public offering, from cash flow
from operations and from borrowing capacity to adequately finance this project.
The Company believes additional term financing is available for this project to
the extent required, however there can be no assurance that such financing will
be available.
Recently, Statement of Financial Accounting Standards No. 121, "Impairment
of Long-Lived Assets" (SFAS 121) was issued. SFAS 121 is required for fiscal
years beginning after December 15, 1995. Management of the Company believes that
the adoption of SFAS 121 will not have a material impact on the financial
position or results of operations of the Company. In addition, Statement of
Financial Accounting Standards No. 123 "Accounting For Stock-Based Compensation"
(SFAS 123) was issued. SFAS 123 is required for fiscal years beginning after
December 15, 1995. The Company will continue to apply the provisions of
Accounting Principles Board Opinion No. 25, and make the supplemental
disclosures required by SFAS 123. Management does not believe that this
accounting treatment will have a material impact on the financial position or
results of operations of the Company. Both pronouncements are effective for the
Company beginning in fiscal 1997.
ITEM 8. -- FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Financial Statements of the Company filed as part of this report on
Form 10-K are listed in Item 14(a).
19
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Special Devices, Incorporated:
We have audited the accompanying consolidated balance sheets of Special
Devices, Incorporated and subsidiary as of October 31, 1996 and 1995, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended October 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Special
Devices, Incorporated and subsidiary as of October 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended October 31, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 15, 1997
20
<PAGE> 23
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1995 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash............................................................ $ 3,928,185 $ 2,592,578
Marketable securities........................................... 8,700,000 10,700,000
Accounts receivable, net of allowance of $216,604 in 1995 and
$155,959 in 1996 for doubtful accounts (Note 3).............. 12,562,082 12,663,230
Inventories (Note 4)............................................ 17,239,608 18,298,705
Prepaid expenses................................................ 299,506 401,645
Deferred income taxes (Note 7).................................. 591,000 670,000
----------- -----------
Total current assets.................................... 43,320,381 45,326,158
----------- -----------
Property, plant and equipment, at cost:
Land............................................................ 1,559,827 1,611,331
Building........................................................ 4,941,897 7,562,979
Machinery and equipment......................................... 28,646,606 35,736,957
Furniture and fixtures.......................................... 1,778,829 2,221,376
Transportation equipment........................................ 3,008,482 3,066,463
Leasehold improvements.......................................... 2,124,280 2,334,412
Construction in progress (includes land and related costs
of $3,700,000 in 1996)....................................... 5,059,924 5,695,185
----------- -----------
47,110,845 58,228,703
Less accumulated depreciation and amortization.................. 12,195,400 17,597,716
----------- -----------
34,915,445 40,630,987
----------- -----------
Other assets...................................................... 385,050 202,050
----------- -----------
$78,620,876 $86,159,195
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 5)...................... $ 1,864,710 $ 1,296,973
Trade accounts payable.......................................... 4,314,767 3,075,758
Accounts payable to related parties (Note 10)................... 1,573,660 2,294,688
Accrued payroll and benefits.................................... 1,721,332 1,104,613
Accrued expenses................................................ 548,862 605,881
Income taxes payable (Note 7)................................... 127,101 1,991,290
----------- -----------
Total current liabilities............................... 10,150,432 10,369,203
Long-term debt, less current portion (Note 5)..................... 4,026,574 3,319,709
Deferred income taxes (Note 7).................................... 2,390,000 2,769,000
----------- -----------
Total liabilities....................................... 16,567,006 16,457,912
Commitments and contingencies (Note 8)............................ -- --
Stockholders' equity (Note 6):
Preferred stock, $.01 par value. Authorized 2,000,000 shares;
no shares issued or outstanding.............................. -- --
Common stock, $.01 par value. Authorized 20,000,000 shares;
issued and outstanding 7,655,076 shares in 1995 and 7,675,535
in 1996...................................................... 76,551 76,756
Additional paid-in capital...................................... 49,711,881 49,911,050
Retained earnings............................................... 12,265,438 19,713,477
----------- -----------
Total stockholders' equity.............................. 62,053,870 69,701,283
----------- -----------
$78,620,876 $86,159,195
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 24
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
---------------------------------------------
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Net sales........................................ $64,508,654 $100,591,878 $104,482,025
Cost of sales (Note 10).......................... 54,424,607 82,970,922 84,327,787
---------- ----------- -----------
Gross profit................................... 10,084,047 17,620,956 20,154,238
---------- ----------- -----------
Operating expenses............................... 4,351,700 7,682,252 8,110,025
---------- ----------- -----------
Earnings from operations.................... 5,732,347 9,938,704 12,044,213
---------- ----------- -----------
Other (expense) income:
Interest expense............................... (457,617) (964,099) (364,992)
Interest income................................ -- 296,733 484,710
Other, net..................................... 5,320 28,332 9,108
---------- ----------- -----------
Total other (expense) income................ (452,297) (639,034) 128,826
---------- ----------- -----------
Earnings before income taxes................ 5,280,050 9,299,670 12,173,039
Income taxes (Note 7)............................ 2,111,000 3,720,000 4,725,000
---------- ----------- -----------
Net earnings................................... $ 3,169,050 $ 5,579,670 $ 7,448,039
========== =========== ===========
Net earnings per share........................... $ 0.55 $ 0.82 $ 0.96
========== =========== ===========
Weighted average common shares and common
equivalents outstanding........................ 5,785,512 6,831,590 7,762,529
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 25
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at October 31,
1993....................... 5,758,750 $57,588 $19,647,446 $ 3,516,718 $ 23,221,752
Issuance of common stock on
exercise of stock
options.................... 28,666 286 268,290 -- 268,576
Net earnings................. -- -- -- 3,169,050 3,169,050
--------- ------ ---------- ---------- ----------
Balance at October 31,
1994....................... 5,787,416 57,874 19,915,736 6,685,768 26,659,378
Issuance of common stock on
exercise of stock
options.................... 97,660 977 863,229 -- 864,206
Sale of 1,770,000 shares of
common stock, net of
applicable costs........... 1,770,000 17,700 28,932,916 -- 28,950,616
Net earnings................. -- -- -- 5,579,670 5,579,670
--------- ------ ---------- ---------- ----------
Balance at October 31,
1995....................... 7,655,076 76,551 49,711,881 12,265,438 62,053,870
Issuance of common stock on
exercise of stock
options.................... 20,459 205 199,169 -- 199,374
Net earnings................. -- -- -- 7,448,039 7,448,039
--------- ------ ---------- ---------- ----------
Balance at October 31,
1996....................... 7,675,535 $76,756 $49,911,050 $19,713,477 $ 69,701,283
========= ====== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 26
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
----------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................... $ 3,169,050 $ 5,579,670 $ 7,448,039
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization............... 2,748,783 4,430,382 5,402,314
Changes in assets and liabilities:
Increase in accounts receivable............. (519,664) (3,991,946) (101,148)
Increase in inventories..................... (7,172,149) (1,911,395) (1,059,097)
Decrease (increase) in prepaid expenses..... 72,165 27,087 (102,139)
Decrease in other assets.................... 122,938 180,000 183,000
Increase (decrease) in accounts payable,
accounts payable to related parties and
other accrued expenses.................... 4,106,652 (1,201,710) (1,077,681)
(Decrease) increase in income taxes
payable................................... (129,271) 117,372 1,864,189
Increase in deferred taxes, net............. 855,000 398,000 300,000
------------- ------------- -------------
Net cash provided by operating activities...... 3,109,174 3,627,460 12,857,477
------------- ------------- -------------
Cash flows from investing activities:
Acquisition of assets of Scot, Inc.......... (5,311,000) -- --
Purchases of property, plant and
equipment................................. (6,275,378) (13,375,729) (11,117,856)
Purchases of marketable securities.......... -- (8,700,000) (2,000,000)
------------- ------------- -------------
Net cash used in investing activities.......... (11,586,378) (22,075,729) (13,117,856)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock...... 268,576 29,814,823 199,374
Proceeds from issuance of long term debt.... 146,741 2,769,000 --
Net borrowings (payments) under revolving
line
of credit................................. 8,910,000 (9,410,000) --
Repayment of long term debt................. (1,026,281) (1,278,504) (1,274,602)
------------- ------------- -------------
Net cash provided by (used in) financing
activities.................................. 8,299,036 21,895,319 (1,075,228)
------------- ------------- -------------
Net (decrease) increase in cash................ (178,168) 3,447,050 (1,335,607)
Cash at beginning of year........................ 659,303 481,135 3,928,185
------------- ------------- -------------
Cash at end of year.............................. $ 481,135 $ 3,928,185 $ 2,592,578
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................... $ 399,322 $ 1,008,983 $ 354,938
Income taxes................................ 1,385,000 2,960,500 2,437,500
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 27
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Special
Devices, Incorporated, a Delaware corporation, and its wholly owned subsidiary
(the Company). All material inter-company accounts and transactions have been
eliminated.
Revenue Recognition
The Company has two operating divisions. The Automotive Products Division,
organized in 1989, manufactures products, to customer specifications, under
standard purchase orders. Sales are recognized when products are shipped. The
Aerospace Division manufactures products under fixed price, long-term contracts
directly for the Department of Defense, their prime contractors and commercial
companies. The contracts vary in length, but are generally completed within 12
to 24 months. Sales under long-term production contracts are recognized as units
are shipped.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities and the reported amounts of
income and expenses for the periods presented. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash, trade accounts receivable, and
all current liabilities approximate the fair values due to the relatively short
maturities of these instruments.
Marketable securities consist of a tax-exempt mutual fund and are
classified as available-for-sale. These securities are stated at fair value
based on market quotes. The cost basis of the securities approximates the fair
value.
The carrying amounts of the Company's long-term debt approximate the fair
value due to variable interest rates which approximate market rates associated
with the notes.
Inventories
Inventories, other than inventoried costs relating to long-term contracts,
are stated at the lower of cost (principally first-in, first-out) or market.
Inventoried costs relating to long-term contracts and programs are stated at the
actual production cost, including overhead incurred to date reduced by amounts
identified with revenue recognized on units delivered. Inventoried costs
relating to long-term contracts are further reduced by any amounts in excess of
estimated realizable value. The costs attributed to units delivered under
long-term contracts are based on the estimated average cost of all units
expected to be produced under existing contracts.
In accordance with industry practice, inventories are classified as current
assets although inventories may include amounts relating to contracts and
programs having production cycles longer than one year.
25
<PAGE> 28
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. The cost of maintenance and
repairs is charged against results of operations as incurred. Depreciation is
charged against results of operations using the straight-line method over the
estimated service lives of the related assets. The principal lives used in
determining depreciation rates of various assets are as follows:
<TABLE>
<S> <C>
Building.......................................................... 25 years
Machinery and equipment........................................... 7.5 years
Furniture and fixtures............................................ 5 years
Transportation equipment.......................................... 4 years
</TABLE>
Leasehold improvements are amortized over the lesser of 10 years or the
remaining life of the lease. Upon sale or retirement of the depreciable
property, the related cost and accumulated depreciation are eliminated from the
accounts and gains or losses are reflected in earnings.
Net Earnings Per Share
Net earnings per share is computed by dividing net earnings by the weighted
average number of common stock and dilutive common stock equivalents outstanding
during the period.
Income Taxes
The Company accounts for income taxes under the asset and liability method
of accounting for income taxes whereby deferred income taxes are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
Impairment of Long-Lived Assets
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ", in March 1995
which is effective for fiscal years beginning after December 15, 1995. SFAS No.
121 establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS No. 121 is effective for the Company beginning fiscal 1997.
Since the Company's current policy is consistent with the provisions of SFAS No.
121, it does not anticipate that adoption of the new pronouncement will have a
material impact on its financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation.
26
<PAGE> 29
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITION
The Company acquired, in September, 1994, substantially all the assets of
Scot, Inc. a manufacturer of propellant explosive and life support devices for
government and commercial purposes. Consideration consisted of $5,310,000 cash,
which has been allocated to the acquired assets based on estimated fair values.
Since the acquisition is accounted for as a purchase, the consolidated financial
statements include its assets and operations since the date of the acquisition.
(3) ACCOUNTS RECEIVABLE
Accounts receivable are as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Commercial customers.............................. $ 7,825,252 $ 6,388,176
U.S. Government................................... 374,305 2,299,218
U.S. Government contractors....................... 4,579,129 4,131,795
----------- -----------
12,778,686 12,819,189
Less allowance for doubtful accounts............ 216,604 155,959
----------- -----------
$ 12,562,082 $ 12,663,230
=========== ===========
</TABLE>
The activity relating to the allowance for doubtful accounts was as follows:
<TABLE>
<S> <C>
Balance at October 31, 1993....................... $ 257,899
Additions charged to expense...................... 54,400
Write-offs........................................ (13,295)
----------
Balance at October 31, 1994....................... 299,004
Adjustment to reserve............................. (82,400)
Write-offs........................................ --
----------
Balance at October 31, 1995....................... 216,604
Additions charged to expense...................... 81,000
Write-offs and other.............................. (141,645)
----------
Balance at October 31, 1996....................... $ 155,959
==========
</TABLE>
(4) INVENTORIES
Inventories and inventoried costs relating to long-term contracts are
classified as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Raw materials and components...................... $ 4,998,400 $ 6,167,337
Work in process................................... 5,766,087 7,278,149
Finished goods.................................... 1,103,141 1,020,337
Inventoried costs relating to long term contracts,
net of
amounts attributed to revenues recognized to
date............................................ 5,568,687 3,835,468
----------- -----------
17,436,315 18,301,291
Less progress payments related to long-term
contracts....................................... 196,707 2,586
----------- -----------
$17,239,608 $18,298,705
=========== ===========
</TABLE>
27
<PAGE> 30
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inventoried costs relate to costs of products currently in progress. There
are no significant inventoried costs relating to the production costs of
delivered units over the estimated average cost of all units expected to be
produced.
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Bank term notes..................................... $3,201,339 $2,164,886
Finance company..................................... 2,602,743 2,392,295
Other notes......................................... 87,202 59,501
---------- ----------
5,891,284 4,616,682
Less current portion.............................. 1,864,710 1,296,973
---------- ----------
$4,026,574 $3,319,709
========== ==========
</TABLE>
During the fiscal year ended October 31, 1996, the Company maintained a
credit agreement (the "Credit Agreement") with a bank under which the Company
had in place a revolving credit facility (the "Revolver") and a $5,000,000,
five-year term loan (the "Term Loan"). Under the terms of the Revolver (as
amended in October 1995), the Company could borrow up to a maximum of $6,500,000
in advances from November 1, 1995 through March 1, 1997. There were no amounts
outstanding under the Revolver during 1996. Proceeds advanced under the Revolver
could be used to support working capital needs and capital expenditures. The
Revolver would have expired and become due on March 1, 1997.
The Term Loan, the principal balance of which was being amortized on a
monthly basis, bore interest at a fixed rate per annum of 7.30% and had an
outstanding principal balance of $1,583,347 at October 31, 1996. Proceeds from
the term loan were applied to repay a prior credit facility with a different
bank. The Term Loan was required to be fully amortized by May 1, 1998.
In December 1996, the Company signed a new credit agreement (the "New
Agreement") with a different bank. The balance of the Term Loan and any other
outstanding borrowings with the former bank were paid at that time. The New
Agreement expires May 1, 1998, and any borrowings under the New Agreement bear
interest at the bank's Reference Rate less .25 percentage point, or at the
Company's option, at LIBOR plus .75 percentage point. The New Agreement contains
two revolving credit facilities. The Company may borrow up to $10,000,000 under
Facility No. 1, and may borrow up to $12,000,000 under Facility No. 2. Facility
No. 1 may be used for commercial letters of credit not to exceed $500,000 and
for standby letters of credit not to exceed $6,000,000, which reduce the amount
available under the agreement. In addition, the Company has the option of
converting outstanding borrowings, in increments of not less than $1,000,000,
under Facility No. 2 to a 5-year term loan. Any amounts converted to term debt
under Facility No. 2 will bear interest at the bank's long-term interest rate in
effect at the time of such conversion.
Substantially all of the Company's assets were pledged as collateral under
the former Credit Agreement, and are also pledged as collateral under the New
Agreement, except as noted below. In addition, the New Agreement contains
covenants that include requirements to meet certain financial tests and ratios
(including minimum current ratio, debt service ratio, minimum tangible net
worth, maximum debt ratio and maintenance of profitable annual operations) and
restrictions and limitations on the sale of assets, new borrowings, mergers and
purchases of stock.
28
<PAGE> 31
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's wholly owned subsidiary, Scot, Inc., has a term loan with a
bank, which was renewed in August, 1996, secured by certain real property of
Scot. The principal balance outstanding under the renewed loan at October 31,
1996, was $581,500. The loan is being amortized with monthly payments of
approximately $7,800, including interest, adjusted monthly, at 1.9% over the
bank's LIBOR rate (5.6% at October 31, 1996). Any unpaid principal is due on
August 1, 2001.
The finance company notes are secured by related equipment. The first note
is being amortized over 12 years, with interest at 5.9% through November, 1996,
and with interest at prime (8.5% at October 31, 1996) plus one-half percent
through November, 2006, when the note will be fully amortized. Monthly payments
are approximately $20,300 through November, 1996. The unpaid balance at October
31, 1996 was $1,832,700. The second note is being amortized over 10 years, with
interest of 4.9% through December, 1996, and with interest at prime plus
one-half percent through December, 2004, when the note will be fully amortized.
Monthly payments are approximately $7,100 through December, 1996. The unpaid
balance at October 31, 1996 was $559,600.
The scheduled principal payments of long-term debt outstanding at October
31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31,
---------------------------------------------------------
<S> <C>
1997................................................... $1,238,700
1998................................................... 788,600
1999................................................... 210,000
2000................................................... 238,900
2001................................................... 253,500
Thereafter............................................. 1,886,900
----------
$4,616,600
==========
</TABLE>
(6) STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue 2,000,000 shares of Preferred Stock,
$.01 par value. Shares of Preferred Stock may be issued from time to time in one
or more series and the Board of Directors, without further stockholder approval,
is authorized to fix the rights and terms, including dividends and liquidation
preferences and any other rights to each such series of Preferred Stock. At
October 31, 1995 and 1996, no shares of Preferred Stock were issued or
outstanding.
Stock Options and Grants
During 1991, the Company adopted its Stock Incentive Plan (the Plan). The
Plan is administered by a committee of the Board of Directors which determines
the amount, type, vesting period, terms and conditions of the awards. The Plan
provides for the issuance of restricted stock, grants of incentive and
non-qualified stock options, stock appreciation rights and performance share
awards at amounts which approximate current market value on the date of grant.
The Company has reserved 560,000 shares of common stock for issuance under the
plan.
Pursuant to the Plan, no option may be granted that is exercisable in less
than six months or more than ten years from the grant date. Certain events,
including a change in control of the Company, may accelerate exercise dates,
cause forfeiture of all shares of any restricted stock and terminate all
conditions relating to the realization of any performance awards.
29
<PAGE> 32
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock option activity for the three years ended October 31, 1996 was as
follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
------- -------------------------------
<S> <C> <C>
Options outstanding at October 31, 1993....... 206,000 $ 9.25 - 9.50 per share
Options issued.............................. 175,000 $ 6.50 - 9.50 per share
Options exercised........................... (28,666) $ 9.25 - 9.50 per share
Options expired, terminated................. (28,500) $ 9.50 per share
-------
Options outstanding at October 31, 1994....... 323,334 $ 6.50 - 21.50 per share
Options issued.............................. 25,500 $10.00 - 21.50 per share
Options exercised........................... (97,660) $ 9.00 - 10.25 per share
Options expired............................. (3,667) $ 9.25 - 9.50 per share
-------
Options outstanding at October 31, 1995....... 247,507 $ 6.50 - 21.50 per share
Options issued.............................. 117,000 $13.75 - 17.75 per share
Options exercised........................... (20,460) $ 9.50 - 10.00 per share
Options terminated.......................... (24,337) $ 9.00 - 21.50 per share
-------
Options outstanding at October 31, 1996....... 319,710 $ 6.50 - 21.50 per share,
======= expiring on various dates from
December 13, 2001 to March 5,
2008
</TABLE>
Prior to fiscal year ended October 31, 1996, all options granted vest
ratably over a 3-year period from the grant date. Options granted during the
fiscal year ended October 31, 1996 vest ratably over 5 years from the grant
date. At October 31, 1996, 149,200 options were exercisable at prices ranging
from $6.50 to $18.00 per share.
In January 1997, the Company's Stock Option Committee authorized stock
option grants to certain employees via a special grant which is not part of the
1991 Stock Option Plan. Under terms of this authorization, 130,000 shares were
granted which vest ratably over 5 years from the grant date, and 312,000 shares
vest ratably over 8 years from the grant date. The 8 year options contain
vesting acceleration clauses during the first 36 months of the option; the
acceleration clauses are contingent upon the price of the Company's Common Stock
attaining a certain level, and upon the Company attaining certain earning
levels. The options were granted at the fair market value of the stock on the
grant date, which was $17.00 per share. These grants are subject to shareholder
approval.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123") "Accounting for Stock Based
Compensation" in October 1995. SFAS No. 123 encourages the fair value based
method of accounting for employee stock compensation plans. SFAS No. 123 allows
companies to retain the current method of accounting for stock compensation as
set forth in Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees." The Company expects to retain the current method of
accounting. Accordingly, SFAS No. 123 will not have a material impact on the
Company's consolidated results of operations or financial position. However,
beginning in the fiscal year ended October 31, 1997, pro forma disclosures must
be made as if SFAS No. 123 had been adopted.
30
<PAGE> 33
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES
The provisions for income taxes consist of the following for each
respective fiscal year ended October 31:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.............................. $ 864,000 $2,570,000 $3,558,000
State................................ 392,000 752,000 867,000
---------- ---------- ----------
$1,256,000 $3,322,000 $4,425,000
========== ========== ==========
Deferred:
Federal.............................. $ 752,000 $ 404,000 $ 279,000
State................................ 103,000 (6,000) 21,000
---------- ---------- ----------
$ 855,000 $ 398,000 $ 300,000
========== ========== ==========
Total
Federal.............................. $1,616,000 $2,974,000 $3,837,000
State................................ 495,000 746,000 888,000
---------- ---------- ----------
$2,111,000 $3,720,000 $4,725,000
========== ========== ==========
</TABLE>
Temporary differences which give rise to deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, 1995 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C>
Deferred tax liabilities-non-current:
Depreciation................................ $(2,390,000) $(2,769,000)
----------- -----------
Deferred tax assets-current:
Allowance for doubtful accounts............. 87,000 60,000
Inventory................................... 80,000 264,000
Vacation.................................... 268,000 153,000
Other reserves.............................. 36,000 --
State taxes................................. 120,000 193,000
----------- -----------
591,000 670,000
----------- -----------
Net deferred tax liability.................... $(1,799,000) $(2,099,000)
=========== ===========
</TABLE>
Management believes that it is more likely, than not, that future
operations will generate sufficient taxable income to realize the deferred tax
assets.
The provisions for income taxes for the years ended October 31, 1994, 1995
and 1996 differ from the provisions that would have resulted by applying the
Federal statutory rates during such periods to the earnings before income taxes.
The reasons for these differences are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income taxes at Federal rate........... $1,795,000 $3,162,000 $4,139,000
State income taxes..................... 327,000 492,000 675,000
Other.................................. (11,000) 66,000 (89,000)
---------- ---------- ----------
$2,111,000 $3,720,000 $4,725,000
========== ========== ==========
</TABLE>
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109) effective November 1, 1993. SFAS 109
required a change to the "assets and liability method" of accounting for income
taxes from the "deferred method" of accounting for income taxes which
31
<PAGE> 34
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
was required by Accounting Principles Board Opinion No. 11 ("APB 11"). Under
SFAS 109, deferred tax assets and liabilities are recognized with respect to the
tax consequences attributable to the differences between the financial statement
carrying values and the tax basis of existing assets and liabilities. There was
no cumulative effect of this accounting change at time of adoption.
(8) COMMITMENTS AND CONTINGENCIES
LEASES
Land and Buildings
The Company is obligated under a month-to-month operating lease for the
property on which the Company's Newhall facility is located. This lease is with
a partnership which is composed of certain stockholders of the Company, one of
which is an officer of the company. Monthly rental expense as of October 31,
1996 was $41,600 per month with annual increases equal to any changes in the
Consumer Price Index.
Other Operating Leases
The Company also has several non-cancelable operating leases, primarily for
transportation equipment and temporary office units, that expire through August,
1998. Rental expenses for these operating leases for each of the fiscal years
ended October 31, 1994, 1995, and 1996 were $83,600, $99,100 and $114,900,
respectively.
Future minimum lease payments under non-cancelable operating leases are as
follows:
<TABLE>
<S> <C>
Year ending October 31:
1997........................................... $45,900
1998........................................... 13,000
-------
Total minimum lease payments........... $58,900
=======
</TABLE>
OTHER
The Company had commitments at October 31, 1996, to acquire capital
equipment, at cost aggregating approximately $6,500,000, primarily for
production and other support equipment required for the increased operations of
the Automotive Products Division. In addition, in order to improve manufacturing
efficiencies and to provide facilities for growth, the Company purchased in
October 1996, approximately 280 acres of land in the City of Moorpark, located
in Ventura County, north of Los Angeles, where the Company plans to build new
facilities. Development of the land infrastructure, including grading, began in
January 1997, and is expected to be completed in late Spring 1997, at which time
construction of the buildings is expected to begin. The construction is expected
to be completed by the end of 1997, and the Company expects to move its entire
California-based operations, including Automotive Products, Aerospace and the
administrative offices in early 1998 to these new facilities. Total cost of the
project is estimated at $18,000,000 of which $3,700,000 had been spent at
October 31, 1996 and is included in construction in progress in the accompanying
consolidated balance sheet. The Company anticipates spending approximately
$10,000,000 in fiscal year 1997, and approximately $4,300,000 in fiscal year
1998 to complete this project. The Company has committed to complete the land
infra-structure, the total cost of which is estimated to be approximately
$7,000,000.
32
<PAGE> 35
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Litigation
The Company is a defendant in pending claims and lawsuits arising in the
normal course of business. In the opinion of the Company's management, after
consultation with counsel, these matters are not expected to have a material
adverse effect upon the financial position, results of operations or liquidity
of the Company.
(9) EMPLOYEE BENEFIT PLANS
Effective March 1, 1993, the Company adopted the Special Devices, Inc.
401(k) Plan. The Company established the Plan to meet the requirements of a
qualified retirement plan pursuant to the provisions of Section 401(k) of the
Internal Revenue Code. The Plan provides eligible employees the opportunity to
make tax deferred contributions to a retirement trust account in amounts up to
15% of their gross wages. The Company can elect to make matching contributions
in amounts that can change from year to year. During 1994, the Company matched
25%, and in 1995 and 1996 matched 30%, of the employees deferral up to the first
5 percent of each participating employees deferral. Employees vest immediately
in the Company's matching contributions. The Company's matching contributions
aggregated $104,000, $135,900, and $221,400 in 1994, 1995, and 1996,
respectively.
(10) RELATED PARTY TRANSACTIONS
The Company purchases materials from two corporations owned by one of its
principal stockholders. During the years ended October 31, 1994, 1995 and 1996,
$1,357,100, $1,247,400 and $2,361,500, respectively, of materials were purchased
from such stockholder's corporations. At October 31, 1995 and 1996, $172,100 and
$229,400, respectively, were owed to the corporations owned by this principal
stockholder.
During 1990, the same principal stockholder of the Company acquired a
significant stockholding in the parent company of a corporation that supplies
materials to the Company. During the years ended October 31, 1994, 1995 and
1996, $9,060,800, $12,791,600, and $12,768,500, respectively, of materials were
purchased from such corporation. At October 31, 1995 and 1996 $1,401,600 and
$2,065,700 respectively, was due to this corporation.
(11) MAJOR CUSTOMERS
Sales to customers, in excess of 10% of net sales during any of the past
three years, as a percentage of net sales, were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Automotive:
TRW, Incorporated........................ 67.9% 59.9% 59.7%
</TABLE>
33
<PAGE> 36
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 1995 and 1996 (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
JANUARY APRIL JULY OCTOBER FULL
29 30 30 31 YEAR
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1995
Net sales............. $22,154 $25,092 $28,973 $24,373 $100,592
Gross profit.......... 3,816 4,494 5,199 4,112 17,621
Earnings from
operations......... 2,074 2,958 3,046 1,861 9,939
Net earnings.......... 1,035 1,522 1,889 1,134 5,580
Net earnings per
share.............. .18 .26 .25 .15 .82
1996
Net sales............. $22,541 $24,222 $25,631 $32,088 $104,482
Gross profit.......... 3,958 4,504 5,238 6,454 20,154
Earnings from
operations......... 2,213 2,418 3,491 3,922 12,044
Net earnings.......... 1,360 1,526 2,148 2,414 7,448
Net earnings per
share................. .18 .20 .28 .31 .96
</TABLE>
During the fourth quarter of 1995, the Company capitalized approximately
$525,000 of fixed asset additions, relating to Automotive Products, which had
been recorded as repairs and maintenance expense during the nine months ended
July 31, 1995.
(13) INDUSTRY SEGMENT INFORMATION
The Company operates primarily in two industry segments -- aerospace and
automotive. In the aerospace industry, the Company produces pyrotechnic devices
under long-term contracts for the Department of Defense and their prime
contractors. In the automotive industry, the Company produces air bag initiators
under trade terms for commercial companies. The Company has a multi-year
agreement to supply its largest customer that expires in 2000 and a multi-year
agreement to supply its second largest customer that expires in 1999.
Each division is allocated administrative operating expenses incurred by
the Company (which are not attributable to a particular division) on an
equitable basis to fairly reflect the benefit received by each operating
division. For the fiscal year 1994, the allocation was based on each Division's
sales as a percent of total sales. In fiscal years 1995 and 1996, the allocation
was made approximately equally to each division. Accordingly, for fiscal year
1994, earnings from operations would have been higher for Automotive Products
and lower for Aerospace by $532,000, respectively, under the current allocation
method. Administrative operating expenses amounted to $1,967,000, $2,550,000 and
$2,704,000 in fiscal years 1994, 1995 and 1996, respectively.
The Company operates entirely within the United States and has no
intersegment sales. Corporate assets are primarily cash, prepaids and other
assets.
34
<PAGE> 37
SPECIAL DEVICES, INCORPORATED
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial information for these segments is summarized in the table below:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Net sales:
Automotive Products..................... $49,459,703 $ 71,252,937 $ 80,253,225
Aerospace............................... 15,048,951 29,338,941 24,246,800
----------- ------------ ------------
Total net sales...................... $64,508,654 $100,591,878 $104,482,025
=========== ============ ============
Earnings from operations:
Automotive Products..................... $ 3,158,207 $ 4,600,013 $ 8,244,332
Aerospace............................... 2,574,140 5,338,691 3,799,881
----------- ------------ ------------
Total earnings from operations....... $ 5,732,347 $ 9,938,704 $ 12,044,213
=========== ============ ============
Depreciation and amortization:
Automotive Products.................. $ 2,504,410 $ 3,560,159 $ 4,623,005
Aerospace............................ 205,768 400,504 429,809
Corporate............................ 38,605 469,719 349,500
----------- ------------ ------------
Total depreciation and
amortization....................... $ 2,748,783 $ 4,430,382 $ 5,402,314
=========== ============ ============
Capital expenditures:
Automotive Products.................. $ 5,729,554 $ 10,234,185 $ 10,511,449
Aerospace............................ 3,605,129(1) 183,375 346,367
Corporate............................ 297,162 2,958,169 260,040
----------- ------------ ------------
Total capital expenditures........... $ 9,631,845 $ 13,375,729 $ 11,117,856
=========== ============ ============
Identifiable assets:
Automotive Products.................. $36,421,795 $ 48,213,492 $ 54,658,384
Aerospace............................ 13,891,523 13,691,696 14,445,201
Corporate............................ 1,375,907 16,715,668 17,055,610
----------- ------------ ------------
Total identifiable assets............ $51,689,225 $ 78,620,876 $ 86,159,195
=========== ============ ============
</TABLE>
- ---------------
(1) Includes $3,356,467 of fixed assets acquired from Scot.
35
<PAGE> 38
ITEM 9. -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the Company's
proxy statement to be filed within 120 days after the end of the Company's most
recent fiscal year and is incorporated herein by reference.
ITEM 11. -- EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's
proxy statement to be filed within 120 days after the fiscal year end and is
incorporated herein by reference.
ITEM 12. -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's
proxy statement to be filed within 120 days after the fiscal year end and is
incorporated herein by reference.
ITEM 13. -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company's
proxy statement to be filed within 120 days after the fiscal year end and is
incorporated herein by reference.
PART IV
ITEM 14. -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(A)(1) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE REFERENCE
FORM 10-K
--------------
<S> <C>
Independent Auditors' Report................................................... 20
Consolidated Balance Sheets at October 31, 1995 and 1996....................... 21
Consolidated Statements of Earnings for each of the three years ended October
31, 1996..................................................................... 22
Consolidated Statements of Stockholders' Equity for each of the three years
ended
October 31, 1996............................................................. 23
Consolidated Statements of Cash Flows for each of the three years ended October
31, 1996..................................................................... 24
Notes to Consolidated Financial Statements..................................... 25
</TABLE>
(A)(2) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of Securities and Exchange Commission are not required under the
applicable instructions or required information is included in the Consolidated
Financial Statements and Notes thereto they are inapplicable and are therefore
omitted.
36
<PAGE> 39
(A)(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- -------------------------------------------------------------------------
<S> <C>
(1) 3.1 Certificate of Incorporation of the Registrant.
(1) 3.2 Agreement of Merger.
(1) 3.3 Bylaws of the Registrant.
(2) 3.4 Certificate of Amendment dated May 6, 1992 to the Certificate of
Incorporation of the Registrant.
(1) 4.1 Specimen Common Stock Certificate.
(1)10.1 Lease dated May 1, 1991 between the Registrant and Placerita Land and
Farming Company.
(1)10.2 Letter Agreement dated June 8, 1990 between the Registrant and Hermetic
Seal Corporation.
(1)10.3 Master Purchase Agreement, dated May 15, 1990, between the Registrant and
TRW Inc. (confidential treatment granted as to part).
(1)10.4 Technology License Agreement dated November 7, 1990 between the
Registrant and Davey Bickford Smith.
(3)10.5 Amended and Restated 1991 Stock Incentive Plan
(1)10.6 Special Devices, Inc. 401(k) Plan.
(3)10.7 Third Amendment to Credit Agreement dated September 7, 1994 between
Registrant and Bank of California.
(3)10.8 Fourth Amendment to Credit Agreement dated October 5, 1994 between
Registrant and Bank of California.
(3)10.9 Fifth Amendment to Credit Agreement dated January 20, 1995 between
Registrant and Bank of California.
(4)10.11 First Amendment to Master Purchase Agreement, dated February 25, 1993
between the Registrant and TRW, Inc. (confidential treatment granted as
to part).
(4)10.12 Letter Agreement, dated November 30, 1994 between the Registrant and
Hermetic Seal Corporation (confidential treatment granted as to part).
(3)10.13 Employment Agreement dated September 7, 1994, between the Registrant,
Scot, Inc. and Samuel Levin.
(3)10.14 Promissory Note dated November 30, 1994 in favor of Beechcraft Acceptance
Corporation Inc.
(3)10.15 Security Agreement dated November 30, 1994 in favor of Beechcraft
Acceptance Corporation, Inc.
(3)10.16 Airplane Purchase Order dated December 1, 1994 with United Beechcraft,
Inc.
(5)10.17 Second Amendment to Master Purchase Agreement, dated March 8, 1995,
between the Registrant and TRW, Inc. (confidential treatment granted as
to part).
(6)10.18 Sixth Amendment to Credit Agreement dated October 31, 1995 between the
Registrant and Bank of California.
(6)10.19 Supply Agreement dated as of November 14, 1995 between the Registrant and
Morton International, Inc. (confidential treatment requested as to part).
10.20 Credit Agreement, dated December 12, 1996, between Registrant and Bank of
America.
10.21 Development Agreement, dated August 28, 1996, between Registrant and the
City of Moorpark.
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- -------------------------------------------------------------------------
<S> <C>
11.1.. Statement Re: Computation of per share earnings.
(3)21.1.. Subsidiaries of the Registrant
23.1.. Consent of KPMG Peat Marwick LLP
</TABLE>
----------------------
(1) Previously filed as an exhibit to Registration Statement on Form
S-1 (File No. 33-40903) and incorporated herein by reference.
(2) Previously filed as an exhibit to Annual Report on Form 10-K for
the fiscal year ended October 31, 1992 and incorporated herein by
reference.
(3) Previously filed as an exhibit to Annual Report on Form 10-K for
the fiscal year ended October 31, 1994 and incorporated herein by
reference.
(4) Previously filed as an exhibit to Amendment No. 1 on Form 10-K/A
for the fiscal year ended October 31, 1994 and incorporated herein
by reference.
(5) Previously filed as an exhibit to Registration Statement on Form
S-1 (File No. 33-89902) and incorporated herein by reference.
(6) Previously filed as an exhibit to Annual Report on Form 10-K for
the fiscal year ended October 31, 1995 and incorporated herein by
reference.
(B) REPORTS ON FORM 8-K
None
38
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Newhall, State of California, on January 27, 1997.
SPECIAL DEVICES, INCORPORATED
By: /s/ THOMAS F. TREINEN
--------------------------
Its: Chief Executive Officer
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 Company
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ THOMAS F. TREINEN Director, January 27, 1997
- --------------------------------------- Chairman and President
Thomas F. Treinen (Principal Executive
Officer)
/s/ DONALD A. BENDIX Director January 27, 1997
- ---------------------------------------
Donald A. Bendix
/s/ JOHN M. CUTHBERT Director and President, January 27, 1997
- --------------------------------------- Automotive Products Division
John M. Cuthbert
/s/ NELSON HOFFMAN Director January 27, 1997
- ---------------------------------------
Nelson Hoffman
/s/ SAMUEL LEVIN Director and President, January 27, 1997
- --------------------------------------- Scot, Inc.
Samuel Levin
/s/ ROBERT S. RITCHIE Director and Vice President, January 27, 1997
- --------------------------------------- Aerospace Division
Robert S. Ritchie
/s/ JACK B. WATSON Director January 27, 1997
- ---------------------------------------
Jack B. Watson
/s/ JOHN T. VINKE Vice President -- Finance January 27, 1997
- --------------------------------------- Chief Financial Officer
John T. Vinke (Principal Financial and
Accounting Officer)
</TABLE>
39
<PAGE> 1
EXHIBIT 10.20
Credit Agreement, dated December 12, 1996, between Registrant and Bank of
America.
<PAGE> 2
[LOGO]
BANK OF AMERICA BUSINESS LOAN AGREEMENT
NATIONAL TRUST AND SAVINGS ASSOCIATION
This Agreement dated as of December 12, 1996, is between Bank of America
National Trust and Savings Association (the "Bank") and Special Devices,
Incorporated, a Delaware corporation. (the "Borrower").
1. FACILITY NO. 1: LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide
a One of credit ("Facility No. 1") to the Borrower. The amount of the
line of credit (the "Facility No. 1 Commitment") is Ten Million
Dollars ($10,000,000).
(b) This is a revolving line of credit with a within line facility for
letters of credit. During the availability period, the Borrower may
repay principal amounts and reborrow them.
(c) The Borrower agrees not to permit the outstanding principal balance of
the line of credit plus the outstanding amounts of any letters of
credit, including amounts drawn on letters of credit and not yet
reimbursed, to exceed the Facility No. 1 Commitment.
1.2 AVAILABILITY PERIOD. The line of credit is available between the date
of this Agreement and May 1, 1998 (the "Facility No. 1 Expiration Date") unless
the Borrower is in default.
1.3 INTEREST RATE.
(a) Unless the Borrower elects an optional interest rate as described
below, the interest rate is the Bank's Reference Rate minus one-
quarter (-0.25) percentage point.
(b) The Reference Rate is the rate of interest publicly announced from
time to time by the Bank in San Francisco, California, as its
Reference Rate. The Reference Rate is set by the Bank based on
various factors, including the Bank's costs and desired return,
general economic conditions and other factors, and is used as a
reference point for pricing some loans. The Bank may price loans to
its customers at, above, or below the Reference Rate. Any change in
the Reference Rate shall take effect at the opening of business on the
day specified in the public announcement of a change in the Bank's
Reference Rate.
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on December 1, 1996, and then monthly
thereafter until payment in full of any principal outstanding under
this line of credit.
(b) The Borrower will repay in full all principal and any unpaid interest
or other charges outstanding under this line of credit no later than
the Facility No. 1 Expiration Date.
(c) Any amount bearing interest at an optional interest rate (as described
below) may be repaid at the end of the applicable interest period,
which shall be no later than the Expiration Date.
1.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect to have all or portions of
Facility No. 1 (during the availability period) bear interest at the rate(s)
described below during an interest period agreed to by the Bank and the
Borrower. Each interest rate is a rate per year. Interest will be paid on the
last day of each Interest period, and on the last day each month during the
interest period. At the end of any interest period, the interest rate will
revert to the rate based on the Reference Rate, unless the Borrower has
designated another optional interest rate for the portion.
- 1 -
<PAGE> 3
1.6 FIXED RATE. The Borrower may elect to have all or portions of the
principal balance of Facility No. 1 bear interest at the Fixed Rate, subject to
the following requirements:
(a) The "Fixed Rate" means the fixed interest rate the Bank and the
Borrower agree will apply to the portion during the applicable
interest period.
(b) The interest period during which the Fixed Rate will be in effect will
be one year or less.
(c) Each Fixed Rate portion will be for an amount not less than the
following:
(i) for interest periods of 14 days or longer, Five Hundred
Thousand Dollars ($500,000).
(ii) for interest periods of 1 to 3 days, Five Million Dollars
($5,000,000).
(iii) for interest periods of between 4 days and 13 days, an amount
which, when multiplied by the number of days in the applicable
interest period, is not less than fifteen million (15,000,000)
dollar-days.
(d) The Borrower may not elect a Fixed Rate with respect to any portion of
the principal balance of the line of credit which is scheduled to be
repaid before the last day of the applicable interest period.
(e) Any portion of the principal balance of Facility No. 1 already bearing
interest at the Fixed Rate will not be converted to a different rate
during its interest period.
(f) Each prepayment of a Fixed Rate portion, whether voluntary, by reason
of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee equal to
the amount (if any) by which
(i) the additional interest which would have been payable
on the amount prepaid had it not been paid until the
last day of the interest period, exceeds
(ii) the interest which would have been recoverable by the
Bank by placing the amount prepaid on deposit in the
certificate of deposit market for a period starting
on the date on which it was prepaid and ending on the
last day of the interest period for such portion.
1.7 LIBOR RATE. The Borrower may elect to have all or portions of the
principal balance of Facility No. 1 bear interest at the LIBOR Rate plus
three-quarter (0.75) percentage point.
Designation of a LIBOR Rate portion is subject to the following requirements:
(a) The interest period during which the LIBOR Rate will be in effect will
be one, or two weeks, or one, two, three, four, five, six, seven,
eight nine, ten or eleven months. The first day of the interest
period must be a day other than a Saturday or a Sunday on which the
Bank is open for business in California, New York and London and
dealing in offshore dollars (a "LIBOR Banking Day"). The last day of
the interest period and the actual number of days during the interest
period will be determined by the Bank using the practices of the
London inter-bank market.
(b) Each LIBOR Rate portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000) for interest periods of one month
or longer. For shorter maturities, each LIBOR Rate portion will be
for an amount which, when multiplied by the number of days in the
applicable interest period, is not less than fifteen million
(15,000,000) dollar-days.
(c) The "LIBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All
amounts in the calculation will be determined by the Bank as of the
first day of the interest period.)
- 2 -
<PAGE> 4
LIBOR Rate = London Inter-Bank Offered Rate
------------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Inter-Bank Offered Rate" means the interest rate at
which the Bank's London Branch, London, Great Britain, would
offer U.S. dollar deposits for the applicable interest period
to other major banks in the London inter-bank market at
approximately 11:00 a.m. London time two (2) London Banking
Days before the commencement of the interest period. A
"London Banking Day" is a day on which the Bank's London
Branch is open for business and dealing in offshore dollars.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by
member banks of the Federal Reserve System for Eurocurrency
Liabilities, as defined in Federal Reserve Board Regulation D,
rounded upward to the nearest 1/100 of one percent. The
percentage will be expressed as a decimal, and will include,
but not be limited to, marginal, emergency, supplemental,
special, and other reserve percentages.
(d) The Borrower shall irrevocably request a LIBOR Rate portion no later
than 12:00 noon San Francisco time on the LIBOR Banking Day preceding
the day on which the London Inter-Bank Offered Rate will be set, as
specified above.
(e) The Borrower may not elect a LIBOR Rate with respect to any principal
amount which is scheduled to be repaid before the last day of the
applicable interest period.
(f) Any portion of the principal balance already bearing interest at the
LIBOR Rate will not be converted to a different rate during its
interest period.
(g) Each prepayment of a LIBOR Rate portion, whether voluntary, by reason
of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid and a prepayment fee as
described below. A "prepayment" is a payment of an amount on a date
earlier than the scheduled payment date for such amount as required by
this Agreement The prepayment fee shall be equal to the amount (if
any) by which:
(i) the additional interest which would have been payable during
the interest period on the amount prepaid had it not been
prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market,
or other appropriate money market selected by the Bank, for a
period starting on the date on which it was prepaid and ending
on the last day of the interest period for such portion (or
the scheduled payment date for the amount prepaid, if
earlier).
(h) The Bank will have no obligation to accept an election for a LIBOR
Rate portion if any of the following described events has occurred and
is continuing:
(i) Dollar deposits in the principal amount, and for periods equal
to the interest period, of a LIBOR Rate portion are not
available in the London inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR
Rate portion.
1.8 LETTERS OF CREDIT. This line of credit may be used for financing:
- 3 -
<PAGE> 5
(i) commercial letters of credit with a maximum maturity of 180
days but not to extend more than 180 days beyond the Facility
No. 1 Expiration Date. Each commercial letter of credit will
require drafts payable at sight.
(ii) standby letters of credit with a maximum maturity of 1 year
but not to extend more than 1 year beyond the Facility No. 1
Expiration Date.
(iii) The amount of the letters of credit outstanding at any one
time, (including amounts drawn on letters of credit and not
yet reimbursed), may not exceed Five Hundred Thousand Dollars
($500,000) for,commercial letters of credit and Six Million
Dollars ($6,000,000) for standby letters of credit.
The Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of the Bank,
be added to the principal amount outstanding under this Agreement.
The amount will bear interest and be due as described elsewhere in
this Agreement.
(b) if there is an event of default under this Agreement, upon demand by
the Bank, to immediately prepay and make the Bank whole for any
outstanding letters of credit.
(c) the issuance of any letter of credit and any amendment to a letter of
credit is subject to the Bank's written approval and must be in form
and content satisfactory to the Bank and in favor of a beneficiary
acceptable to the Bank.
(d) to sign the Bank's form Application and Agreement for Commercial
Letter of Credit or Application and Agreement for Standby Letter of
Credit.
(e) to pay any issuance and/or other fees that the Bank notifies the
Borrower will be charged for issuing and processing letters of credit
for the Borrower.
(f) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
(g) to pay the Bank a non-refundable fee equal to the greater of 1.25% per
annum of the outstanding undrawn amount of each standby letter of
credit or a minimum of Five Hundred Dollars ($500), payable quarterly
in advance, calculated on the basis of the face amount outstanding on
the day the fee is calculated.
2. FACILITY NO. 2: LINE OF CREDIT AMOUNT AND TERMS
2.1 LINE OF CREDIT AMOUNT.
(a) Until May 1, 1998 (the "Facility No. 2 Expiration Date"), the Bank
will provide a line of credit ("Facility No. 2") to the Borrower. The
amount of the line of credit (the "Facility No. 2 Commitment") is
Twelve Million Dollars ($12,000,000).
(b) This is a revolving line of credit under which the Borrower may obtain
advances ("Advances") and term loans ("Term Loans") at any time up to
the Facility No. 2 Expiration Date. Until that date, Advances may be
repaid (either from the Borrower's own funds or from the proceeds of a
Term Loan) and reborrowed, subject to all of the terms and conditions
of this Agreement.
(c) Term Loans are subject to all of the following conditions:
(i) Term Loans may be used only to repay any portion of the
outstanding principal balance of Advances, to repay all of
such outstanding principal balance on the Facility No. 2
Expiration Date, or for other purposes permitted under
Paragraph 8.1 of this Agreement;
- 4 -
<PAGE> 6
(ii) Each Term Loan will be repaid in sixty (60) successive equal
monthly installments, starting on the first day of the month
following the month in which Term Loan was made. Amounts
repaid may not be reborrowed:
(iii) Each Term Loan will be in a minimum amount of One Million
Dollars ($1,000,000), except for a Term Loan made on the
Facility No. 2 Expiration Date, which may be in a lesser
amount equal to the then-outstanding principal balance of all
Advances;
(iv) No more than four (4) Term Loans may be outstanding at any one
time; and
(v) No Term Loan may be obtained after the Facility No. 2
Expiration Date.
(d) The Borrower agrees not to permit the outstanding principal balance of
all Advances and all Term Loans to exceed the Facility No. 2
Commitment at any time.
2.2 INTEREST RATE. Unless the Borrower elects an optional interest rate
as described below, the interest rate is the Bank's Reference Rate minus
one-quarter (-0.25) percentage point.
2.3 REPAYMENT TERMS.
(a) The Borrower will pay interest on December 1, 1996, and then monthly
thereafter until payment in full of any principal outstanding under
this line of credit.
(b) The Borrower will repay the principal amount of all Advances
outstanding on the Facility No. 2 Expiration Date on that date. At
the Borrower's option, such repayment may be made out of the proceeds
of a Term Loan made on that date. On May 1, 2003, the Borrower will
repay the remaining principal balance of Facility No. 2 plus any
interest then due.
(c) Any amount bearing interest at an optional interest rate (as described
below) may be repaid at the end of the applicable interest period.
2.4 Optional Interest Rates. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect to have all or portions of
Facility No. 2 bear interest at the rates described below during an interest
period agreed to by the Bank and the Borrower. Each interest rate is a rate
per year. Interest will be paid on the last day of each interest period, and
on the first day of each month during the interest period. At the end of any
interest period, the interest rate will revert to the rate based on the
Reference Rate, unless the Borrower has designated another optional interest
rate for the portion.
2.5 Fixed Rate. The Borrower may elect to have all or portions of the
principal balance of Advances under Facility No. 2 bear interest at the Fixed
Rate, subject to the following requirements:
(a) The "Fixed Rate" means the fixed interest rate the Bank and the
Borrower agree will apply to the portion during the applicable
interest period.
(b) The interest period during which the Fixed Rate will be in effect will
be no shorter than 14 days and no longer than one year. Each interest
period must end no later than the Facility No. 2 Expiration Date.
(c) Each Fixed Rate portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000).
(d) Any portion of the principal balance of Facility No. 2 already bearing
interest at the Fixed Rate will not be converted to a different rate
during its interest period.
(e) Each prepayment of a Fixed Rate portion, whether voluntary, by reason
of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee equal to
the amount (if any) by which
(i) the additional interest which would have been payable on the
amount prepaid had it not been paid until the last day of the
interest period, exceeds
- 5 -
<PAGE> 7
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the certificate of
deposit market for a period starting on the date on which it
was prepaid and ending on the last day of the interest period
for such portion.
2.6 LIBOR Rate. The Borrower may elect to have all or portions of the
principal balance of Advances under Facility No. 2 bear interest at the LIBOR
Rate plus three-quarter (0.75) percentage point.
Designation of a LIBOR Rate portion is subject to the following requirements:
(a) The interest period during which the LIBOR Rate will be in effect will
be one, or two weeks, or one, two, three, four, five, or six months.
The first day of the interest period must be a day other than a
Saturday or a Sunday on which the Bank is open for business in
California, New York and London and dealing in offshore dollars (a
"LIBOR Banking Day"). The last day of the interest period and the
actual number of days during the interest period will be determined by
the Bank using the practices of the London interbank market. In any
event, each interest period must end no later than the Facility No. 2
Expiration Date.
(b) Each LIBOR Rate portion will be for an amount not less than Five
Hundred Thousand Dollars ($500,000).
(c) The "LIBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All
amounts in the calculation will be determined by the Bank as of the
first day of the interest period.)
LIBOR Rate = London Inter-Bank Offered Rate
------------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Inter-Bank Offered Rate" means the interest rate at
which the Bank's London Branch, London Great Britain, would
offer U.S. dollar deposits for the applicable interest period
to other major banks in the London inter-bank market at
approximately 11:00 a.m. London time two (2) London Banking
Days before the commencement of the interest period. A "London
Banking Day" is a day on which the Bank's London Branch is
open for business and dealing in offshore dollars.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by
member banks of the Federal Reserve System for Eurocurrency
Liabilities, as defined in Federal Reserve Board Regulation D,
rounded upward to the nearest 1/100 of one percent. The
percentage will be expressed as a decimal, and will include,
but not be limited to, marginal, emergency, supplemental,
special, and other reserve percentages.
(d) The Borrower shall irrevocably request a LIBOR Rate portion no later
than 12:00 noon San Francisco time on the LIBOR Banking Day preceding
the day on which the London Inter-Bank Offered Rate will be set, as
specified above.
(e) Any portion of the principal balance of Facility No. 2 already bearing
interest at the LIBOR Rate will not be converted to a different rate
during its interest period.
(f) Each prepayment of a LIBOR Rate portion, whether voluntary, by reason
of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid and a prepayment fee as
described below. A "prepayment" is a payment of an amount on a date
earlier than the scheduled payment date for such amount as required by
this Agreement The prepayment fee shall be equal to the amount (if
any) by which:
- 6 -
<PAGE> 8
(i) the additional interest which would have been payable during
the interest period on the amount prepaid had it not been
prepaid, exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the domestic
certificate of deposit market, the eurodollar deposit market,
or other appropriate money market selected by the Bank, for a
period starting on the date on which it was prepaid and ending
on the last day of the interest period for such portion (or
the scheduled payment date for the amount prepaid, if
earlier).
(g) The Bank will have no obligation to accept an election for a LIBOR
Rate portion if any of the following described events has occurred and
is continuing:
(i) Dollar deposits in the principal amount, and for periods equal
to the interest period, of a LIBOR Rate portion are not
available in the London inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the cost of a
LIBOR Rate portion.
2.7 LONG TERM RATE. The Borrower may elect to have all or portions of the
Term Loans under Facility No. 2 bear interest at the Long Term Rate, subject to
the following requirements:
(a) The interest period during which the Long Term Rate will be in effect
will be one year or more.
(b) The "Long Term Rate" means the fixed interest rate the Bank and the
Borrower agree will apply to the portion during the applicable
interest period.
(c) Each Long Term Rate portion will be for an amount not less than One
Hundred Thousand Dollars ($100,000).
(d) Any portion of the principal balance of the Facility No. 2 already
bearing interest at the Long Term Rate will not be converted to a
different rate during its interest period.
(e) The Borrower may prepay any Long Term Rate portion in whole or in part
in the minimum amount of One Hundred Thousand Dollars ($100,000). The
Borrower will give the Bank irrevocable written notice of the
Borrower's intention to make the prepayment, specifying the date and
amount of the prepayment. The notice must be received by the Bank at
least 5 banking days in advance of the prepayment. All prepayments of
principal on the Long Term Rate portion will be applied on the most
remote principal installment or installments then unpaid.
(f) Each prepayment of a Long Term Rate portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by payment of
all accrued interest on the amount of the prepayment and the
prepayment fee described below.
(g) The prepayment fee will be the sum of fees calculated separately for
each Prepaid Installment as follows:
(i) The Bank will first determine the amount of interest which
would have accrued each month for the Prepaid Installment had
it remained outstanding until the applicable Original Payment
Date, using the Long Term Rate;
(ii) The Bank will then subtract from each monthly interest amount
determined in (i), above, the amount of interest which would
accrue for that Prepaid Installment if it were reinvested from
the date of prepayment through the Original Payment Date,
using the following rate:
(A) If the Original Payment Date is more than 5 years
after the date of prepayment: the Treasury Rate plus
one-quarter of one percentage point:
(B) If the Original Payment Date is 5 years or less after
the date of prepayment: the Money Market Rate.
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(iii) If (i) minus (ii) for the Prepaid Installment is greater than
zero, the Bank will discount the monthly differences to the
date of prepayment by the rate used in (ii) above. The sum of
the discounted monthly differences is the prepayment fee for
that Prepaid Installment.
(h) The following definitions will apply to the calculation of the
prepayment fee:
"Money Market" means the domestic certificate of deposit market, the
eurodollar deposit market or other appropriate money market selected
by the Bank.
"Money Market Rate" means the fixed interest rate per annum which the
Bank determines could be obtained by reinvesting a specified Prepaid
Installment in the Money Market from the date of prepayment through
the Original Payment Date.
"Original Payment Dates" means the dates on which principal of the
Long Term Rate portion would have been paid if there had been no
prepayment If a portion of the principal would have been paid later
than the end of the interest period in effect at the time of
prepayment, then the Original Payment Date for that portion will be
the last day of the interest period.
"Prepaid Installment" means the amount of the prepaid principal of the
Long Term Rate portion which would have been paid on a single Original
Payment Date.
"Treasury Rate" means the interest rate yield for U.S. Government
Treasury Securities which the Bank determines could be obtained by
reinvesting a specified Prepaid Installment in such securities from
the date of prepayment through the Original Payment Date.
(i) The Bank may adjust the Treasury Rate and Money Market Rate to reflect
the compounding, accrual basis, or other costs of the Long Term Rate
portion. Each of the rates is the Bank's estimate only and the Bank
is under no obligation to actually reinvest any prepayment. The rates
will be based on information from either the Telerate or Reuters
information services, The Wall Street Journal, or other information
sources the Bank deems appropriate.
3. EXPENSES
(a) The Borrower agrees to immediately repay the Bank for reasonable
expenses relating to this Agreement that include, but are not limited
to, filing, recording and search fees, appraisal fees, and
documentation fees.
(b) The Borrower agrees to reimburse the Bank for any reasonable expenses
it incurs in the preparation of this Agreement and any agreement or
instrument required by this Agreement. Expenses include, but are not
limited to, reasonable attorneys' fees, including any allocated costs
of the Bank's in-house counsel.
(c) The Borrower agrees to reimburse the Bank for the reasonable cost of
periodic audits and appraisals of the personal property collateral
securing this Agreement, at such intervals as the Bank may reasonably
require. The audits and appraisals may be performed by employees of
the Bank or by independent appraisers.
4. COLLATERAL
4.1 PERSONAL PROPERTY. The Borrower's obligations to the Bank under this
Agreement will be secured by personal property the Borrower now owns or will
own in the future as listed below. The collateral is further defined in
security agreement(s) executed by the Borrower. In addition, all personal
property collateral securing this Agreement shall also secure all other present
and future obligations of the Borrower to the Bank (excluding any consumer
credit covered by the federal Truth in Lending law, unless the Borrower has
otherwise agreed in writing). All personal property collateral securing any
other present or future obligations of the Borrower to the Bank shall also
secure this Agreement.
(a) Machinery, equipment, and fixtures.
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(b) Inventory.
(c) Receivables.
5. DISBURSEMENTS, PAYMENTS AND COSTS
5.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be
made in writing in a manner acceptable to the Bank, or by another
means acceptable to the Bank.
5.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each
payment by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank
from time to time;
(b) made for the account of the Bank's branch selected by the Bank from
time to time;
(c) made in immediately available funds, or such other type of funds
selected by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at
its discretion, require the Borrower to sign one or more promissory
notes.
5.3 TELEPHONE AUTHORIZATION.
(a) The Bank may honor telephone instructions for advances or repayments
or for the designation of optional interest rates given by any one of
the individuals authorized to sign loan agreements on behalf of the
Borrower, or any other individual designated by any one of such
authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from
the Borrower's account number 14656-01160, or such other of the
Borrower's accounts with the Bank as designated in writing by the
Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in
connection with any act resulting from telephone instructions it
reasonably believes are made by any individual authorized by the
Borrower to give such instructions. This indemnity and excuse will
survive this Agreement.
5.4 DIRECT DEBIT (PRE-BILLING).
(a) The Borrower agrees that the Bank will debit the Borrower's deposit
account number 14656-01160, or such other of the Borrower's accounts
with the Bank as designated in writing by the Borrower (the
"Designated Account) on the date each payment of principal and
interest and any fees from the Borrower becomes due (the "Due Date).
If the Due Date is not a banking day, the Designated Account Will be
debited on the next banking day.
(b) Approximately 10 days prior to each Due Date, the Bank will mail to
the Borrower a statement of the amounts that will be due on that Due
Date (the "Billed Amount"). The calculation will be made on the
assumption that no new extensions of credit or payments will be made
between the date of the billing statement and the Due Date, and that
there will be no changes in the applicable interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued
Amount").
If the Billed Amount debited to the Designated Account differs from the
Accrued Amount, the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount, the
Billed Amount for the following Due Date will be increased by
the amount of the discrepancy. The Borrower will not be in
default by reason of any such discrepancy.
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(ii) If the Billed Amount is more than the Accrued Amount, the
Billed Amount for the following Due Date will be decreased by
the amount of the discrepancy.
Regardless of any such discrepancy, interest will continue to accrue
based on the actual amount of principal outstanding without
compounding. The Bank will not pay the Borrower interest on any
overpayment.
(d) The Borrower will maintain sufficient funds in the Designated Account
to cover each debit. If there are insufficient funds in the Designated
Account on the date the Bank enters any debit authorized by this
Agreement, the debit will be reversed.
5.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking
day is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. For amounts bearing interest at a LIBOR Rate, a
banking day is a day other than a Saturday or a Sunday on which the Bank is
open for business in California, New York and London and dealing in offshore
dollars. All payments and disbursements which would be due on a day which is
not a banking day will be due on the next banking day. All payments received
on a day which is not a banking day will be applied to the credit on the next
banking day.
5.6 TAXES. The Borrower will not deduct any taxes from any payments it
makes to the Bank. If any government authority imposes any taxes on any
payments made by the Borrower, the Borrower will pay the taxes and will also
pay to the Bank, at the time interest is paid, any additional amount which the
Bank specifies as necessary to preserve the after-tax yield the Bank would have
received if such taxes had not been imposed. Upon request by the Bank, the
Borrower will confirm that it has paid the taxes by giving the Bank official tax
receipts (or notarized copies) within 30 days after the due date. However, the
Borrower will not pay the Bank's net income taxes.
5.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the
Banks costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks and which arises after the date of this
Agreement. The costs and losses will be allocated to the loan in a manner
determined by the Bank, using any reasonable method. The costs include the
following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments
for credit.
5.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement,
all interest and fees, if any, will be computed on the basis of a 360-day year
and the actual number of days elapsed. This results in more interest or a
higher fee than if a 365-day year is used.
5.9 INTEREST ON LATE PAYMENTS. At the Bank's sole option in each
instance, any amount not paid when due under this Agreement (including
interest) shall bear interest from the due date at the Bank's Reference Rate
plus two (2.0) percentage points. This may result in compounding of interest.
5.10 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Bank bear interest at a rate per annum equal to Bank's Reference Rate
plus two (2.0) percentage points.
6. CONDITIONS
The Bank must receive the following items, in form and content acceptable to
the Bank, before it is required to extend any credit to the Borrower under this
Agreement:
6.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance
by the Borrower of this Agreement and any instrument or agreement required
under this Agreement have been duly authorized.
6.9 SECURITY AGREEMENTS. Signed original security agreements,
assignments, financing statements and fixture filings (together with collateral
in which the Bank requires a possessory security interest), and deeds of trust
which the Bank requires.
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<PAGE> 12
6.3 EVIDENCE OF PRIORITY. Evidence that security interests and liens in
favor of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing.
6.4 INSURANCE. Evidence of insurance coverage, as required in the
"Covenants" section of this Agreement.
6.5 OTHER ITEMS. Any other items that the Bank reasonably requires.
7. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, the Borrower makes the following
representations and warranties which survive until the Bank is repaid in full.
Each request for an extension of credit constitutes a renewed representation.
7.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed
and existing under the laws of the state where organized.
7.2 AUTHORIZATION. This Agreement, and any instrument or agreement
required hereunder, are within the Borrower's powers, have been duly
authorized, and do not conflict with any of its organizational papers.
7.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed
and delivered, will be similarly legal, valid, binding and enforceable.
7.4 GOOD STANDING. In each state in which the Borrower does business, it
is properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes except where such failure would not have a material
adverse effect upon the Borrower.
7.5 NO CONFLICTS. This Agreement does not conflict with any law,
agreement, or obligation by which the Borrower is bound.
7.6 FINANCIAL INFORMATION. All financial and other related information
that has been or will be supplied to the Bank, is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's financial condition.
(b) in form and content reasonably required by the Bank.
(c) in compliance with all government regulations that apply.
7.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would materially impair the
Borrower's financial condition or ability to repay the loan, except as have
been disclosed in writing to the Bank.
7.8 COLLATERAL. All collateral required in this Agreement is owned by the
grantor of the security interest free of any title defects or any liens or
interests of others except for liens permitted by Paragraph 8.10(c) and other
liens to which the Bank has consented in writing.
7.9 PERMITS, FRANCHISES. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade
name rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
7.10 OTHER OBLIGATIONS. The Borrower is not in default on any obligation
for borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
7.11 INCOME TAX RETURNS. the Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
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<PAGE> 13
7.12 NO EVENT OF DEFAULT. There is no event which is, or with notice or
lapse of time or both would be, a default under this Agreement.
7.13 LOCATION OF BORROWER. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
8. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
8.1 USE OF PROCEEDS. To use the proceeds of (i) Facility No. 1 only for
working capital and to facilitate the issuance of commercial and standby
letters of credit; and (ii) Facility No. 2 to finance the acquisition of
capital assets, and real estate construction and/or refinancing existing term
debt.
8.2 FINANCIAL INFORMATION. To provide the following financial information
and statements and such additional information as requested by the Bank from
time to time:
(a) Within 120 days after the date of filing with the Securities and
Exchange Commission, copies of the Borrower's Form 10-K Annual Report
containing the Borrower's audited financial statements with opinion
acceptable to the Bank.
(b) Copies of the Borrower's Form 10-Q Quarterly Report within 60 days
after the date of filing with the Securities and Exchange Commission.
8.3 QUICK RATIO. To maintain a ratio of quick assets to current
liabilities of at least 1.15:1.0. This ratio shall be measured quarterly.
"Quick assets" means cash, short-term cash investments, net trade receivables
and marketable securities not classified as long-term Investments. Current
liabilities to include the principal amount outstanding under Facility No. 1
but exclude understandings under the line portion of Facility No. 2.
8.4 TANGIBLE NET WORTH. To maintain on a quarterly basis, tangible net
worth equal to at least the sum of the following.
(a) Sixty Two Million Dollars ($62,000,000); plus
(b) 50% of net income after income taxes (without subtracting losses)
earned in fiscal year 1997, and each fiscal year thereafter,
"Tangible net worth" means the gross book value of the Borrower's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, deferred research and
development costs, deferred marketing expenses, and other like intangibles, and
monies due from affiliates, officers, directors or shareholders of the
Borrower) less total liabilities, including but not limited to accrued and
deferred income taxes, and any reserves against assets.
8.5 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. To maintain a ratio of
total liabilities to tangible net worth not exceeding 0.50:1.0. This ratio
shall be measured quarterly. "Total liabilities" means the sum of current
liabilities plus long term liabilities.
8.6 DEBT COVERAGE RATIO. To maintain a Debt Coverage Ratio of at least
1.75:1.0. This ratio shall be measured quarterly.
"Debt Coverage Ratio" means the ratio of: (i) the sum of, net profit after
taxes, plus interest expense, plus depreciation and amortization, less
dividends; to (ii) the sum of the current portion of long-term debt plus
interest expense. This ratio will be calculated at the end of each fiscal
quarter, using fiscal year-to-date results on an annualized basis. The current
portion of long term debt will be measured as of the last day of the current
quarter and will exclude Facility No. 2 except for portions of any Term Loan due
within one year.
8.7 PROFITABILITY. To maintain a positive net income after taxes and
extraordinary items for each annual accounting period.
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8.8 LIMITATION ON LOSSES. Not incur a net loss after taxes and before
extraordinary items in any two (2) consecutive quarterly accounting periods.
8.9 OTHER DEBTS. Not to have outstanding or incur any direct or
contingent debts (other than those to the Bank), or become liable for the debts
of others without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Additional purchase money debt for business purposes which do not
exceed a total principal amount of Five Million Dollars ($5,000,000)
outstanding at any one time.
8.10 OTHER LIENS. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property the Borrower now or later owns,
except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing
to the Bank.
(d) Additional Purchase money security interests in property acquired
after the date of this Agreement if the total principal amount of
debts secured by such liens does not exceed Five Million Dollars
($5,000,000) at any one time.
(e) Statutory liens of landlords and liens of carriers, warehousemen,
mechanics, materialmen, bankers and other liens imposed by law and
created in the ordinary course of business.
(f) Liens incurred and deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and
other types of social security benefits.
(g) Liens existing on assets of any person at the time such person is
acquired in a transaction permitted under Paragraph 8.22(c), provided
such lien was not created in contemplation of such acquisition and
such lien does not encumber any assets other than the assets subject
to such lien at the time of such acquisition.
(h) Other liens incidental to the conduct of the business or the ownership
of the assets of the Borrower that (i) were not Incurred in
connection with borrowed money, (ii) do not in the aggregate
materially detract from the value of the assets subject thereto or
materially impair the use thereof in the operation of such business
and (iii) do not secure obligations aggregating in excess of
$100,000.
8.11 CAPITAL EXPENDITURES. Not to spend or incur obligations for more than
Fifteen Million Dollars ($15,000,000) in each fiscal year ending 1996 and
1997, and not more than Seven Million Five Hundred Thousand Dollars
($7,500,000) In any single fiscal year thereafter to acquire fixed or capital
assets.
8.12 OUT OF DEBT PERIOD (FACILITY NO. 1). To repay any advances in full,
and not to draw any additional advances on its Facility No.1, for a period of
at least 30 consecutive days in each line-year. "Line-year" means the period
between the date of this Agreement and May 1, 1997, and each subsequent
one-year period (if any). For the purposes of this paragraph, "advances does
not include undrawn amounts of outstanding letters of credit.
8.13 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over One Million Dollars ($1,000,000) against the
Borrower.
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(b) any substantial dispute between the Borrower and any government
authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrowers financial condition or
operations.
(e) any change in the Borrower's name, legal structure, place of business,
or chief executive office if the Borrower has more than one place of
business.
8.14 BOOKS AND RECORDS. To maintain adequate books and records.
8.15 AUDITS. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
8.16 COMPLIANCE WITH LAWS. To comply with the laws (including any
fictitious name statute), regulations and orders of any government body with
authority over the Borrower's business except where such failure to comply
would not have a material adverse effect upon the Borrower.
8.17 PRESERVATION OF RIGHTS. To maintain and preserve all rights,
privileges, and franchises the Borrower now has that are necessary or useful
for the conduct of its business.
8.18 MAINTENANCE OF PROPERTIES. To make any repairs, renewals or
replacements necessary to keep the Borrower's properties in good working
condition.
8.19 PERFECTION OF LIENS. To help the Bank perfect and protect its
security interests and liens as the Bank may reasonably request, and reimburse
it for related costs it incurs to protect its security interests and liens.
8.20 COOPERATION. To take any action reasonably requested by the Bank to
carry out the intent of this Agreement.
8.21 INSURANCE.
(a) INSURANCE COVERING COLLATERAL. To maintain all risk property damage
insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount acceptable to
the Bank. The insurance must be issued by an insurance company
acceptable to the Bank and must include a lender's loss payable
endorsement in favor of the Bank in a form acceptable to the Bank.
(b) GENERAL BUSINESS INSURANCE. To maintain insurance as is usual for the
business it is in.
(c) EVIDENCE OF INSURANCE. Upon the request of the Bank, to deliver to
the Bank a copy of each insurance policy, or, if permitted by the
Bank, a certificate of insurance listing all insurance in force.
8.22 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written
consent:
(a) engage in any business activities substantially different from the
Borrower's present business except for incidental activities
reasonably related thereto.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, pool, joint venture,
syndication, or other combination; or acquire or purchase a business
or its assets for a consideration, including assumption of debt, in
excess of Five Million Dollars ($5,000,000) in the aggregate; provided
that Borrower may consummate acquisitions in an aggregate amount not
exceeding Five Million Dollars ($5,000,000) only so long as such
acquisition would not otherwise constitute a breach of any term or
covenant of this Agreement; and, provided, further, that Borrower
shall not purchase or otherwise acquire any shares in any corporation
or
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<PAGE> 16
association or any interest in any other business entity or enter into
any merger or consolidation if (i) the Borrower is not the surviving
entity, or (ii) the Borrower has knowledge of facts or circumstances
that such purchase or acquisition is likely to be hostile or
unfriendly.
(d) lease, or dispose of all or a substantial part of the Borrower's
business or the Borrower's assets.
(e) sell or otherwise dispose of any assets for less than fair market
value, or enter into any sale and leaseback agreement covering any of
its fixed or capital assets.
9. HAZARDOUS WASTE INDEMNIFICATION
The Borrower will indemnify and hold harmless the Bank from any loss or
liability directly or indirectly arising out of the use, generation.
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a hazardous substance. This indemnity will apply
whether the hazardous substance is on, under or about the Borrower's property
or operations or property leased to the Borrower. The indemnity includes but
is not limited to attorneys' fees (including the reasonable estimate of the
allocated cost of in-house counsel and staff). The indemnity extends to the
Bank, its parent, subsidiaries and all of their directors, officers, employees,
agents, successors, attorneys and assigns. "Hazardous substances" means any
substance, material or waste that is or becomes designated or regulated as
"toxic," "hazardous," "pollutants or contaminant" or a similar designation or
regulation under any federal, state or local law (whether under common law,
statute, regulation or otherwise) or judicial or administrative interpretation
of such, including without limitation petroleum or natural gas. This indemnity
will survive repayment of the Borrower's obligations to the Bank.
10. DEFAULT
If any of the following events occur, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
10.1 FAILURE TO PAY. The Borrower fails to make a payment under this
Agreement when due.
10.2 LIEN PRIORITY. The Bank fails to have an enforceable first lien
(except for any prior liens to which the Bank has consented in writing
including any liens permitted under Paragraph 8.10(c) on or security interest
in any property given as security for this loan.
10.3 FALSE INFORMATION. The Borrower has given the Bank false or
misleading Information or representations that are false or misleading in any
material respect.
10.4 BANKRUPTCY. The Borrower files a bankruptcy petition, a bankruptcy
petition is filed against the Borrower, or the Borrower makes a general
assignment for the benefit of creditors.
10.5 RECEIVERS. A receiver or similar official is appointed for the
Borrower's business, or the business is terminated.
10.6 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more
trade creditors against the Borrower in an aggregate amount of Seven Million
Dollars ($7,000.000) or more in excess of any insurance coverage.
10.7 JUDGMENTS. Any judgments or arbitration awards are entered against
the Borrower, or the Borrower enters into any settlement agreements with
respect to any litigation or arbitration, in an aggregate amount of Two Million
Dollars ($2,000,000) or more in excess of any insurance coverage and such
judgment or award is not discharged or stayed within 30 days.
10.8 TRW CONTRACT. The Borrower's contract with TRW Inc relating to
automotive airbags reduces for any reason TRW Inc's total requirement for the
airbag components that TRW Inc purchases from the Borrower by
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<PAGE> 17
an amount that represents, on an annualized basis at the time of reduction, 20%
or more of the Borrowers total revenues.
10.9 GOVERNMENT ACTION. Any government authority takes action that
materially adversely affects the Borrower's financial condition or ability to
repay.
10.10 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the
Borrower's financial condition, properties, or ability to repay the loan.
10.11 CROSS-DEFAULT. Any default occurs under any agreement in connection
with any credit the Borrower has obtained from anyone else or which the
Borrower has guaranteed.
10.12 DEFAULT UNDER RELATED DOCUMENTS. Any security agreement or other
document required by this Agreement is violated or no longer in effect.
10.13 OTHER BANK AGREEMENTS. The Borrower fails to perform any obligation
under any other agreement the Borrower has with the Bank or any affiliate of
the Bank within 30 days of notice of such failure.
10.14 OTHER BREACH UNDER AGREEMENT. The Borrower fails to perform any
obligation under, any term of this Agreement not specifically referred to in
this Article. If, in the Bank's opinion, the breach is capable of being
remedied, the breach will not be considered an event of default under this
Agreement for a period of thirty (30) days after the date on which the Bank
gives written notice of the breach to the Borrower; provided, however, that the
Bank will not be obligated to extend any additional credit to the Borrower
during that period.
11. ENFORCING THIS AGREEMENT; MISCELLANEOUS
11.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
11.2 CALIFORNIA LAW. This Agreement is governed by California law.
11.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's
and the Bank's successors and assignees. The Borrower agrees that it may not
assign this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the
right of set-off against the Borrower.
11.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those
that arise from:
(i) This Agreement (including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or delivered
in connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted
between the Borrower and the Bank, including claims for injury
to persons, property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United
States Arbitration Act. The United States Arbitration Act will apply
even though this Agreement provides that it is governed by California
law.
(c) Arbitration proceedings will be administered by the American
Arbitration Association and will be subject to its commercial rules of
arbitration.
- 16 -
<PAGE> 18
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent
of the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute
of limitations. The arbitrators will have the authority to decide
whether any such claim or controversy is barred by the statute of
limitations and, if so, to dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be
submitted to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or
claim, at the time of the proposed submission to arbitration, arises
from or relates to an obligation to the Bank secured by real property
located in California. In this case, both the Borrower and the Bank
must consent to submission of the claim or controversy to arbitration.
If both parties do not consent to arbitration, the controversy or
claim will be settled as follows:
(i) The Borrower and the Bank will designate a referee (or a panel
of referees) selected under the auspices of the American
Arbitration Association in the same manner as arbitrators are
selected in Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be
appointed by a court as provided in California Code of Civil
Procedure Section 638 and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an
active attorney or a retired judge; and
(iv) The award that results from the decision of the referee (or
the panel will be entered as a judgment in the court that
appointed the referee, in accordance with the provisions of
California Code of Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the Bank
to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank,
including the suing party, to submit the controversy or claim to
arbitration if the other party contests the lawsuit. However, if the
controversy or claim arises from or relates to an obligation to the
Bank which is secured by real property located in California at the
time of the proposed submission to arbitration, this right is limited
according to the provision above requiring the consent of both the
Borrower and the Bank to seek resolution through arbitration.
(j) If the Bank forecloses against any real property securing this
Agreement, the Bank has the option to exercise the power of sale under
the deed of trust or mortgage. or to proceed by judicial foreclosure.
11.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default,
it may enforce a later default. Any consent or waiver under this Agreement
must be in writing.
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<PAGE> 19
11.6 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all
reasonable costs incurred by the Bank in connection with administering this
Agreement.
11.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any
reasonable costs and attorneys' fees incurred by the Bank in connection with
the enforcement or preservation of any rights or remedies under this Agreement
and any other documents executed in connection with this Agreement, and
including any amendment, waiver, "workout" or restructuring under this
Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing
party is entitled to recover costs and reasonable attorneys' fees incurred in
connection with the lawsuit or arbitration proceeding, as determined by the
court or arbitrator. As used in this paragraph, "attorneys' fees" includes the
allocated costs of in-house counsel.
11.8 ONE AGREEMENT. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the
Bank and the Borrower concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit, and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
11.9 NOTICES. All notices required under this Agreement shall be
personally delivered or sent by first class mail, postage prepaid, to the
addresses on the signature page of this Agreement, or to such other addresses
as the Bank and the Borrower may specify from time to time in writing.
11.10 HEADINGS. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
11.11 COUNTERPARTS. This Agreement may be executed in as many counterparts
as necessary or convenient, and by the different parties on separate
counterparts each of which, when so executed, shall be deemed an original but
all such counterparts shall constitute but one and the same agreement.
This Agreement is executed as of the date stated at the top of the first page.
[LOGO]
BANK OF AMERICA SPECIAL DEVICES, INCORPORATED, A
NATIONAL TRUST AND SAVINGS ASSOCIATION DELAWARE CORPORATION
X /s/ RICK PANKOW X /s/ THOMAS F. TREINAN
----------------------------- ----------------------------
By: Rick Pankow By: Thomas F. Treinan
Title: Vice President Title: Chief Executive Officer/
President
ADDRESS WHERE NOTICES TO THE ADDRESS WHERE NOTICES TO THE
BANK ARE TO BE SENT: BORROWER ARE TO BE SENT:
5945 Canoga Avenue 16830 W. Placerita Canyon
Woodland Hills, CA 91367 Newhall, CA 91321
- 18 -
<PAGE> 20
[LOGO] SECURITY AGREEMENT
BANK OF AMERICA (RECEIVABLES, INVENTORY AND EQUIPMENT)
1. THE SECURITY. The undersigned Special Devices, Incorporated
(Borrower") hereby assigns and grants to Bank of America National Trust and
Savings Association ("Bank") a security interest in the following described
property ("Collateral"):
A. All of the following, whether now owned or hereafter acquired by
Borrower accounts, contract rights, chattel paper, instruments,
deposit accounts and general intangibles.
B. All inventory now owned or hereafter acquired by Borrower.
C. All machinery, furniture, fixtures and other equipment of every type
now owned or hereafter acquired by Borrower (including, but not
limited to, the equipment described in the attached Equipment
Description, if any).
D. All negotiable and nonnegotiable documents of title now owned or
hereafter acquired by Borrower covering any of the above-described
property.
E. All rights under contracts of insurance now owned or hereafter
acquired by Borrower covering any of the above-described property.
F. All proceeds, product, rents and profits now owned or hereafter
acquired by Borrower of any of the above-described property.
G. All books and records now owned or hereafter acquired by Borrower
pertaining to any of the above-described property, including but not
limited to any computer-readable memory and any computer hardware or
software necessary to process such memory ("Books and Records").
2. THE INDEBTEDNESS. The Collateral secures and will secure all
indebtedness of Borrower to Bank. For the purposes of this Agreement
"Indebtedness" means all loans and advances made by Bank to Borrower and all
other obligations and liabilities of Borrower to Bank, whether now existing or
hereafter incurred or created, whether voluntary or involuntary, whether due or
not due, whether absolute or contingent, or whether incurred directly or
acquired by Bank by assignment or otherwise. Unless Borrower shall have
otherwise agreed in writing, Indebtedness, for the purposes of this Agreement,
shall not include "consumer credit" subject to the disclosure requirements of
the Federal Truth in Lending Act or any regulations promulgated thereunder.
3. BORROWER'S COVENANTS. Borrower covenants and warrants that unless
compliance is waived by Bank in writing:
A. Borrower will properly preserve the Collateral; defend the Collateral
against any adverse claims and demands; and keep accurate Books and
Records.
B. Borrower has notified Bank in writing of, and will notify Bank in
writing prior to any change in, the locations of
(i) Borrower's place of business or Borrower's chief executive
office if Borrower has more than one place of business, and
(ii) any Collateral, including the Books and Records.
C. Borrower will notify Bank in writing prior to any change in Borrower's
name, identity or business structure.
D. Borrower will maintain and keep in force insurance covering Collateral
designated by Bank against fire and extended coverages. Such
insurance shall require losses to be paid on a replacement cost basis,
be issued by insurance companies acceptable to Bank and include a loss
payable endorsement in favor of Bank in a form acceptable to Bank.
E. Except for liens permitted under the Business Loan Agreement between
Borrower and Bank (e.g., permitted purchase money liens) Borrower has
not granted and will not grant any security interest in any of the
Collateral except to Bank, and will keep the Collateral free of all
liens, claims, security interests and encumbrances of any kind or
nature except the security interest of Bank.
F. Borrower will not sell, lease, agree to sell or lease, or otherwise
dispose of, or remove from Borrower's place of business (i) any
inventory except in the ordinary course of business as heretofore
conducted by Borrower, or (ii) any other Collateral except with the
prior written consent of Bank and except for obsolete or worn-out
equipment.
G. Borrower will promptly notify Bank in writing of any event which
materially and adversely affects the value of the Collateral, the
ability of Borrower or Bank to dispose of the Collateral, or the
rights and remedies of Bank in relation thereto, including, but not
limited to, the levy of any legal process against any Collateral and
the adoption of any marketing order, arrangement or procedure
affecting the Collateral, whether governmental or otherwise.
H. If any Collateral is or becomes the subject of any registration
certificate or negotiable document of title, including any warehouse
receipt or bill of lading, Borrower shall immediately deliver such
document to Bank.
I. Borrower will not attach any Collateral to any real property or
fixture in a manner which might cause such Collateral to become a part
thereof unless Borrower first obtains the written consent of any
owner, holder of any lien on the real property or fixture, or other
person having an interest in such property to the removal by Bank of
the Collateral from such real property or fixture. Such written
consent shall be in form and substance acceptable to Bank and shall
provide that Bank has no liability to such owner, holder of any lien,
or any other person.
J. Until Bank exercises its rights to make collection, Borrower will
diligently collect all Collateral.
- 1 -
<PAGE> 21
4. ADDITIONAL OPTIONAL REQUIREMENTS. Borrower agrees that Bank may at
its option at any time, whether or not Borrower is in default:
A. Require Borrower to deliver to Bank (i) copies of or extracts from.
the Books and Records, and (ii) information on any contracts or other
matters affecting the Collateral.
B. Examine the Collateral, including the Books and Records, and make
copies of or extracts from the Books and Records, and for such
purposes enter at any reasonable time upon the property where any
Collateral or any Books and Records are located.
C. Require Borrower to deliver to Bank any instruments or chattel paper.
5. DEFAULTS. Any one or more of the following shall be a default
hereunder:
A. Borrower fails to pay any Indebtedness when due.
B. Borrower breaches any term, provision, warranty or representation
under this Agreement, or under any other obligation of Borrower to
Bank and such breach remains uncured thirty (30) days after notice
(subject to any grace period applicable thereto).
C. Any custodian, receiver or trustee is appointed to take possession,
custody or control of all or a substantial portion of the property of
Borrower or of any guarantor of any Indebtedness.
D. Borrower or any guarantor of any Indebtedness becomes insolvent, or is
generally not paying or admits in writing its inability to pay its
debts as they become due, fails in business, makes a general
assignment for the benefit of creditors, dies or commences any case,
proceeding or other action under any bankruptcy or other law for the
relief of, or relating to, debtors.
E. Any case, proceeding or other action is commenced against Borrower or
any guarantor of any Indebtedness under any bankruptcy or other law
for the relief of, or relating to, debtors.
F. Any involuntary lien of any kind or character attaches to any
Collateral except for liens permitted under the Business Loan
Agreement between Borrower and Bank.
G. Any financial statements, certificates, schedules or other information
now or hereafter furnished by Borrower to Bank proves false or
incorrect in any material respect
6. BANK'S REMEDIES AFTER DEFAULT. In the event of any default Bank may
do any one or more of the following
A. Declare any Indebtedness immediately due and payable, without notice
or demand.
B. Enforce the security interest given hereunder pursuant to the Uniform
Commercial Code and any other applicable law.
C. Enforce the security interest of Bank in any deposit account of
Borrower maintained with Bank by applying such account to the
Indebtedness.
D. Require Borrower to assemble the Collateral, including the Books and
Records, and make them available to Bank at a place designated by
Bank.
E. Enter upon the property where any Collateral, including any Books and
Records, are located and take possession of such Collateral and such
Books and Records, and use such property (including any buildings and
facilities) and any of Borrower's equipment, if Bank deems such use
necessary or advisable in order to take possession of, hold, preserve,
process, assemble, prepare for sale or lease, market for sale or
lease, sell or lease, or otherwise dispose of, any Collateral.
F. Grant extensions and compromise or settle claims with respect to the
Collateral for less than face value, all without prior notice to
Borrower.
G. Use or transfer any of Borrower's rights and interests in any
Intellectual Property now owned or hereafter acquired by Borrower, if
Bank deems such use or transfer necessary or advisable in order to
take possession of, hold, preserve, process, assemble, prepare for
sale or lease, market for sale or lease, sell or lease, or otherwise
dispose of, any Collateral. Borrower agrees that any such use or
transfer shall be without any additional consideration to Borrower.
As used in this paragraph, "Intellectual Property" includes, but is
not limited to, all trade secrets, computer software, service marks,
trademarks, trade names, trade styles, copyrights, patents,
applications for any of the foregoing, customer lists, working
drawings, instructional manuals, and rights in processes for technical
manufacturing, packaging and labelling, in which Borrower has any
right or interest, whether by ownership, license, contract or
otherwise.
H. Have a receiver appointed by any court of competent jurisdiction to
take possession of the Collateral.
I. Take such measures as Bank may deem necessary or advisable to take
possession of, hold, preserve, process, assemble, insure, prepare for
sale or lease, market for sale or lease, sell or lease, or otherwise
dispose of, any Collateral, and Borrower hereby irrevocably
constitutes and appoints Bank as Borrower's attorney-in-fact to
perform all acts and execute all documents in connection therewith.
J. Require Borrower to segregate all collections and proceeds of the
Collateral so that they are capable of identification and deliver
daily such collections and proceeds to Bank in kind.
K. Require Borrower to obtain Bank's prior written consent to any sale,
lease, agreement to sell or lease, or other disposition of any
inventory.
L. Notify any account debtors, any buyers of the Collateral, or any other
persons of Bank's interest in the Collateral.
M. Require Borrower to direct all account debtors to forward all payments
and proceeds of the Collateral to a post office box under Bank's
exclusive control.
N. Demand and collect any payments and proceeds of the Collateral. In
connection therewith Borrower irrevocably authorizes Bank to endorse
or sign Borrower's name on all checks, drafts, collections, receipts
and other
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<PAGE> 22
documents, and to take possession of and open the mail addressed to
Borrower and remove therefrom any payments and proceeds of the
Collateral (delivering to Borrower the remaining portions of such
mail).
7. MISCELLANEOUS.
A. Any waiver, express or implied, of any provision hereunder and any
delay or failure by Bank to enforce any provision shall not preclude
Bank from enforcing any such provision thereafter.
B. Borrower shall, at the request of Bank, execute such other agreements,
documents, instruments, or financing statements in connection with
this Agreement as Bank may reasonably deem necessary.
C. All notes, security agreements, subordination agreements and other
documents executed by Borrower or furnished to Bank in connection with
this Agreement must be in form and substance satisfactory to Bank.
D. This Agreement shall be governed by and construed according to the
laws of the State of California, to the jurisdiction of which the
parties hereto submit.
E. All rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies otherwise provided by law. Any
single or partial exercise of any right or remedy shall not preclude
the further exercise thereof or the exercise of any other right or
remedy.
F. All terms not defined herein are used as set forth in the Uniform
Commercial Code.
G. In the event of any action by Bank to enforce this Agreement or to
protect the security interest of Bank in the Collateral, or to take
possession of, hold, preserve, process. assemble, insure, prepare for
sale or lease, market for sale or lease, sell or lease, or otherwise
dispose of, any Collateral, Borrower agrees to pay immediately the
costs and expenses thereof, together with reasonable attorneys' fees
and allocated costs for in-house legal services.
H. Any Borrower who is married agrees that such Borrower's separate
property shall be liable for payment of the Indebtedness if such
Borrower is personally liable for the Indebtedness.
Date: December 12, 1996
BANK OF AMERICA BORROWER
NATIONAL TRUST AND SAVINGS ASSOCIATION Special Devices, Incorporated
X /s/ RICK PANKOW X /s/ THOMAS F. TREINAN
----------------------------- ----------------------------
By: Rick Pankow, Vice President By: Thomas F. Treinan
Chief Executive Officer/President
- 3 -
<PAGE> 1
EXHIBIT 10.21
Development Agreement, dated August 28, 1996, between Registrant and the City of
Moorpark.
<PAGE> 2
New file 114.737
96-124171 Rec Fee .00
A.R. .00
Recording Requested By
and When Recorded Return To: Recorded
Official Records
CITY CLERK County of
CITY OF MOORPARK Ventura
799 Moorpark Avenue Richard D. Dean
Moorpark, California 93021 Recorder
8:02am 10-Sep-96 MOOR CQ 36
EXEMPT FROM RECORDER'S FEES
Pursuant to Government Code
Section 6103
- ----------------------------------------------------------------
*photocopy of document
also located in
Recorded Doc file #929
ref #351
DEVELOPMENT AGREEMENT
BY AND BETWEEN
THE CITY OF MOORPARK
AND
SPECIAL DEVICES, INCORPORATED
THIS AGREEMENT SHALL BE RECORDED WITHIN TEN DAYS
OF EXECUTION BY ALL PARTIES HERETO PURSUANT TO
THE REQUIREMENTS OF GOVERNMENT CODE SECTION 63868.5
<PAGE> 3
DEVELOPMENT AGREEMENT
This Development Agreement ("Agreement") is made this 28th day of
August, 1996, by and between the CITY OF MOORPARK, a municipal corporation,
("City") and SPECIAL DEVICES, INCORPORATED, a Delaware corporation,
("Developer"). In consideration of the mutual covenants and agreements
contained in this Agreement, City and Developer agree as follows;
1. Recitals. This Agreement is made with respect to the following facts
and for the following purposes, each of which is acknowledged as true and
correct by the parties:
A. Pursuant to Government Code Section 65864 et. seq. and
Ordinance No. 59 of City, City is authorized to enter into binding contractual
agreements with any person having legal or equitable interest in real property
for the development of such property in order to establish certainty in the
development process.
B. Developer is in escrow to purchase in fee simple certain real
property in, and contiguous to, the City of Moorpark, as more specifically
described by the legal description set forth in Exhibit A-1, and owns in fee
simple certain real property in the City of Moorpark, as more specifically
described by the legal description set forth in Exhibit A-2, collectively "the
Property". The exhibits are attached hereto and incorporated herein by this
reference.
C. Upon application of Developer, City has approved General Plan
Amendment No. 95-1, Zone Change No. 95-3 and Vesting Tentative Tract Map (VTTM)
No. 5004 for the Property (collectively "the Property Approvals"). In addition
and upon application of Developer, City has approved Industrial Planned
Development Permit ("IPD") No. 95-2 for a portion of the Property. The
approval of the Property Approvals and IPD No. 95-2 is subject to a mitigation
monitoring program that was approved by City on the date first above written
("the Mitigation Monitoring Program"). Implementation of IPD No. 95-2 is
referred to herein as the Project. Collectively, the Property Approvals, IPD
No. 95-2, and the Mitigation Monitoring Program are referred to as "the
Entitlements".
D. By this Agreement, City desires to obtain the binding
agreement of Developer to develop the Property in accordance with this
Agreement and the Entitlements. In consideration thereof, City agrees to limit
the future exercise of certain of its governmental and proprietary powers to
the extent specified in this Agreement.
1
<PAGE> 4
E. By this Agreement, Developer desires to obtain the binding
agreement of City to permit the development of the Property, if developed at
all, in accordance with this Agreement and the Entitlements. In consideration
thereof, Developer agrees to waive its rights to legally challenge the
limitations and exactions imposed upon the development of the Property pursuant
to the Entitlements and to provide the public benefits specified in this
Agreement.
F. City and Developer each acknowledges and agrees that the
consideration that is to be exchanged pursuant to this Agreement is fair, just
and reasonable. The parties further acknowledge and agree that this Agreement
is consistent with the General Plan of City as amended by General Plan
Amendment NO. 95-1.
G. On August 12, 1996, the Planning Commission of City held a
duly noticed public bearing on this Agreement and recommended approval of the
same.
H. On August 21, the City Council of City ("the City Council")
held a duly noticed public hearing on this Agreement, and by Ordinance No. 220
("the Enabling Ordinance") approved the same.
I. City and Developer acknowledge and agree that there may be
conflicts and inconsistencies between the provisions of this Agreement and the
provisions of the Property Approvals or IPD No. 95-2 and that in the event of
any such conflict or inconsistency it is the intention and agreement of City
and Developer that the provisions of this Agreement shall control and shall
take precedence over and supersede the provisions of the Property Approvals and
IPD No. 95-2 to the extent of such conflict or inconsistency.
2. Binding Effect. The burdens of this Agreement are binding
upon, and the benefits of the Agreement inure to the benefit of, the parties
and their successors in interest and constitute covenants which run with the
Property. Whenever the terms "City" and "Developer" are used herein, such
terms shall include any successors in interest to the parties.
3. Development of the Property. The following provisions shall
govern the subdivision, development and use of the Property:
(a) Permitted Uses. The permitted and conditionally
permitted uses of that portion of Lot 3 of VTTM No. 5004 that is
subject to IPD No. 95-2 shall be limited to those set forth in said
IPD. The permitted and conditionally permitted uses of the remainder
of Lot 3 and the Project if IDP-95-2 is not use inaugurated within
three (3) years of Project approval, shall be those permitted and
conditionally permitted uses
2
<PAGE> 5
Subject to application and processing of an Industrial Planned
Development Permit as follows:
(1) Manufacturing industries which are completely contained within a
wholly enclosed building.
(1)(a) Apparel and related products
(1)(b) Drugs, pharmaceuticals, perfumes, cosmetics and the like
(1)(c) Electrical and electronic machinery, equipment and supplies
including batteries, household appliances, and transmission
and distribution equipment, and industrial apparatus
(1)(d) Food and related products including bakery products but
excluding alcoholic beverages, sugar refining and slaughtering
(1)(e) Furniture and related fixtures
(1)(f) Instruments for measuring, analyzing and controlling
(1)(g) Jewelry, silverware and plated ware
(1)(h) Leather and leather products including tanning, curing and
finishing of hides and skins
(1)(I) Lumber and wood products and processes including cabinet work,
plywood, particleboard and veneer manufacture; and wood
preserving
(1)(j) Machinery, including office, computing and Accounting machines
(1)(k) Metal products, fabricated
(1)(1) Machine shops, plating, polishing, anodizing, engraving and
related operations
(1)(m) Musical instruments, including pianos and organs
(1)(n) Pens, pencils and other office and artists materials
(1)(o) Personal goods
(1)(p) Photographic, medical and optical goods, and watches and
clocks
(1)(g) Printing, publishing and related industries
(1)(r) Rubber and plastics products including tire retreading and
recapping
(1)(s) Stone, clay and glass products
(1)(t) Products fabricated from cement, concrete and plaster
(1)(u) Glass and glassware, pressed and blown, including flat glass
and glass products, made of purchased glass
(1)(v) Toys and amusement, sporting and athletic goods
(1)(w) Transportation equipment, motorcycles, bicycles and related
parts
(2) Offices: business, professional and administrative, except health and
veterinary
3
<PAGE> 6
(3) Lumber and building materials sales yards
The permitted and conditionally Permitted uses of the remainder of the
Property shall be limited to those that are allowed by the
conservation easement described in subsection (C) of Section 6 hereof
for Lot A and by subsection (k) of Section 6 hereof for Lot 1 and
Lot 2.
(b) Development Standards. All design and development
standards, including but not limited to density or intensity of use,
maximum height and size of buildings, that are applicable to the
Property are set forth in Section 5 hereof.
(c) Reservations and Dedications. All reservations and
dedications of land for public purposes that are applicable to the
Property are set forth in (I) VTTM No. 5004 and (ii) Section 6 hereof.
(d) Modification and Extension of IPD No. 95-2.
Throughout the term of this Agreement, Developer shall have the right,
at its election and without risk to any right that is vested in it
pursuant to this Agreement, to apply to City for minor modifications
to IPD No. 95-2. The approval or conditional approval of any such
minor modification shall not require an amendment to this Agreement,
provided that, in addition to any other findings that may be required
in order to approve or conditionally approve the minor modification, a
finding is made that the modification is consistent with this
Agreement.
It is understood by the parties that IPD No. 95-2 may not remain valid
for the term of this Agreement. Accordingly, throughout the term of
this Agreement, Developer shall have the right, at its election, to
apply for a time extension before IPD No. 95-2 expires or for a new
permit after IPD No. 95-2 has expired.
4. Intentionally Deleted.
5. Vesting of Development Rights.
(a) All construction on the Property shall adhere to the
Uniform Building Code, including the Fire Resistive Design Manual, National
Electrical Code, Uniform Plumbing Code, Uniform Mechanical Code, Uniform
Housing Code, Uniform Code for the Abatement of Dangerous Buildings, Uniform
Code for Building Conservation and Uniform Administrative Code (" the Building
Codes") most recently adopted by City and in effect at the time a plan check or
permit is required.
(b) The portion of the Property that is subject to IPD
No. 95-2 shall be developed in accordance therewith and with VTTM
4
<PAGE> 7
No. 5004, the Mitigation monitoring Program and this Agreement. Any item not
otherwise addressed in said permit, map or program or this Agreement shall be
governed by the applicable provisions of the Moorpark Municipal Code or other
City ordinance, rule, regulation, or policy as most recently adopted by city
and in effect at the time that Developer's submittal is received by City.
Any minor modification to, or time extension of, IPD No. 95-2
and any time extension of VTTM No. 5004 shall be on the basis of the
ordinances, rules, regulations, and policies as most recently adopted by City
and in effect at the time the request for the minor modification or extension
is received by city.
The following shall be prepared consistent with the
ordinances, rules, regulations, and policies as most recently adopted by City
or other applicable agency and in effect at the time they are submitted to City
for review and approval;
Erosion and Sediment Control Plan (Condition Nos. 97, 99 and
100 of VTTM No. 5004);
Master Drainage and Flood Control Improvement Plan ("FCIP")
(Condition No. 104 of VTTM No. 5004); and
Bank Protection Plan ("BPP") (Condition No. 105 of VTTM No.
5004 and Condition No. 107 of IPD No. 95-2).
(c) All developable portions of the Property not subject
to IPD No. 95-2 shall be developed in accordance with VTTM No. 5004, the
Mitigation Monitoring Program, this Agreement and the applicable provisions of
the Moorpark Municipal Code or other city ordinance, rule, regulation, or
policy as most recently adopted by City and in effect at the time that
Developer's submittal is received by City. This subsection does not limit the
provisions of subsection (a) of Section 3 relative to the permitted and
conditionally permitted uses of the Property.
6. Developer Agreements
(a) The terms and conditions for the payments required by
subdivisions (l) and (m) of this Section shall be those contained in a
promissory note in the form of Exhibit B ("the Promissory Note"), which shall
be secured by a deed of trust and rider to deed of trust in the form of Exhibit
C ("the Deed of Trust") , both of which are attached to this Agreement and by
this reference are incorporated herein. Developer shall execute the Promissory
Note and the Deed of Trust and shall cause the Deed of Trust to be recorded
within seven (7) days after it takes fee title to the Property.
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Developer acknowledges that City may, at its Option, record a
request for notice under Civil Code Section 2924b in accordance with the
provisions thereof.
(b) Developer shall grant, in a form acceptable to City,
a conservation easement to retain Lot A of VTTM No. 5004 in a predominantly
open space condition consistent with Civil Code Section 815 et seq. except for
the following purposes: temporary construction (including temporary pumping
needed for dewatering as part of any approved grading operations for VTTM No.
5004 and IPD No. 95-2), landscape maintenance of manufactured slope areas,
vegetation clearance within two hundred (200) feet of any structure for fire
hazard reduction, revegetation and biological habitat enhancement required by
City consistent with the Mitigation Monitoring Program, drainage conveyance,
and emergency access from Lot 3 of VTTM No. 5004 to State Route ("SR") 23/New
Los Angeles Avenue entrance/exit ramps and roads at the sole discretion of the
City Council. No excavation, drilling, extraction, pumping (excluding such
pumping as may be needed for dewatering as part of approved grading
operations), mining, or similar activity shall be allowed in any portion of the
Property zoned Open Space. The limitations and exclusions described in this
subsection shall be included in the conservation easement. The foregoing does
not restrict the extraction of subsurface mineral resources by drilling from
off the Property so long as the drilling apparatus and equipment are screened
from view from all points within the City. Further, if the drilling site is
not within the City, Developer agrees that before proceeding with any drilling
it shall secure a use permit from the City which may include conditions
ordinarily placed upon drilling operations. Further, noise impacts from the
drilling shall meet the same noise standards as placed on IPD 95-2 and there
shall be no visible evidence or impacts on the ground surface of Lot A.
The conservation easement shall be recorded concurrently with
the recordation of the final subdivision map for VTTM No. 5004, execution of
the early grading agreement by the City Manager, or recordation of this
Agreement, whichever occurs first.
(c) On or before the effective date of this Agreement,
Developer shall pay all outstanding City processing and environmental impact
report costs related to VTTM No. 5004, IPD No. 95-2, GPA 95-1, and Zone Change
No. 95-3 and for preparation of this Agreement.
(d) Developer shall diligently process, at its sole cost
and expense, an application for annexation of the approximate 56.84 acres of
Lot A of VTTM No. 5004, which acreage is currently not in the City, to the
City, so that a LAFCO decision is rendered prior to October 1, 1997. The
completed application shall be submitted to City and LAFCO within six (6)
months after approval of this Agreement.
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(e) Developer shall make an irrevocable offer of
dedication to City for public street purposes of that portion of Lot 3 of VTTM
No. 5004 containing the private road prior to approval of the final map for
VTTM No. 5004. Said private road shall be built to City standards for an
industrial collector street, except that the width of the street and the
sidewalk requirements shall conform to the requirements of the conditions of
approval of VTTM No. 5004 and IPD No. 95-2. Concurrently with the
aforementioned offer of dedication, Developer shall make an irrevocable offer
of dedication to City of (I) the area between the right-of-way of the private
road and the sight distance lines at the offramp intersection and (ii) slope
easements for road maintenance purposes along the private road where the top of
cut plus 5 feet or the toe of fill plus 5 feet is beyond the area offered for
dedication of right-of-way for public street purposes. Said slope easements
shall include the area covered by the cut slope plus 5 feet and fill slope plus
5 feet.
(f) Developer shall annex all of the property within VTTM
No. 5004 that is within the City to Ventura County Waterworks District No. 1
("the District") prior to occupancy of the first building within the Project or
approval of the final map for VTTM No. 5004, whichever occurs first. Developer
shall annex the approximate 56.84 acres of Lot A of VTTM No. 5004 that is not
within the City to the District only if such annexation occurs concurrently
with the annexation of said property to the City. In the event that LAFCO
denies annexation of the approximate 56.84 acres to the City, Developer shall
withdraw its consent to the annexation of said acres to the District and shall
take all other actions reasonable necessary to prevent the annexation to the
District.
(g) Developer agrees to not oppose creation of a
redevelopment project area (as defined by applicable State law) encompassing
any part of the Property provided that the project area is consistent with the
rights of Developer under this Agreement.
(h) Developer agrees to dedicate Lot 4 and Lot D, as
described in Condition No. 16 of VTTM No. 5004, in fee simple interest to City
concurrently with the recordation of the final map for VTTM Map No. 5004.
These lots are to be used for public benefit as determined by City in it's
sole discretion.
(i) Developer agrees not to request any concession,
waiver, modification or reduction of any fee, regulation, requirement, policy
or standard condition for development of Lots 1 and 2 of VTTM No. 5004, and
further agrees to pay all fees imposed by City for future buildings, so long as
said fees are also imposed in a similar manner on similar projects.
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(j) Developer agrees that the modifications to Caltrans
rights-of-way adjacent to the Property, including but not limited to
reconfiguration of certain freeway entrance/exit ramps (SR 23 interchanges) and
signalization of SR 23 interchanges with New Los Angeles Avenue, shall be
completed within twelve (12) months of the first occupancy of a building on the
Property and that the bid award for construction shall occur prior to first
occupancy.
(k) Developer agrees that the maximum building square
footage for Lot 1 of VTTM No. 5004 shall not exceed 132,183 and for Lot 2 of
VTTM No. 5004 shall not exceed 37,200, and further agrees that the permitted
and conditionally permitted uses of Lots 1 and 2 shall be limited to (i)
shopping centers, (ii) hotels and motels, (iii) bars, taverns and night clubs
but only in conjunction with a hotel or motel use, (iv) conference centers and
convention centers, (v) hospitals, (vi) retail pharmacies for prescription
pharmaceutical only, (vii) restaurants, cafes and cafeterias, (viii) retail
trades, only within a building and (ix) motor vehicle, mobile home,
recreational vehicle and boat dealers and for Lot 2 only, automobile service
station including a mini mart.
(1) Developer agrees to pay City in accordance with the
provisions of this subsection if, for any reason, Developer does not employ the
number of full-time employees required by this subsection at the Project
facilities described in IPD No. 95-2.
The number of full-time employees employed at the Project
facilities on the date of initial occupancy is hereinafter referred to as the
Initial Number. Initial occupancy shall mean the last day of the month in
which the first certificate of occupancy for the Project facilities is issued
plus sixty (60) calendar days. As of the first anniversary of the initial
occupancy, the number of full-time employees employed at the Project facilities
shall be not less than the Initial Number plus the First Year Number. The
"First Year Number" shall mean the Initial Number plus seventy-five, provided
that if the Initial Number is reduced during the first year by the attrition of
employees who were employed full-time at the Project facilities at initial
occupancy ("original employees) and their positions are refilled by the hiring
of new full-time employees prior to the first anniversary of the Project
facilities ("new employees"), the 75 shall be reduced by the number of new
employees. (e.g., if there were 490 full-time employees at initial occupancy
and 30 new full-time employees were hired prior to the first anniversary of the
Project facilities to replace 30 of the original full-time employees, the First
Year Number is 490 plus 75 minus 30 for a total of 535 full-time employees.)
As of the second anniversary of the initial occupancy, the number of full-time
employees employed at the Project facilities shall be not less than the First
Year Number plus 75 ("the Second Year Number"). As of the third anniversary of
the initial occupancy, the number of full-time employees employed at the Project
facilities shall be not less than the First Year Number plus 150 ("the Third
Year Number").
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Each of the three (3) years that the minimum number of full-time employees
specified above are not employed at the Project facilities, Developer shall pay
City the sum of Twenty-Five Thousand Dollars ($25,000.00) within sixty (60)
days after the applicable anniversary date of the Project facilities.
In the event that the Initial Number is less than 490, the
Third Year Number shall be increased by the difference between the Initial
Number and 490 ("the Additional Number") up to a cap of 100. (E.g. if the
Initial Number is 380 then using the example from above the First Year Number
is 425 (380 plus 75 minus 30) and so the Third Year Number of 575 (425 plus
150) shall be increased by the Additional Number of 100 for a total of 675
full-time employees.) within sixty (60) days after the third anniversary of the
Project facilities, Developer shall pay City Three Hundred Thirty Three Dollars
($333) for each of the Additional Number of full-time employees that are not
employed at the Project facilities as of the third anniversary thereof. (E.g.,
using the example from above, Developer shall pay City $33,300 ($333 times
100.)
Upon City's request, Developer shall provide City with access,
during normal business hours and at the Project facilities, to payroll and
related records necessary to determine if Developer is in compliance with the
full-time employee requirements of this subsection and subsection (m) of this
Section.
In the event one or more payments are made by Developer
pursuant to subsection (m) of this Section, then the provisions of this
subsection shall not apply. Developer shall not be in material breach of this
subsection unless it fails to make timely payment of any payment due pursuant
to this subsection.
(m) Developer agrees that if, for any reason, it does not
build the Project described in IPD No. 95-2 and any City approved minor
modification thereto and relocate the Los Angeles County operations of Special
Devices, Incorporated to the Project facilities within three (3) years after
the effective date of this Agreement, Developer shall pay City the sum of Four
Hundred Ninety-Two Thousand, Three Hundred and Fifty-One Dollars ($492,351.00)
plus Seventy-Five Thousand Dollars ($75,000.00) per year for four (4)
consecutive years.
The $492,351.00 shall be payable in the amounts and at the times as
follows:
(1) At any time any part of Lot 1 or Lot 2 of VTTM No.
5004 is sold or leased to a third party (except for month to month
leases), Developer shall pay City $246,175.00, Payment is due upon
close of escrow of the sale or upon execution of the lease or the
third (3rd) anniversary of the effective date of this Agreement,
whichever is later.
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(2) At any time Lot 3 of VTTX NO. 5004 is sold or leased
to a third party (except for month to month leases) and No. 1, above,
has occurred, Developer shall pay City $246,176.00; however, if No. 1,
above, has not occurred or if No. 1 above has occurred prior to the
third (3rd) anniversary of the effective date of this Agreement, then
Developer shall pay City $492,351.00. Payment is due upon close of
escrow of the sale or upon execution of the lease.
(3) At any time a final map for any subsequent
subdivision of Lot 3 of VTTM No. 5004 is approved and No. 1, above,
has occurred, Developer shall pay City $246,176.00; however, if No. 1,
above, has not occurred then Developer shall pay City $492,351.00.
Payment is due prior to the recordation of said final map.
(4) On the tenth (10th) anniversary of the effective date
of this Agreement, Developer shall pay City any portion of the
$492,351.00 not previously paid to City pursuant to Nos. 1, 2 and 3
above.
The four (4) $75,000.00 payments totaling $300,000.00 shall be
paid beginning on the fourth (4) anniversary of the effective date of this
Agreement. In the event Developer relocates to the Project facilities after
the third anniversary of the effective date of this Agreement, no further
payment of the aforementioned Three Hundred Thousand Dollars ($300,000.00)
shall be due and owing, except that the annual amount that would otherwise have
been due and payable on the next succeeding anniversary date shall be prorated
as of the date of initial occupancy of the Project facilities and shall be paid
to City on the date of initial occupancy. (E.g., if such relocation occurs
three (3) months after the fourth anniversary, then Developer would have paid
Seventy Five Thousand Dollars ($75,000.00) on the fourth anniversary and would
pay Eighteen Thousand Seven Hundred Fifty Dollars ($18,750.00) on the date of
initial occupancy. The remaining Two Hundred Six Thousand, Two Hundred and
Fifty Dollars ($206,250.00) would not be owed by Developer.)
Developer shall not be in material breach of this subsection
unless it fails to make timely payment of any payment due pursuant to this
subsection.
(n) Developer agrees to pay for City costs at the
applicable rates then in effect for review and plan check monitoring and
inspection of work performed by consultants retained by Developer and City
pursuant to subsection (p) of Section 7 hereof.
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7. City Agreements.
(a) The Property shall be exempt from the provisions of
Chapter 17.38 (Hillside Management) of the Moorpark Municipal Code.
(b) The Property shall be exempt from any growth
management ordinance that is adopted by the City Council or by initiative of
the electorate.
(c) If requested in writing by Developer and limited to
City's legal authority, City shall proceed to acquire, at Developer's sole cost
and expense, easements or fee title to land in which Developer does not have
title or interest in order to allow construction of public improvements
required of Developer. The process shall generally follow Government Code
Section 66457 et seq. and shall include the obligation of Developer to enter
into an agreement with City, guaranteed by cash deposits and other security as
the City may require, to pay all City costs including but not limited to,
acquisition of the interest, attorney fees, appraisal fees, engineering fees,
and City overhead expenses of fifteen percent (15%) on all out-of-pocket costs
and City staff costs.
(d) City shall use its best efforts to process plan
checking and early grading agreement for the Project in an expedited manner.
(e) The City Manager is authorized to sign an early
grading agreement on behalf of City to allow rough grading of the Project prior
to City Council approval of the final map for VTTM No. 5004. Said early
grading agreement shall be consistent with the conditions of the Entitlements
and contingent on City Engineer and Director of Community Development
acceptance of a Performance Bond in a form and amount satisfactory to them to
guarantee (i) implementation of the erosion control plan and completion of the
rough grading, (ii) construction of the private street and secondary access and
all related improvements including landscaping, (iii) construction of SR 23
interchanges with New Los Angeles Avenue improvements, including signalization,
(iv) construction of water line and sewer line extensions, (v) construction of
all required drainage improvements and (vi) implementation and maintenance of
habitat restoration as required by the mitigation Monitoring Program. In the
event that Developer fails to comply with any provision of the early grading
agreement, the City Council may by resolution declare the surety forfeited;
provided, however, the City Council shall not declare any such forfeiture,
unless the City Manager has given Developer ten (10) days prior written notice
of such failure and Developer has failed to cure the failure within the ten day
period if the failure is capable of cure within such ten day period or has
failed to commence the cure within the ten day period and diligently prosecute
the same to completion if the failure is not capable of cure with such ten day
period.
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(f) The fees for the Los Angeles Avenue Area of
Contribution ("the AOC fees") for the Project are set at One Hundred Thirty one
Thousand Nine Hundred and Twelve Dollars ($131,912.00) (8.5 acres at $15,519,00
per acre) for up to One Hundred Thirty Two Thousand (132,000) square feet of
building. The Project AOC fees shall not be required to be paid by Developer
until the time of issuance of a zone clearance for the first building permit
for the Project or approval of the final map for VTTM No. 5004, whichever
occurs first. For any other development of the developable portions of the
Property, the AOC fees shall be the dollar amount in effect at the time of
issuance of a zone clearance for the first building permit for the development
or approval of the final map for any subdivision of the Property subsequent to
the recordation of the final map for VTTM No. 5004, whichever occurs first.
(g) The Citywide Traffic Mitigation Fee shall not be
required to be paid by Developer until the time of issuance of a zone clearance
for the first building permit for each lot within the boundaries of the
Property. The fee is fifty cents ($.50) per square foot of building. The fee
shall be adjusted annually (commencing one year after approval of VTTM No.
5004) by any increase in the Consumer Price Index ("CPI") until paid in full.
The CPI increase shall be determined by using the information provided by the
U.S. Department of Labor, Bureau of Labor Statistics, for all urban consumers
within the Los Angeles/Anaheim/Riverside metropolitan area during the prior
year. The calculation shall be made using the month of January of each year.
(h) Except as otherwise provided in this Agreement, no
fees, other than fees for plan checking, permits, processing and other services
controlled by City, shall be required to be paid by Developer until the time of
issuance of a zone clearance for the first building permit for each lot within
the boundaries of the Property, unless the fee is otherwise due at a later
time.
(i) Upon the effective date of this Agreement, the period
required for use inauguration of IPD, No. 95-2 shall be extended from one (1)
year to three (3) years.
(j) City agrees to accept Lots 4 and D as satisfaction of
the requirements imposed by Condition No. 61 of VTTM No. 5004 and Condition No.
88 of IPD 95-2.
(k) The Project shall be exempt from the Art in Public
Places fee.
(1) The Property shall be exempt from the landscape fee
of five cents ($.05) per square foot for the Property given the large
percentage of the site retained in natural open space.
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(m) City agrees that the contribution requirements of
Condition No. 127 of VTTM No. 5004 shall be satisfied upon completion of
installation of the two traffic signals at the SR 23/New Los Angeles
interchange to the satisfaction of City.
(n) City shall not require Developer to remove noxious
plants from the Arroyo Simi.
(o) City agrees that, in implementation of Condition No.
26 of VTTM No. 5004, the City Engineer and Director of Community Development
may jointly approve elevation changes, not to exceed five (5) feet, for the
purpose of providing contour grading of the ridgeline.
(p) City agrees that, in implementation of Condition No.
25 of VTTM No. 5004 and Condition 37 of IPD No. 95-2 (Environmental Quality
Assurance Program), VTTM Condition 47 and IPD Condition 77 (Habitat Restoration
Plan), VTTM Condition 48 and IPD Condition 78 (Oak Woodland Restoration and
Reforestation Plan), VTTM Condition 56 and IPD Condition 83 (Mapping and
preservation of two stands of Lyon's Pentachaeta), VTTM Conditions 62 and 63
and IPD Conditions 89 and 90 (Cultural Resource Monitoring Program), VTTM
Condition 64 and IPD Condition 91 (Paleontological Mitigation Plan), VTTM
Condition 104 (Master Drainage and Flood Control Improvement Plan), and VTTM
Condition 105 (Bank Protection Plan), Developer may retain consultants as its
independent contractors to prepare the required work. The consultants shall be
as mutually agreed upon by City and Developer. Work required to be performed
by the City Engineer, the City Attorney, City's designated geologist, City's
designated geotechnical engineer, and public agencies not under the
jurisdiction of City shall not be deemed consultants for purposes of this
subsection. City further agrees to work with Developer to ensure the
economical use of consultants. The City Manager is authorized, on behalf of
the City, to approve the consultants and to do so for other conditions of
approval when, in his sole discretion, such action is consistent with the
intent of this section. When consultants are required to review work on behalf
of City, the Developer may elect to have City retain one consultant under City
direction to perform the work. In the event of such election, City shall not
add its usual and ordinary administrative costs but shall charge Developer for
all City staff time spent to administer the contract and review work. Such
costs are in addition to the condition compliance fee and other related costs.
8. Supersession of Agreement by Change of Law. In the
event that any state or federal law or regulation enacted after this Agreement
becomes effective prevents or precludes compliance with any provision of the
Agreement, such provision shall be deemed modified or suspended to comply with
such state or federal law or regulation, as reasonably determined necessary by
City.
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9. Demonstration of Good Faith Compliance.
In order to ascertain compliance by Developer with the
provisions of this Agreement, the Agreement shall be reviewed annually in
accordance with Ordinance No. 59 of City or any successor thereof then in
effect. The failure of City to conduct any such annual review shall not in any
manner constitute a default by City hereunder, diminish, impede, or abrogate
the obligations of Developer hereunder or render this Agreement invalid or
void.
10. Breach by Developer.
Each of the following events shall be deemed a material breach
of Developer's obligations under this Agreement:
(a) Developer practices, or attempts to practice, any
fraud or deceit upon City.
(b) Developer becomes insolvent or proceedings in
bankruptcy are instituted by or against Developer, or Developer is
adjudged bankrupt or insolvent by any court, or a receiver or trustee
in bankruptcy or a receiver of the Property is appointed in any suit
or proceeding brought by or against Developer, or Developer makes an
assignment for the benefit of creditors provided, however, Developer
shall not be deemed in material breach pursuant to this subparagraph
in the event the suit or proceeding is dismissed within ninety (90)
days following the date of initiation thereof.
(c) Developer willfully violates any orders or rulings of
any regulatory body having jurisdiction over Developer relative to the
Property, provided that Developer may contest any such orders or
rulings by appropriate proceedings conducted in good faith, in which
case no breach of this Agreement shall be deemed to have occurred
unless and until there is a final adjudication adverse to Developer.
(d) Developer fails to make any payments required under
this Agreement; provided, however, Developer shall not be deemed in
material breach of this subsection, unless City has given Developer
ten (10) days prior written notice of such failure and Developer has
failed to make payment within the ten day period.
(e) Developer materially breaches any of the other
provisions of the Agreement and the same is not cured within the time
set in a written notice of the breach from City to Developer, provided
that if Developer cannot reasonably cure the breach within the time
set forth in such notice, Developer fails to commence to cure such
breach within the time set forth in such notice and diligently
prosecute the cure to completion.
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11. Mortgage Protection. Whenever City delivers any
notice to Developer with respect to any breach by Developer, City shall at the
same time deliver to each holder of record of any deed of trust on the Property
(the "Financier") a copy of such notice, provided that the Financier has given
prior written notice of its name and address to City and the notice makes
specific reference to this section.
Each Financier that has given prior notice to City pursuant to
this section shall have the right, at its option and insofar as the rights of
City are concerned, to cure any such breach within fifteen (15) days after the
receipt of the notice from City. If such breach cannot be cured within such
time period, the Financier shall have such additional period as may be
reasonably required to cure the same, provided that the Financier delivers
written notice to City of its intention to cure and commences the cure within
fifteen (15) days after receipt of the notice from city and thereafter
diligently prosecutes the same to completion. The City shall not terminate
this Agreement by reason of Developer's breach without allowing the Financier
to cure the same as specified herein.
Notwithstanding any cure by Financier, this Agreement shall be
binding and effective against the Financier and any owner of the Property, or
any part thereof, whose title thereto is acquired by foreclosure, trustee sale
or otherwise,
12. Estoppel Certificate. Either party may, at any time
and from time to time, deliver written notice to the other party requesting
that such party certify in writing that, to the knowledge of the certifying
party, (i) this Agreement is in full force and effect and a binding obligation
of the parties, (ii) this Agreement has not been amended, or if amended, the
identify of each amendment, and (iii) the requesting party is not in breach of
this Agreement, or if in breach, a description of each such breach. The party
receiving a request hereunder shall execute and return such certificate within
thirty (30) days following the receipt thereof. City acknowledges that a
certificate hereunder may be relied upon by successors in interest to Developer
and holders of record of deeds of trust on the Property.
13. Administration of Agreement. All decisions by City
staff concerning the interpretation and administration of this Agreement and
development of the Property in accordance herewith are appealable by Developer
to the City Council, provided that any such appeal shall be filed with the City
Clerk of City within ten (10) days after Developer is notified of the staff
decision. The City Council shall render its decision to affirm, reverse or
modify the staff decision within thirty (30) days after the appeal was filed.
Developer shall not seek judicial review of any staff decision without first
having exhausted its remedies pursuant to this section.
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14. Amendment or Termination by Mutual Consent. In
accordance with the provisions of Ordinance No. 59 of City or any successor
thereof then in effect, this Agreement may be amended or terminated, in whole
or in part, by mutual consent of City and Developer.
15. Indemnification. Developer shall indemnify, defend
with counsel approved by City, and hold harmless City and its officers,
employees and agents from and against any and all losses, liabilities, fines,
penalties, costs, claims, demands, damages, injuries or judgments arising out
of, or resulting in any way from, Developer's performance pursuant to this
Agreement.
16. Time of Essence. Time is of the essence for each
provision of this Agreement of which time is an element.
17. Term. This Agreement shall become effective on the
date that the current legal owners of the Property agree to be bound by the
provisions of this Agreement or on the date that Developer takes legal title to
the Property, whichever occurs first, but in no event sooner than the date upon
which the Enabling Ordinance becomes effective pursuant to Government Code
Section 36937.
The Agreement shall remain in effect for ten (10) years from
its effective date.
The expiration of this Agreement shall not affect any right or
duty arising independently from any Entitlement that is approved by City
concurrently with, or subsequent to, the adoption of the Enabling Ordinance.
Upon the expiration of this Agreement, City and Developer
agree to cooperate and execute any document reasonably requested by the other
party to remove this Agreement from the public records as to the Property, or
any portion thereof, to the extent permitted by applicable laws.
18. Notices. All notices given pursuant to this
Agreement shall be in writing and shall be effective when personally delivered
or upon the third (3rd) day after deposit in the United States mail, registered
or certified, postage prepaid, return receipt requested, to the party at the
address indicated below:
To City: City of Moorpark
799 Moorpark Avenue
Moorpark, CA 93021
Attn. City Manager
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To Developer: Special Devices, Incorporated
16830 Placerita Canyon Road
Newhall, CA 91321
Attn. President
Either party may, from time to time, by written notice to the other, designate a
different address which shall be substituted for the one above specified.
19. Entire Agreement. This Agreement contains the entire
agreement between the parties regarding the subject matter hereof, and all
prior agreements or understandings, oral or written, are hereby merged herein.
This Agreement shall not be amended, except as expressly provided herein.
20. Waiver. No waiver of any provision of this Agreement
shall constitute a waiver of any other provision, whether or not similar; nor
shall any such waiver constitute a continuing or subsequent waiver of the same
provision. No waiver shall be binding, unless it is executed in writing by a
duly authorized representative of the party against whom enforcement of the
waiver is sought.
21. Severability. If any provision of this Agreement is
determined by a court of competent jurisdiction to be invalid or unenforceable,
the remainder of this Agreement shall be effective to the extent the remaining
provisions are not rendered impractical to perform, taking into consideration
the purposes of this Agreement.
22. Relationship of the Parties. The parties
acknowledge that, in entering into and performing under this Agreement, each is
acting as an independent entity and not as an agent of the other in any
respect. Nothing contained herein or in any document executed in connection
herewith shall be construed as creating the relationship of partners, joint
venturers or any other association of any kind or nature between City and
Developer.
23. Constructive Notice and Acceptance. Every person
who, now or hereafter, owns or acquires any right, title or interest in or to
any portion of the Property is, and shall be, conclusively deemed to have
consented and agreed to every provision contained herein, whether or not any
reference to this Agreement is contained in the instrument by which such person
acquired an interest in the Property.
24. No Third Party Beneficiaries. This Agreement is made
and entered into for the sole benefit of the parties and their successors in
interest. No other person shall have any right of action based upon any
provision of this Agreement.
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25. Recordation Agreement. This Agreement and any
amendment or termination thereof shall be recorded in the official records of
the County of Ventura by the City Clerk of City within the period required by
Ordinance 59 of City or any successor thereof then in effect.
26. Cooperation Between the Parties. Each party shall
execute and deliver to the other all such other and further instruments and
documents as may be necessary to carry out the purposes of this Agreement.
27. Rules of Construction. The captions and headings of
the various sections and subsections of this Agreement are for convenience of
reference only, and they shall not constitute a part of this Agreement for any
other purpose or affect the interpretation of the Agreement. Should any
provision of this Agreement be found to be in conflict or inconsistent with any
provision of the Property Approvals or IPD No. 95-2, the provisions of this
Agreement shall control and shall take precedence over and supersede the
provisions of the Property Approvals and IPD No. 95-2 to the extent of such
conflict or inconsistency, Should any provision of the Promissory Note be found
to be in conflict or inconsistent with any provision of this Agreement, the
provisions of the Promissory Note shall control and shall take precedence over
and supersede the provisions the Agreement to the extent of such conflict or
inconsistency.
28. Joint Preparation. This Agreement shall be deemed to
have been prepared jointly and equally by the parties, and it shall not be
construed against either party on the ground that the party prepared the
Agreement or caused it to be prepared.
29. Governing Law and Venue. This Agreement is made,
entered into, and executed in the County of Ventura, California, and the laws
of the State of California shall govern its interpretation and enforcement.
Any action, suit or proceeding related to, or arising from, this Agreement
shall be filed in the appropriate court having jurisdiction in the County of
Ventura.
30. Attorneys' Fees. In the event any action, suit or
proceeding is brought for the enforcement or declaration of any right or
obligation pursuant to, or as a result of any alleged breach of, this
Agreement, the prevailing party shall be entitled to its reasonable attorneys'
fees and litigation expenses and costs, and any judgment, order or decree
rendered in such action, suit or proceeding shall include an award thereof.
31. Counterparts. This Agreement has been executed in
duplicate counterparts, each of which shall be deemed an original, but both of
which constitute one and the same instrument.
18
<PAGE> 21
IN WITNESS WHEREOF, the parties have each executed this
Agreement of the date first written above.
CITY OF MOORPARK
By: /s/ PAUL W. LAWRASON JR.
---------------------------------
Paul W. Lawrason Jr.
Mayor
ATTEST
/s/ LILLIAN M. HARE
--------------------------------------
Lillian M. Hare
City Clerk
SPECIAL DEVICES, INCORPORATED
By: /s/ THOMAS F. TREINEN
---------------------------------
Thomas F. Treinen
President
__________________________, hereby agrees this ____ day of ____________, 1996 to
be bound by and perform under the provisions of this Agreement as if it were a
party hereto.
By:
---------------------------------
Name
----------------------------
Title
---------------------------
19
<PAGE> 22
STATE OF CALIFORNIA )
) ss.
COUNTY OF VENTURA )
On August 28, 1996 before me Lillian E. Hare, City Clerk of the City
of Moorpark, California, personally appeared Thomas F. Treinen, personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person whose name is subscribed to the within instrument and acknowledged to me
that he executed the same in his authorized capacity as President of Special
Devices, Incorporated, and that by his signature on the instrument the person,
or the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
Signature /s/ LILLIAN E. HARE (Seal)
-----------------------------------------
20
<PAGE> 23
MOORPARK
799 Moorpark Avenue Moorpark, California 93021 (805) 529-6864
PUBLIC AGENCY FORM OF ACKNOWLEDGEMENT
STATE OF CALIFORNIA)
COUNTY OF VENTURA ) ss.
On this 28th day of August, in the year 1996, before me Lillian E. Hare, City
Clerk, personally appeared Paul W. Lawrason Jr., personally known to me to be
the person who executed this instrument as the Mayor of the City of Moorpark,
California and acknowledged to me that the City of Moorpark executed it.
Lillian E. Hare, City Clerk
<PAGE> 24
LEGAL DESCRIPTION
EXHIBIT A-1
That portion of Tract "M" of the Rancho Simi, partially in the City of
Moorpark, County of Ventura, State of California, as per map re-entitled "Map
of the Lands of Rancho Simi", being Subdivision Map No. 2 of Lands of the Simi
Land and Water Company, made 1887 and 1888 by Stow and Powers, Surveyors,
recorded in Book 3, Page 7 of Maps, in the office of the County Recorder of
said County, described as follows:
That portion of the land described in deed recorded September 11, 1963 in Book
2390, Page 306, Official Records, in said County Recorder's Office, lying
Northerly and Northwesterly of the following described lines:
Beginning at an angle point in the boundary of the above mentioned land, being
the Southwest corner of Tract "I" and the Southerly terminus of that certain
course in the boundary of said land designated in said deed as bearing South
and having a length of 56 chains and considered for the purpose of this
description as bearing South 00 degrees 00' 18" East; thence along said
boundary, North 00 degrees 00' 18" West 610.00 feet to the true point of
beginning; thence South 78 degrees 43'06" West 1536.87 feet; thence South 60
degrees 17' 07" West 2360.38 feet; thence South 72 degrees 15' 15" West 2646.01
feet to a Westerly boundary of said land, being an Easterly boundary of
Moorpark Road.
EXCEPT that portion of said land lying Westerly of the Easterly line of the
land described as Parcel 1A and also except that portion described as Parcel
1E, in the Final Order of Condemnation, recorded May 22, 1969 in Book 3492,
Page 234, Official Records.
ALSO EXCEPT one half of 27/40ths interest of all oil and mineral rights below
500 feet from the surface, but without the right of surface entry, as reserved
by Vivian Agoure Escallier, et al., in deed recorded September 11, 1963 in Book
2390, Page 306, of Official Records.
<PAGE> 25
ALSO EXCEPT one half of 13/40ths interest of all oil and mineral rights, below
500 feet from the surface, but without the right of surface entry, as reserved
by Peter Vail, as Guardian of the estate of Angele Agoure Vail, an incompetent
person, in deed recorded October 17, 1963 in Book 2410, Page 561 of Official
Records.
ALSO EXCEPT 25% of all minerals, coal, oil, petroleum, gas, asphaltum and
kindred substances, now or hereafter in or under said land below a depth of 500
feet from the surface thereof, without the right of surface entry, as reserved
in the deed dated December 13, 1966 from Milan Roven and Abraham Spiegel,
recorded December 20, 1966 in Book 3081, Page 337, Official Records.
Prepared by South Bay Engineering Company
ROSS N. BOLTON
<PAGE> 26
LEGAL DESCRIPTION
EXHIBIT A-2
PARCEL 1
That portion of Tract "M", Rancho Simi, as shown on map recorded in Book
3, page 7 of Maps, in the office of the County Recorder of said county as
acquired by the State of California by Final Order of Condemnation, filed in
Superior Court Case no. 50755, in and for said county, a certified copy of
which was recorded May 22, 1969 in Book 3492, page 234 of Official Records in
said office, described as follows:
Beginning at the Southerly terminus of that certain course described in
Parcel IA of said Condemnation as course "(31) S 18 degrees 20'04"E, 150.00
feet"; thence along the generally Easterly lines of said Parcel IA the
following (6) six courses:
(1) course "(32)" S 22 degrees 23'08" E, 620.66 feet,
(2) course "(33)" N 53 degrees 37'53" E, 424.26 feet,
(3) course "(34)" S 24 degrees 25'28" E, 367.89 feet,
(4) course "(35)" S 51 degrees 37'53" E, 192.46 feet,
(5) course "(36)" S 7 degrees 47'37" E, 130.59 feet,
(6) course "(37)" S 30 degrees 11'43" W, 537.28 feet;
thence leaving said generally Easterly lines, N 0 degrees 24'36" W, 572.67
feet; thence N 27 degrees 44" 07"W, 322.87 feet; thence S 61 degrees 45" 26"W,
335.00 feet; thence N 19 degrees 02' 33"W, 1033.21 feet to the Southerly line
of the Southern Pacific Railroad Company Right of Way, 100.00 feet wide as
described in Book 77, page 370 of Deeds in said office; thence Easterly along
said Southerly line N 75 degrees 42'14"E, 77.50 feet to the Northerly terminus
of that certain course described in said Parcel 1A as course "(30) S 11 degrees
04'53 E, 186.29 feet"; thence along said courses (30) S 11 degrees 04'53"E,
186.29 feet and (31) S 18 degrees 20'04"E, 150.00 feet to the point of
beginning.
TOGETHER with the right of access over and across courses (30) through
<PAGE> 27
(37) of said Parcel 1A, as well as the Easterly 120.00 feet of the
above-described course of: S 61 degrees 45'26"W, 335.00 feet and the northerly
120.00 feet of the above-described course of N 27 degrees 44'07" W, 322.87 feet;
also, for emergency vehicle use (only) the Northerly 50.00 feet of course (38)
of said parcel 1A (N 17 degrees 01'41"W, 340.64 feet) and the Southerly 50.00
feet of the above-described course of: N 0 degrees 24'36"W, 572.67 feet.
There shall be no other abutter's rights of access appurtenant to the
above-described real property in and to the adjacent State Freeway.
PARCEL 2
That portion of Tract "M", Rancho Simi, as shown on map recorded in Book
3, page 7 of Maps, in the office of the County Recorder of said county, as
acquired by the State of California by Final Order of Condemnation, filed in
Superior Court Case No. 50755, in and for said county, a certified copy of
which was recorded May 22, 1969 in Book 3492, page 234 of Official Records in
said office, described as follows:
Beginning at the Westerly terminus of that certain course described in
Parcel 1E of said Final Order of Condemnation as S 75 degrees 42'14"W, 570.68
feet; thence along said certain course N 75 degrees 42'14" E, 570.68 feet to a
tangent curve concave Southwesterly and having a radius of 74.00 feet; thence
Southeasterly along said curve through an angle of 78 degrees 21'50", an arc
distance of 101.21 feet; thence tangent to said curve N 25 degrees 55'56"W,
90.00 feet; thence N 65 degrees 33'06"W, 142.39 feet; thence N 24 degrees
07'03" W, 135.80 feet to the Southerly line of the Southern Pacific Railroad
Right of Way, 100.00 feet wide as shown in Book 77, page 370 of Deeds in said
office; thence Westerly along said Southerly line S 75 degrees 42'14" W, 485.00
feet to the Northerly terminus of that certain course described in Parcel 1A of
said Final Order of Condemnation as course "(30) S 11 degrees 04'53" E, 186.29
feet"; thence Southerly along said course (30) S 11 degrees 04'53" E, 186.29
feet; thence Southerly along course (31) of said Parcel 1A, S 18 degrees
20'04"E, 66.17 feet to the point of beginning.
PARCEL 3
ALSO THE STATE OF CALIFORNIA, acting by and through its Director of
Transportation, does hereby release and QUITCLAIM to the hereinabove named
<PAGE> 28
grantee, in the same manner of vesting as hereinabove set forth, all right,
title and interest in and to all that real property described as Parcel 1F
(slope easement), in said Final Order of Condemnation (State parcel 44485-6).
SUBJECT TO THE EXCEPTION THEREFROM, of all oil, minerals, natural gas and
other hydrocarbons by whatsoever name known, that may be within or under the
herein conveyed parcels of land, and the rights thereto, together with certain
other conditions, as excepted and reserved in Parcels 1A and 1E of the above
mentioned Final Order of Condemnation.
Prepared by South Bay Engineering Company
ROSS N. BOLTON
<PAGE> 29
EXHIBIT B
PROMISSORY NOTE SECURED BY DEED OF TRUST
______________, California
________________, 1996
For value received, SPECIAL DEVICES, INCORPORATED, a Delaware corporation,
("Developer") promises to pay to the CITY OF MOORPARK ("City"), or to order, at
799 Moorpark Avenue, Moorpark, California, or at such other place as City may
from time to time designate by written notice to Developer, the principal
amounts specified in Section 2 below. Said amounts shall be due and payable in
lawful tender of the United States of America without setoff, deduction or
counterclaim.
1. Development Agreement. This Promissory Note (the "Note") is issued
pursuant to that certain Development Agreement dated August 21, 1996, by and
between City and Developer (the "Agreement"). The defined terms in this Note
shall have the same meanings as in the Agreement. Any default under the
Agreement shall constitute a default under this Note.
2. Principal Amounts, Terms of Payment, and Acceleration of
Payment.
A. If, for any reason, Developer does not (i) build the Project
facilities described in Industrial Development Permit ("IPD") No. 95-2 and any
minor modification thereto that is approved by City and (ii) relocate the Los
Angeles County operations of Special Devices, Incorporated to the Project
facilities within three (3) years after the effective date of the Agreement,
Developer shall pay City:
(1) The sum of FOUR HUNDRED NINETY-TWO THOUSAND, THREE HUNDRED AND
FIFTY-ONE DOLLARS ($492,351.00), which sum shall be due and payable in
the amounts and at the times as follows:
(a) At any time any part of Lot 1 or Lot 2 of Vesting Tract Map No.
5004 is sold or leased to a third party (except for month to month
leases), Developer shall pay City $246,175.00. Payment is due upon
close of escrow of the sale or upon execution of the lease or the
third (3rd) anniversary of the effective date of this Agreement,
whichever is later.
(b) At any time Lot 3 of Vesting Tract Map No. 5004 is sold or
leased to a third party (except for month to
21
<PAGE> 30
month leases) and (a) above has occurred, Developer shall pay City
$246,176.00; however, if (a) above has not occurred or if (a) above
has occurred prior to the third (3rd) anniversary of the effective
date of this Agreement, then Developer shall pay City $492,351.00.
Payment is due upon close of escrow of the sale or upon execution of
the lease;
(c) At any time a final map for any subsequent subdivision of Lot 3
of Vesting Tract Map No. 5004 is approved and (a) above has occurred,
Developer shall pay City $246,176.00; however, if (a) above has not
occurred then Developer shall pay City $492,351.00. Payment is due
prior to the recordation of said final map;
(d) On the tenth (10th) anniversary of the effective date of the
Agreement, Developer shall pay City any portion of the $492,351.00
not previously paid to City pursuant to (a), (b) and (c) above; and
(2) The sum of SEVENTY-FIVE THOUSAND DOLLARS ($75,000.00) per year
for four consecutive years, for a total of Three Hundred Thousand Dollars.
Payments shall begin on the fourth (4) anniversary of the effective date
of the Agreement; provided, however, if Developer relocates to the Project
facilities after the third anniversary of the effective date of the
Agreement, no further payments of the aforementioned Three Hundred
Thousand Dollars ($300,000.00) shall be due and owing, except that the
annual amount that would otherwise have been due and payable on the next
succeeding anniversary date shall be prorated as of the date of initial
occupancy of the Project facilities and shall be paid to City on the date
of initial occupancy. (E.g., if such relocation occurs three (3) months
after the fourth anniversary, then Developer would have paid Seventy Five
Thousand Dollars ($75,000.00) on the fourth anniversary and would pay
Eighteen Thousand Seven Hundred Fifty Dollars ($18,750.00) on the date of
initial occupancy. The remaining Two Hundred Six Thousand, Two Hundred
and Fifty Dollars ($206,250.00) would not be owed by Developer.)
B. If, for any reason, Developer does not employ the number of
full-time employees required by this subparagraph at the Project facilities
described in Industrial Development Permit ("IPD") No. 95-2 and has not made
one or more payments to City pursuant to subparagraph A of this Paragraph,
Developer pay city:
(1) The sum of TWENTY-FIVE THOUSAND DOLLARS ($25,000.00) each of the
three (3) years that the minimum number of full-time employees specified
hereinbelow are not employed at the Project facilities, which sums shall
be due and payable within
22
<PAGE> 31
sixty (60) days after the applicable anniversary of the Project
facilities.
The number of full-time employees employed at the Project facilities
on the date of initial occupancy is hereinafter referred to as the Initial
Number. Initial occupancy shall mean the last day of the month in which
the first certificate of occupancy for the Project facilities is issued
plus sixty (60) calendar days. As of the first anniversary of the initial
occupancy, the number of full-time employees employed at the Project
facilities shall be not less than the Initial Number plus the First Year
Number. The "First Year Number" shall mean the Initial Number plus
seventy-five, provided that if the Initial Number is reduced during the
first year by the attrition of employees who were employed full-time at
the Project facilities at initial occupancy ("original employees") and
their positions are refilled by the hiring of new full-time employees
prior to the first anniversary of the Project facilities ("new
employees"), the 75 shall be reduced by the number of new employees.
(E.g., if there were 490 full-time employees at initial occupancy and 30
new full-time employees were hired prior to the first anniversary of the
Project facilities to replace 30 of the original full-time employees, the
First Year Number is 490 plus 75 minus 30 for a total of 535 full-time
employees.) As of the second anniversary of the initial occupancy, the
number of full-time employees employed at the Project facilities shall be
not less than the First Year Number plus 75 ("the Second Year Number").
As of the third anniversary of the initial occupancy, the number of
full-time employees employed at the Project facilities shall be not less
than the First Year Number plus 150 ("the Third Year Number").
and
(2) The sum of THREE HUNDRED AND THIRTY-THREE DOLLARS ($333.00)
times the Additional Number of full-time employees specified hereinbelow
that are not employed at the Project facilities as of the third
anniversary thereof, which sum shall be due and payable within sixty (60)
days after the third anniversary of the Project facilities.
In the event that the Initial Number, as defined in subparagraph
B.(1) above, is less than 490, the Third Year Number, as defined in
subparagraph B.(1) above, shall be increased by the difference between the
Initial Number and 490 ("the Additional Number") up to a cap of 100. (E.g.
if the Initial Number is 380 then using the example from subparagraph
B.(1) above, the First Year Number is 425 (380 plus 75 minus 30) and so
the Third Year Number of 575 (425 plus 150) shall be increased by the
Additional Number of 100 for a total of 675 full-time employees.)
23
<PAGE> 32
C. Upon City's request, Developer shall provide City with access,
during normal business hours and at the Project facilities, to payroll and
related records necessary to determine if Developer is in compliance with the
full-time employee requirements of subparagraph A and B of this Paragraph.
D. Developer shall have the right to prepay all or part of the
amounts specified in subparagraphs A and B of this Paragraph at any time or
times.
3. Acceleration on Default. If any part of any principal amount
under this Note is not paid when due and remains unpaid after a date specified
by a notice from City to Developer, or if any breach or default under this
Note, the Agreement or the Deed of Trust described in Paragraph 6 hereof is not
cured by a date specified in a notice to Developer from City, the entirety of
the principal amounts outstanding shall at once become due and payable at the
option of City. The date specified in any notice from City to Developer shall
not be less than ten (10) days from the date such notice is deemed delivered
pursuant to the provisions of Paragraph 11 hereof. City may exercise this
option to accelerate during any breach or default by Developer regardless of
any prior forbearance. Failure to exercise, or delay in exercising, this
option shall not constitute a waiver of the right to exercise it for the breach
or default or in the event of any subsequent breach or default.
4. Late Payment Charges and Default Rate.
A. Developer acknowledges that late payments shall cause damage to
City. Developer agrees to pay, for each payment not received by City within
five (5) days after payment is due, a late charge of Two Hundred and Fifty
Dollars and No Cents ($250.00). Acceptance of any late charge by City shall not
constitute a waiver of the default with respect to the overdue amount, and it
shall not prevent City from pursuing any of its other rights and remedies.
B. In the event Developer fails to make any payment when due,
interest shall accrue on said payment from the payment due date at the rate of
ten percent (10%) per annum.
C. In the event that any usury limitations apply to any payment
pursuant to this Paragraph, the specified payment shall be reduced to the
maximum amount permitted by law.
5. Cost of Collection. Developer agrees to pay to City the
following costs, expenses and attorneys' fees paid or incurred by City, or
awarded by a court of competent jurisdiction: (i) the reasonable costs and
expenses of collection or enforcement of, and reasonable attorneys' fees paid
or incurred in connection with the collection or enforcement of, this Note or
any part of it, whether
24
<PAGE> 33
or not suit is filed and (ii) costs of suit and reasonable attorneys' fees in
an action to enforce payment of this Note or any part of it.
6. Security for Note. The indebtedness evidenced by this Note is
secured by a certain Dead of Trust with Assignment of Rents of even date
herewith (the "Deed of Trust").
7. Forbearance Not a Waiver. No delay or omission on the part of
City in exercising any rights under this Note, the Deed of Trust or the
Agreement on breach or default by Developer shall operate as a waiver of such
right or any other right under this Note, the Deed of Trust or the Agreement
for the same breach or default or for any other breach or default.
8. Assignment by City. City shall have the right to sell, assign
or otherwise transfer, in whole or in part, this Note, the Deed of Trust, and
any other instrument evidencing or securing the indebtedness of this Note
without the consent of Developer.
9. No Assignment By Developer. Developer shall not have the right
to assign this Note, in whole or in part, without the prior written consent of
City.
10. Time is of the Essence. Time is of the essence for each and
every obligation under this Note.
11. Notice. Any notice to be given pursuant to this Note shall be
in writing, and all such notices, payments and any other document to be
delivered shall be delivered by personal service or by deposit in the United
States mail, certified or registered, return receipt requested, with postage
prepaid, and addressed to the party for whom intended as follows:
City of Moorpark
799 Moorpark Avenue
Moorpark, California 93021
Attn: City Manager
Special Devices, Incorporated
16830 Placerita Canyon Road
Newhall, CA 91321
Attn: President
Notices, payments and other documents shall be deemed received upon receipt by
personal service or upon the second (2nd) day after deposit in the United
States mail. Either party may, from time to
25
<PAGE> 34
time, by written notice to the other, designate a different address which shall
be substituted for the one above specified.
CITY OF MOORPARK
By
-------------------------------
Paul W. Lawrason Jr.
Mayor
ATTEST
------------------------------------
Lillian E. Hare
City Clerk
SPECIAL DEVICES, INCORPORATED
By:
-------------------------------
Thomas F. Treinen
President
26
<PAGE> 35
EXHIBIT C
RIDER TO DEED OF TRUST
THIS RIDER TO DEED OF TRUST is attached to and incorporated by reference
in that certain Deed of Trust with Assignment of Rents dated _______, 1996,
by and between SPECIAL DEVICES, INCORPORATED, a Delaware corporation
("Trustor"), , a corporation ("Trustee"),
and CITY OF MOORPARK ("Beneficiary").
Said Deed of Trust is hereby modified, and as modified is hereinafter
referred to as "this Deed of Trust", in the following particulars only:
1.1 Subordination to Loans
A. This Deed of Trust shall be automatically subordinated to a deed
of trust to be executed by Trustor to secure a loan (hereinafter referred to as
"the Construction Loan") that is obtained by Trustor for the purpose of
constructing the Project (as defined in that certain Development Agreement
dated August 21, 1996 between Trustor and Beneficiary) on the property,
provided that:
(a) At the time of recordation of the deed of trust securing
the Construction Loan, no unrescinded Notice of Default of this Deed
of Trust appears of record and Trustor is not in default in the
payment of any taxes or assessments affecting said property; and
(b) The amount of the Construction Loan secured by the deed of
trust does not exceed Eighteen Million Dollars ($18,000,000), the
annual interest rate does not exceed the reference rate charged by
the Bank of America or any successor bank to its best customers
(which is not necessarily the lowest rate charged by the bank) plus
ten (10) percentage points, the term is not more than sixty (60)
months, and the loan origination fee does not exceed five (5) points.
B. This Deed of Trust shall be automatically subordinated to a deed
of trust to be executed by Trustor upon completion of the Project on the
property to secure a loan that is obtained by Trustor to provide permanent
financing for the purchase of the property and construction of the Project
(hereinafter referred to as "the Take-out Loan"), provided that:
(a) At the time of recordation of the deed of trust securing
the Take-out Loan, no unrescinded Notice of Default of this Deed of
Trust appears of record and Trustor is not in default in the payment
of any taxes or assessments affecting said property;
29
<PAGE> 36
(b) The amount of the Take-out Loan secured by the deed of
trust does not exceed the lesser of Eighteen Million Dollars
($18,000,000) or eighty percent (80%) of the then appraised value of
Lot 3 of Vesting Tract Map. 5004, the annual interest rate does not
exceed the reference rate charged by the Bank of America or any
successor bank to its best customers (which is not necessarily the
lowest rate charged by the bank) plus ten (10) percentage points, the
term does not exceed thirty (30) years, the loan may be amortizing or
payable interest only, at Trustor's option, and the loan origination
fee does not exceed five (5) points; and
(c) The amount of the Construction Loan is paid in full and the
deed of trust securing the Construction Loan is fully reconveyed.
1.2 Partial Release Following Recordation of Map. At any time after
the recordation of the final map for Vesting Tract No. 5004 in the office of
the County Recorder of the County of Ventura (the "Final Map"), Beneficiary
shall cause Trustor to, and Trustee shall, release all of the Property, except
Lot 3 as designated on the Final Map ("Lot 3"), from the lien or charge of this
Deed of Trust under the following terms and conditions:
(a) Trustor shall submit a written request for the release of all of the
Property, except Lot 3, from the lien or charge of this Deed of Trust;
(b) No release shall be granted at any time that Trustor is in
default under the promissory note of even date herewith, in the event
that an unrescinded Notice of Default appears of record; and
(c) Trustor shall pay to Trustee the costs of executing and
recording any documents needed to release all of the Property, except
Lot 3, from the lien or charge of this Deed of Trust.
1.3 Further Assurances. Beneficiary shall promptly, and in any event
within five (5) days following the written request of Trustor, execute such
subordination and release documentation and such other and further documents as
Trustor or Trustor's Lender may require, in recordable form, to release any
portion of the Property from this Deed of Trust or to subordinate the lien of
this Deed of Trust to the lien of the deed of trust to which this Deed of Trust
is subordinated or to which Beneficiary has agreed to make this Deed of Trust
subordinate hereby. Any subordination documentation that is consistent with
then prevailing industry practice for major commercial lenders and not
incompatible with the provisions of this paragraph shall be deemed reasonable.
30
<PAGE> 37
1.4 Severability. If any provision of this Deed of Trust or the
application hereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder hereof and the application hereof to
other persons or circumstances shall not be effected thereby and shall be
enforced to the extent permitted by law.
1.5 Attorneys' Fees. In the event any action, suit or other legal
proceeding is brought for the enforcement of, or the declaration of, any right
or obligation pursuant to this Deed of Trust or as a result of any alleged
breach of any provision of this Deed of Trust, the prevailing party shall be
entitled to recover its costs and expenses, including reasonable attorneys'
fees, from the losing party, and any judgment or decree rendered in such a
proceeding shall include an award thereof. In the event of nonjudicial
foreclosure of this Deed of Trust, Beneficiary shall be entitled to recover its
costs and expenses, including reasonable attorneys (sic) fees, from the losing
party, and any judgment or decree rendered in such a proceeding shall include
an award thereof. In the event of nonjudicial foreclosure of this Deed of
Trust, Beneficiary shall be entitled to recover its reasonable attorney's fees
and costs, which shall be deemed secured by this Deed of trust, from proceeds
of the sale or as a condition to reinstatement of this Deed of Trust.
1.6 Conflict. In the event of any conflict between the terms of this
Rider to Deed of Trust and the Deed of Trust to which this Rider is attached,
the terms of this Rider shall control.
CITY OF MOORPARK
By:
-------------------------------
Paul W. Lawrason Jr.
Mayor
ATTEST
------------------------------------
Lillian M. Hare
City Clerk
SPECIAL DEVICES, INCORPORATED
By:
-------------------------------
Thomas F. Treinen
President
31
<PAGE> 1
Exhibit 11.1
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Fiscal years ended October 31,
----------------------------------------
1994 1995 1996
---------- ---------- ---------
<S> <C> <C> <C>
Primary Earnings per Common and
Common Equivalent Share:
Average Market Price $ 10.09 18.82 17.04
Weighted average common shares
outstanding during period 5,772,445 6,722,354 7,655,075
Common Stock Equivalents:
Common Stock Options 13,067 109,236 107,454
---------- ---------- ---------
Weighted average common and
common equivalent shares 5,785,512 6,831,590 7,762,529
========== ========== =========
Net earnings for period $3,169,050 5,579,670 7,448,039
========== ========== =========
Primary earnings per share $ .55 .82 .96
========== ========== =========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
[KPMG PEAT MARWICK LLP LETTERHEAD]
ACCOUNTANTS' CONSENT
The Board of Directors
Special Devices, Incorporated:
We consent to incorporation by reference in the registration statement (No.
33-64536) on Form S-8 of Special Devices, Incorporated of our report dated
January 15, 1997, relating to the consolidated balance sheets of Special
Devices, Incorporated and subsidiaries as of October 31, 1996 and 1995, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended October 31, 1996,
which report appears in the October 31, 1996 annual report on Form 10-K of
Special Devices, Incorporated.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 1996 AND THE CONSOLIDATED STATEMENT OF
EARNINGS FOR THE YEAR ENDED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 2,592,578
<SECURITIES> 10,700,000
<RECEIVABLES> 12,663,230
<ALLOWANCES> (155,959)
<INVENTORY> 18,298,705
<CURRENT-ASSETS> 45,326,158
<PP&E> 58,228,703
<DEPRECIATION> 17,597,716
<TOTAL-ASSETS> 86,159,195
<CURRENT-LIABILITIES> 10,369,203
<BONDS> 0
0
0
<COMMON> 76,756
<OTHER-SE> 69,624,527
<TOTAL-LIABILITY-AND-EQUITY> 86,159,195
<SALES> 104,482,025
<TOTAL-REVENUES> 104,482,025
<CGS> 84,327,787
<TOTAL-COSTS> 92,437,812
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 81,000
<INTEREST-EXPENSE> 364,992
<INCOME-PRETAX> 12,173,039
<INCOME-TAX> 4,725,000
<INCOME-CONTINUING> 7,448,039
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 7,448,039
<EPS-PRIMARY> $.96
<EPS-DILUTED> $.96
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